The Customs, Excise & Service Tax Appellate Tribunal (CESTAT), Mumbai has held that the clarification issued by the Directorate General of Foreign Trade (DGFT) confirming their status was binding in the context of the dispute before Customs authorities.
The bench of Ajay Sharma (Judicial Member) and M.M. Parthiban (Technical Member) has observed that Navayuga Engineering Company Limited (NECL) and Krishnapatnam Port Company Limited (KPCL) qualified as “group companies” under Paragraph 9.28 of the Foreign Trade Policy (FTP) 2009-14.
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The Tribunal also held that earnings from maritime services rendered by KPCL to foreign vessels could be utilised by NECL for discharge of export obligation under EPCG licences. Further, it ruled that parts of helicopters used in connection with NECL’s infrastructure projects were eligible for customs duty exemption under Notification No. 91/2009-Customs when imported through valid SFIS/SHIS scrips.
NECL is engaged in development of large infrastructure projects including ports, highways, bridges, tunnels and other projects. For its business, the company imported machinery, capital goods, spare parts and consumables and availed customs duty exemption under various export promotion schemes.
NECL had been issued EPCG licences by the DGFT and had also utilised SFIS/SHIS duty credit scrips issued to KPCL, its group company. The Revenue subsequently questioned the utilisation of the scrips, alleging that NECL and KPCL could not be regarded as group companies for the purposes of the FTP.
The Directorate of Revenue Intelligence (DRI) also alleged that NECL had not properly fulfilled the export obligations attached to the EPCG licences and had utilised earnings generated by KPCL from services rendered to foreign vessels.
The investigation resulted in seizure of imported capital goods and issuance of show cause notices proposing substantial customs duty demands, confiscation and penalties. One notice involved a proposed duty demand of approximately ₹17.04 crore, while another involved a demand of approximately ₹68.98 crore.
A central issue before the Tribunal was the interpretation of Paragraph 9.28 of FTP 2009-14, which defines “Group Company” as two or more enterprises that are directly or indirectly in a position to exercise at least 26% voting rights in the other enterprise or appoint more than 50% of the members of its board.
The record showed that three common directors collectively held 64.30% shareholding in NECL and 36.96% shareholding in KPCL.
Importantly, the DGFT had already examined the relationship between the two companies. The Zonal Joint DGFT, Chennai, had clarified in June 2011 that NECL and KPCL fell within the definition of group companies under Paragraph 9.28. Subsequently, the DGFT, Ministry of Commerce and Industry, issued a clarification dated February 22, 2017, stating that the two companies were covered by the definition of “Group Companies” under FTP 2009-14.
The Tribunal noted that Paragraph 2.3 of the FTP specifically provided that where any question or doubt arose regarding interpretation of the FTP or an authorisation issued under it, the matter was to be referred to the DGFT, whose decision was to be final and binding.
The Tribunal examined whether the common directors’ shareholding could be considered for determining the group-company relationship.
It noted that both NECL and KPCL were incorporated companies and therefore qualified as “enterprises” under the FTP. The Tribunal distinguished the situation from cases involving partnership firms, where the legal status of individual partners may raise different questions.
Considering the shareholding pattern and the applicable FTP provisions, the Tribunal concluded that the two companies satisfied the requirements of Paragraph 9.28. The Tribunal also relied upon the DGFT’s specific clarification confirming their status as group companies.
The Tribunal observed that matters relating to foreign trade fall within the domain of the Department of Commerce and held that the insistence by the DRI/Customs formation on treating the two companies as not being group companies, despite the DGFT clarification, had no legal basis in the circumstances of the case.
The Tribunal also referred to the Supreme Court’s decision concerning Tata Teleservices, observing that the issue of coverage under the “group company” definition in Paragraph 9.28 was supported by the settled legal position considered in that case.
Another important question concerned the use of KPCL’s earnings from port handling and maritime services to fulfil NECL’s export obligation under its EPCG licences.
The Revenue argued that services rendered to import vessels could not be treated as export services for the purpose of the EPCG scheme. It particularly disputed the adjustment of approximately ₹109.64 crore earned by KPCL from foreign-flagged import vessels towards NECL’s export obligation.
