The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), New Delhi, has set aside a customs demand arising from its use of domestically procured bottles, caps and labels to pack liquor manufactured with an imported duty-free input.
The bench of Dr. Rachna Gupta (Officiating President) and Hemambika R. Priya (Technical Member) that the packaging materials could not be treated at par with the imported input physically incorporated into the exported liquor.
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The dispute arose under Advance Authorisations used by the distillery to import an input identified in the order as Vetted Malt Scotch for manufacturing Indian Made Foreign Liquor (IMFL) for export. The company procured glass bottles, caps and labels domestically under Annexure-45, using the facility under Rule 19(2) of the Central Excise Rules, 2002.
The Directorate of Revenue Intelligence (DRI) alleged that the company had breached a condition of Customs Notification No. 96/2009-Cus. According to the department, exports involving materials procured through the Rule 19(2) facility could not be counted towards the export obligations attached to the Advance Authorisations. It also alleged shortfalls in fulfilling export obligations under certain authorisations.
A show-cause notice issued in October 2016 proposed recovery of approximately ₹1.94 crore in customs duty on the alleged notification breach and a further ₹94.21 lakh relating to the alleged export-obligation shortfalls. It also proposed interest and penalties under Sections 114A and 114AA of the Customs Act, 1962. The adjudicating authority confirmed the proposals in an order dated August 30, 2019, which the company challenged before CESTAT.
The company argued that the two facilities covered different goods. The imported Scotch was incorporated into the IMFL, while the bottles, caps and labels were procured domestically and used to pack the finished product. It contended that it had not claimed two duty benefits on the same material.
The department maintained that the company had used duty-free domestic materials alongside a duty-free imported input and that the resulting exports therefore could not discharge the Advance Authorisation obligations. It also questioned declarations concerning the authorisations against which certain exports were attributed.
CESTAT examined the notification’s definition of “materials”. It found that the definition separately identifies raw materials and components required to manufacture the resultant product, and packaging materials required to pack it. That distinction was decisive: the imported Scotch was the input used to manufacture the IMFL, whereas the domestically procured bottles, caps and labels served a packaging function.
The tribunal held that the adjudicating authority had wrongly placed the packaging materials at par with the imported input. In the circumstances of this case, the use of the domestic packaging facility did not establish the alleged violation of the Advance Authorisation condition. The tribunal therefore set aside the August 2019 adjudication order and allowed the company’s appeal.
CESTAT also considered the company’s objection to the DRI officer’s jurisdiction to issue the customs notice. Referring to the Supreme Court’s November 2024 review judgment on the powers of DRI officers assigned the functions of customs officers, it rejected that objection. The notice survived the jurisdictional challenge, but the demand failed on the merits of the packaging-material dispute.
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