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CASE NO.: Appeal (civil) 6769  of  1999

PETITIONER: M/S.  K.R.STEEL UNION LTD.

       Vs.

RESPONDENT: COMMISSIONER OF CUSTOMS, KANDLA (GUJARAT).

DATE OF JUDGMENT:       30/03/2001

BENCH: S.P. Bhuracha, N. Santosh Hegde & Y.K. Sabharwal

JUDGMENT:

SANTOSH HEGDE, J. L...I...T.......T.......T.......T.......T.......T.......T..J

   This  appeal  is  directed  against  the  order  of  the Customs,  Excise and Gold (Control) Appellate Tribunal, (the tribunal),  West  Regional Bench, Mumbai dated 15th  July, 1999 made in Appeal No.C/366/94A.

   The  appellant which is an approved unit situated in the Kandla  Free Trade Zone (KFTZ) was authorised to manufacture one  lakh ton of Cold Rolled Closed Annealed (CRCA) and  Tin Mill  Black  Plate  (TMBP) Coils per year  under  a  licence issued  by the Ministry of Commerce, Government of India  on 30.3.1981.   The  said Ministry by a letter  dated  2.7.1982 approved  the proposal of the appellant for import into  the KFTZ  of  second-hand  machinery  for  the  purpose  of  the manufacture  of  the CRCA and TMBP under certain  conditions which  included that the imported machineries should not  be over  10 years old and it should have a residual life of  at least  5 years.  Based on the said permission, the appellant imported  between  the  period  1983 and  1987  second  hand machineries  as  capital goods for which they had  filed  as many  as  17  Bills  of Entry and  claimed  the  benefit  of Notification No.  77/90-Cus.  dated 17.4.1980.  On 7.2.1992, the  Customs  Authorities issued a show-cause notice to  the appellant  alleging  among other grounds that the  appellant had  imported  contrary  to  the  import  licence,  one  new Thyristor  Converter over and above the Motor Generator Set, a  part  of the Temper Mill and certain quantity of  ceramic wool  as  a new component for the purpose of fabrication  of the Bright Annealing Furnace.

   In  the proceedings before the Collector of Customs, the appellant  contended  that  the  import was  made  with  the permission  of  the authorities of KFTZ issued to them  vide permission    letter     No.FTZ/Adm/2/822/90-IV/4750   dated 25/30.4.1991.   They also contended that the import made  by them was governed by the import export policy applicable for the  year  1983-84  and the Thyristor Converter  system  was imported  as a part of the complete Temper Mill which was in a  second-hand  condition.   The  said  Thyristor  Converter

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though  was  a  new  part  of  the  Temper  Mill,  the  same constituted  in  value  equivalent to only 9% of  the  total value  of the Temper Mill and this particular machinery part was  imported as an alternative to Motor Generator Set which was  supplied  in a non working condition by  the  supplier. Similarly,  it  was  contended that so far as  ceramic  wool which was also a new component of the annealing furnace, the same had to be new since the said ceramic wool had a limited life span, hence when a second-hand annealing furnace was to be installed, it was imperative that the ceramic wool in the same  had  to  be  replaced with new wool  because  the  old ceramic wool had outlived its utility.

   The   Collector  as  per   his  order  dated   31.3.1993 substantially dropped the charges levelled in the show cause notice  and  came  to the conclusion  that  the  machineries imported  viewed  as a whole was substantially old and  that the  Thyristor Converter was an essential part of the Temper Mill,  and  except  for  this   particular  part  all  other components of the Temper Mill were second-hand.  He was also of the opinion that the ceramic wool which was a part of the annealing  furnace  was  a  periodically  replaceable  part, hence,  same  cannot  be  individually   treated  as  a  new machinery,  therefore, was of the opinion that the import in question  was  covered by Notification 77/80-Cus.  and  that the  entire  imported machinery after  fabrication  remained within  the  KFTZ  and was used for the  purpose  of  export production,  accordingly he did not consider it necessary to either  impose  the  penalty and duty as  reflected  in  the show-cause  notice  nor  did  he   think  it  necessary   to confiscate the goods.

