The Principal Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), New Delhi, has quashed a customs duty demand of ₹3.68 crore, along with interest and equivalent penalty, raised under the gold replenishment scheme. 

The bench of Ashok Jindal (Judicial Member) and K. Anpazhakan (Technical Member) has observed that jewellery manufactured through a fully mechanised process was required to achieve only 2.05% value addition, rejecting the Revenue’s contention that 3.5% value addition was mandatory. 

The Bench held that the Department had failed to establish any violation of the Foreign Trade Policy (FTP) or suppression of facts. 

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The appellant/assessee, a Government-nominated agency, imports bullion without payment of customs duty under Notification No. 57/2000-Cus. for supply to eligible jewellery exporters under the Replenishment Scheme.

The Directorate of Revenue Intelligence (DRI), Hyderabad, investigated exports made by M/s Venus Industries, alleging that the exporter had procured duty-free gold by misdeclaring the manufacturing process and failing to satisfy the prescribed value addition norms under the Foreign Trade Policy. Based on these allegations, customs authorities demanded ₹3,68,10,660 from STC with interest and imposed an equal penalty under Section 114A of the Customs Act. Separate penalties were also imposed on Venus Industries and its partner. 

According to the Department, the exported jewellery was not manufactured through a fully mechanised process. Consequently, under Paragraph 4.38 of the FTP read with Paragraph 4.61 of the Handbook of Procedures, the exporter was required to achieve minimum value addition of 3.5%.

Since Venus Industries had declared value addition of only 2.05%, the Department contended that it was ineligible to obtain duty-free gold under the Replenishment Scheme, making STC liable for customs duty under the conditions of Notification No. 57/2000-Cus. and the bond executed at the time of import. 

The appellant and the co-appellants argued that the entire quantity of duty-free gold procured under the scheme was exported as jewellery. The jewellery was manufactured by Ghanshyamdas Jewellery, using a fully mechanised manufacturing process. The case was identical to an earlier decision of the CESTAT Hyderabad Bench in the Diamond India Ltd. matter, where the same job worker, identical machinery and identical manufacturing process had already been recognised as constituting a fully mechanised process. Therefore, the applicable value addition requirement remained 2.05%, not 3.5%. 

The Tribunal observed that the facts of the present case were virtually identical to those considered by the Hyderabad Bench in Diamond India Ltd.

It noted that the same job worker, Ghanshyamdas Jewellery, had manufactured jewellery using machines at every stage, including electric furnaces, rolling machines, design printing machines, mechanised cutters, mechanised chiselling devices, and polishing machines.

The Hyderabad Bench had already held that manufacturing using such machinery constitutes a fully mechanised process, clarifying that mechanisation should not be confused with complete automation. The Tribunal further noted that this decision had subsequently been upheld by the Telangana High Court. 

Applying the earlier precedent, CESTAT held that the jewellery exported by Venus Industries had indeed been manufactured through a fully mechanised system.

Accordingly, the Tribunal ruled that the exporter was required to achieve only 2.05% value addition, and not 3.5% as alleged by the Department.

As a result, the Tribunal concluded that the customs duty demand itself was legally unsustainable. 

The Tribunal additionally held that the Department could not invoke the extended limitation period.

It observed that all shipping bills had been filed under the Replenishment Scheme, provisional invoices clearly disclosed the declared value addition of 2.05%, the export documents contained complete information regarding value, weight and pricing.

Since there was no suppression or intent to evade customs duty, invocation of the extended limitation period under Section 28(4) was held to be invalid. 

The Tribunal also set aside the penalties imposed on Venus Industries and its partner.

It observed that the Department’s case primarily relied upon the statement of the job worker, neither the job worker nor Bullion Line had been made parties to the proceedings, the appellants were denied the opportunity to cross-examine the job worker.

The Tribunal held that the statement could not legally be relied upon for imposing penalties. Since the principal allegation itself had failed, the penalties under Sections 114 and 114AA of the Customs Act were also liable to be set aside. 

Allowing all three appeals, the CESTAT set aside the ₹3.68 crore customs duty demand against STC, quashed the corresponding interest liability, deleted the equal penalty imposed on STC, set aside the penalties imposed on M/s Venus Industries and Arun Kumar Agarwal, and granted consequential relief in accordance with law.

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