The Tribunal examined the relevant FTP provisions concerning export of services and foreign exchange earnings. It noted that services rendered to foreign vessels could constitute services to foreigners and that earnings received in foreign exchange, or in Indian rupees treated as foreign exchange under the applicable framework, could qualify for export-obligation purposes.
The Tribunal found that KPCL’s port handling services included maritime services rendered to foreign vessels arriving for discharge of import cargo, services to foreign vessels loading export cargo and cargo-handling services relating to export cargo.
It accepted the reasoning that maritime services rendered to foreign vessels constituted earnings in foreign exchange and were eligible for discharge of export obligation under the EPCG scheme. Accordingly, NECL could utilise the qualifying earnings of KPCL, its group company, for fulfilling the export obligations attached to the EPCG licences.
The dispute also concerned parts and spares imported for helicopters used by NECL.
The adjudicating authority had earlier confirmed customs duty of ₹6,01,86,677 on the helicopter parts, holding that the goods were not eligible for exemption under Notification No. 91/2009-Customs.
The Tribunal took a different view.
It examined the definition of “capital goods” under Paragraph 9.12 of FTP, which covers plant, machinery, equipment or accessories required directly or indirectly for rendering services, including goods used in the services sector.
According to the Tribunal, the disputed goods were parts or accessories necessary for the functioning of helicopters. It also examined the DGCA regulatory framework governing private and non-scheduled air transport operations.
The Tribunal observed that the reference to “private use” in the DGCA documentation did not necessarily mean personal use. The regulatory framework permitted non-scheduled operators to undertake charter operations for group companies, associated companies and their employees, subject to applicable requirements.
Since the helicopters were used for transporting personnel connected with NECL’s infrastructure projects, including roads, bridges, marine development and turnkey projects, the Tribunal held that their use was connected with the company’s infrastructure business.
Consequently, the helicopter parts could be treated as capital goods for purposes of the applicable SFIS/SHIS provisions.
The Tribunal specifically held that the use of valid SFIS/SHIS scrips issued to KPCL for obtaining customs duty exemption under Notification No. 91/2009-Customs in respect of helicopter parts was within the provisions of the FTP.
The Tribunal therefore rejected the basis on which the adjudicating authority had confirmed the customs duty demand.
It held that the earlier finding treating the helicopter parts as ineligible for exemption could not be sustained.
The Tribunal separately examined the Revenue’s invocation of the extended period under Section 28(4) of the Customs Act, 1962.
The demand of ₹6,01,86,677 covered 19 Bills of Entry filed between January 12, 2012 and May 8, 2015. In respect of ten Bills of Entry, the imports pre-dated June 19, 2014, meaning that the relevant show cause notice was issued beyond the normal two-year period referred to by the Tribunal.
The Tribunal noted that the issue concerning the group-company status had already been brought to the attention of the DGFT and that the Zonal Joint DGFT, Chennai, had issued a clarification in 2011. The clarification had also been furnished to the Customs authorities.
In these circumstances, the Tribunal found that there was no basis to allege suppression of facts or wilful misstatement with an intention to evade duty so as to invoke the extended limitation period under Section 28(4).
Relying upon the Supreme Court’s decision in Pushpam Pharmaceuticals Company v. Collector of Central Excise, Bombay, the Tribunal reiterated that suppression for purposes of an extended limitation provision requires a deliberate act and cannot be established merely by an omission where the relevant facts were known to both sides.
The Tribunal concluded that the demand failed on limitation as well as on merits.
The Tribunal also examined the Revenue’s challenge to the adjudicating authority’s decision to drop substantial portions of the proposed duty demands.
It found no reason to interfere with the order dated May 30, 2017, which had dropped the proceedings arising from the September 30, 2016 show cause notice.
Similarly, the Tribunal upheld the earlier decision allowing exemption benefits under Notification No. 91/2009-Customs and dropping the duty demand of ₹62,96,23,584 under Section 28(4) of the Customs Act.
The Tribunal also sustained the decision not to confiscate the goods and not to impose penalties under Sections 114A, 114AA and 117 of the Customs Act in respect of the matters where the group-company position and related benefits were found legally sustainable.
The Tribunal held that confirmation of the duty demand, confiscation of the helicopter parts, redemption fine and penalties did not withstand legal scrutiny.
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