   As  noticed above, the Department being aggrieved by the said  order  of  the Collector filed an  appeal  before  the tribunal,  who  by  its  order dated  6.8.1989  allowed  the Departments  appeal holding that the import in question was in  contravention of the import export policy as well as the Notification issued thereunder and was also made without the approval  of the KFTZ Board.  Consequently, it remanded  the matter  to  the  Commissioner  for the  limited  purpose  of adjudicating  the liability of the respondent to pay penalty for the irregularity committed in the import.  It is against this order of the tribunal the above appeal is preferred.

   The  only question that arises for our consideration  in this appeal is whether the import of Thyristor Converter and the  ceramic  wool by the appellant as parts of  the  Temper Mill and Bright Annealing Furnace is in contravention of the import permit issued to the appellant.

   In  this regard, it is to be seen that under the  import licence  issued to the appellant, it was permitted to import into   India   second-hand  machinery   of   the   following descriptions :

(a) Temper Mills; (b) Reversing Cold Reduction Mill; (c) Continuous Pickle line; (d) Bright Annealing Furnace Facility; and (e) Reconditioned secondhand cylindrical roll grinding mines.

   This  permission  does not indicate that each and  every part  of  the above machinery should necessarily  be  second hand.  It is seen from the order of the Collector that after examining  the  machinery  in  question,   he  came  to  the

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conclusion  that  the  import  of  Thyristor  Converter  and ceramic  wool  was as a small part of the  larger  machinery permitted  to be imported for the manufacture of 1 lakh tons of CRCA and TMBP Coils per annum which production was purely for  the purpose of export.  These two imported items in the opinion  of the Collector were integral parts of the  larger machinery  permitted  to be imported.  In his opinion  these parts  could  be  imported because they are  being  used  in connection   with  the  production  of  goods  for   export. Therefore,  he  held  that  the materials  imported  by  the appellant  were covered as components for assembling certain capital goods which will be used for production of goods for export.   He  also  noticed the fact that since  the  Temper Mill,   furnaces  and  other   equipments   imported   after fabrication  has to remain in the KFTZ and will be exporting all  its  production,  keeping  in mind the  object  of  the Notification,  he  did not think it was necessary to  invoke the  provisions of Section 111(d) and 112(a) of the  Customs Act  on  the  facts  of this case.   But  the  tribunal  has differed  from this view taken by the Collector holding that the  Notification  in question did not permit the import  of any  new part or replacement material and further held  that the   Notification   in   question    being   an   exemption Notification,  the same will have to be construed  strictly, hence,  the  extended  meaning  sought to be  given  by  the Collector  to the words:  for being used in connection with production was rather fanciful.

   In  our opinion, a Notification like the one which falls for  our  consideration  (77/80-Cus.) cannot be  read  in  a narrow manner so as to defeat the object of the Notification because the notification in question permits the importation of  certain  second-hand  machinery  to   be  used  in   the manufacture of goods meant only for export in units situated in  the  defined  Zones.   The object and  purpose  of  such exemption  notification is to encourage exports by  granting exemption  from customs duty on materials that are  required to  be imported for the purpose of manufacture of  resultant products which are to be exclusively exported.  The words of the  notification  have to be construed keeping in view  the said  object and purpose of the exemption.  This is also the view  taken  by this Court in the case of  Oblum  Electrical Industries  Pvt.Ltd.,  Hyderabad vs.  Collector of  Customs, Bombay  (1997  (7) SCC 581).  This Court in that case  while construing  the  words:  materials required to be  imported for  the  purpose  of  manufacture  of  products  found  in Notification   116-88-Cus.   similar  to  the   Notification involved in this case held:

   The  wordings in the notification have to be  construed keeping  in  view  the  said   object  and  purpose  of  the exemption.   In  the notification two different  expressions have  been used, namely, materials required to be  imported for   the   purpose   of   manufacture  of   products   and replenishment  of  materials  used in  the  manufacture  of resultant products which indicates that the two expressions have not been used in the same sense.  The former expression cannot be construed as referring only to materials which are used in the manufacture of the products.  The said exemption must  be given its natural meaning to include materials that are required in order to manufacture the resultant products. On  that view, the exemption cannot be confined to materials which  are actually used in the manufacture of the resultant product  but  would also include materials which though  not used  in  the  manufacture  of  the  resultant  product  are

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required in order to manufacture the resultant product.

   We  respectfully agree with the view taken by this Court in  the  above cited case and in that view of the matter  we are  of the opinion that the tribunal erred in reversing the finding  of the Collector by adopting a very narrow approach while  construing  the words for being used  in  connection with the production of goods for export.

   Coming  to the factual matrix of the case, we see  while the  Collector came to the conclusion on facts that both the Thyristor  Converter  and the ceramic wool were  only  small parts  of the larger machinery permitted to be imported, the tribunal  proceeded  on a technical ground that since  these parts  were new it required special permission of the  Board without  examining  whether the object of the  import  could have been achieved by either not importing the said parts or by  importing old Thyristor converter or used ceramic  wool. As  a  matter  of  fact, if the tribunal  had  come  to  the conclusion  that  either  the  Thyristor  converter  or  the ceramic wool were not necessary parts of the Temper Mill and the  furnace,  or that these parts were being  imported  for purposes  other than for the use in the Temper Mill and  the furnace  then the view taken by the tribunal could have been justified.  But once it came to the conclusion that both the Temper  Mill  and  the annealing furnace is  imported  in  a second hand condition and these parts were necessary for the working  of that machinery, it ought not to have  interfered with  the  order of the Collector because these  parts  even though  new  were  only a small constituent  of  the  larger machinery.   In  the instant case, the  Thyristor  Converter constituted  only  9% of the total value of the Temper  Mill while ceramic wool which has a life span of only 5 years had to  be  replaced because the furnace without the same  would not  have  performed  to its optimum capacity with  the  old ceramic  wool.  In our opinion, unless it can be established that  in  the guise of importing a second hand machinery  in fact   the  importer  has   imported  substantially  a   new machinery, it is not possible to come to the conclusion that the  import  was  in  contravention of  the  import  licence keeping  in mind the object of the import licence granted to the appellant.

   We  also notice while coming to the conclusion that  the Thyristor  Converter is an absolute necessity the  Collector relied  on  the Inspection Report of M/s.  Dona  Electricals Pvt.Ltd.  The said Inspection Report given after examination of  the  concerned machinery and its drawings had  stated  : in  the  absence  of complete M.G.   system,  a  substitute Thyristor   control   system  is    only   alternative   and imperative.   This  observation  in the  Inspection  Report relied  upon by the Collector clearly shows that the  Temper Mill would be incomplete and be of no use without the import of  Thyristor control system.  Therefore, the finding of the tribunal  that the report of M/s.  Dona Electricals does not support  the  view  taken by the Collector  also  cannot  be sustained.

   In regard to the import of the ceramic wool, it is to be noted  that  the Collector came to the conclusion  that  the said  ceramic  wool is a component which is fitted into  the furnace as a periodically replaceable part and in the normal course  has a life span was only five years.  Therefore,  in his  opinion, while importing second-hand annealing  furnace if  the  importer has replaced the periodically  replaceable

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ceramic  wool  with a new one which also has a limited  life span,  same cannot be construed as importing a new machinery because  in  the opinion of the Collector there  is  nothing improper  in  importing second-hand machinery  with  certain parts which require periodical replacement with new parts so long  as  the  nature  of the basic  machinery  so  imported remains  to be a second-hand machinery.  The tribunal though agreed  with  the finding of the Collector that the  ceramic wool  is  a periodically replaceable part still  held  prior permission  of  the Board was necessary for  such  machinery which  we find difficult to sustain in the view taken by  us herein above.

   For  the reasons stated above, we are in agreement  with the  view expressed by the Collector, hence, we reverse  the finding  of  the  tribunal to the extent  it  is  challenged before  us.   We  make it clear that the appellant  has  not questioned  the  finding  of the tribunal in regard  to  the import  of special steel plates weighting about 11 M.T.   To this  extent, the order of the tribunal remains  undisturbed and  as  directed  by the tribunal the  matter  shall  stand remanded  to the Commissioner for considering the  liability of  the appellant to pay penalty for the unauthorised import of the said special steel plates.

   The  appeal  is allowed to the extent  aforestated.   No costs.

   J.  (S.P.Bharucha)

   J.  (N.Santosh Hegde)

   J.  (Y.K.Sabharwal)

   March 30, 2001.

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