Exemption from Duty

Some exemptions from duties are provided in Customs Act, while some are provided in Customs Tariff Act. Besides, Central Government can grant partial or full exemption from duty under section 25 of Customs Act. These exemptions are summarised here.

Exemptions by Notification - Section 25 (1) of Customs Act, 1962 authorises Central Government to issue notifications granting exemptions from duty. Such exemption may be unconditional or subject to conditions. Such conditions may be required to be fulfilled before or after clearance. Government can also grant exemption by a special order in exceptional circumstances. The exemption notification should be published in gazette. The notification can be issued only in ‘public interest'.

Imports by privileged persons and organisations - Import by U N agencies, Governors, Ford Foundation, Vice President of India, specified equipment by foreign news agency, personal effects of deceased persons, gifts imported by CARE have been granted various exemptions.

Foreign Privileged Persons (Regulation of Customs Privileges) Rules, 1957 make provisions for privileges to specified foreign privileged persons i.e. Diplomats (High Commissioner, Ambassadors, Consul General etc). The imports of goods for their personal use or official use are allowed duty free. They have to produce exemption certificate in prescribed form signed by Head of Diplomatic Mission. Generally, the goods are not checked, but these can be checked if there is suspicion.

They can import cars. These can be sold to another privileged person. These can also be sold to non-privileged person after payment of customs duty, subject to certain restrictions. The car can be sold duty free after four years of import. If the car is totally damaged in accident or stolen, the amount of insurance claim will be treated a scum-duty price and duty so calculated will be payable.

Import for repairs, reconditioning etc. - Goods can be imported for repairs, reconditioning or re-engineering. These have to be re-exported within three years of imports. After imports, the repairs, reconditioning or re-engineering has to be in a bonded warehouse under customs bond. (Notification No. 134/94 - Cus dated 22-6-94) [It is not necessary that goods must have been manufactured in India]

Ad hoc exemptions - Section 25(2) of Customs Act permit Government to issue ad-hoc exemption from customs duty by issue of a special order in exceptional circumstances. The order should specify the exceptional circumstances for granting ad hoc exemption. [Similar provision in section 5A(2) of Central Excise Act]. - - It has been clarified that such exemption can be granted even after duty is paid. In such case, duty has to be refunded - MF(DR) circular No 12/97-Cus dated 12.5.1997.

Exemption of Imports for export - Various schemes have been formed to allow duty free imports of raw materials and components for exports. These include schemes like FTZ, 100% EOU, STP, EHTP, Advance Licences etc. Import of materials for job work and return are also permitted. These are discussed in a later Chapter on ‘Export Incentives'

Project Imports - Heavy Customs duty on imported machinery for projects make the initial project cost very high and project may become unviable. Hence, concept of ‘project Import’ has been introduced to bring machinery etc. required for initial setup or substantial exemption at concessional customs duty.

The goods are classified under heading 98.01, though the machinery and its parts may actually fall under different tariff heading. This simple method is adopted, as otherwise, classifying each machinery and its parts in different heads and valuing them would have been cumbersome and would have delayed clearances, which would cause demurrages. - Chapter 5 Para 1 of CBE&C’s Customs Manual, 2001.

Duty payable - Duty on project imports is basic 25% plus CVD of 16% plus of SAD 4%. .Basic customs duty for fertiliser projects, coal mining projects and power generation projects is 5%. [Notification No 16/2000-Cus dated 1-3-2000]. [Since now customs duty is generally 25%, ‘project import’ is relevant only in case of projects where basic duty is 5%].

Items eligible for Project Imports - The items eligible are specified in heading 98.01 of Customs Tariff Act. These are : all items of machinery including prime movers, instruments, apparatus and appliances, control gear and transmission equipment, auxiliary equipment (including those for research and development, testing and quality control); as well as components or raw materials for manufacture of these items and their components; required for initial setting up of a unit or substantial expansion.

Projects eligible - The projects eligible are : (1) Industrial Plant (2) Irrigation Project (3) Power Project (4) Mining Project (5) Project for oil or mineral exploration (6) Other projects as may be specified by Central Government. Under this head, Central Government has specified various projects like Mumbai Water supply, Mathura-Delhi- Ambala-Jullunder Pipeline, Nhava Sheva port Gas pipe line project, Konkan Railway project etc.

Registration of Contract - Contract for import has to be registered with Customs. Application for registration of Contract must be made before importation and contract must be registered before order for clearance of goods is made from Customs. The contract can be amended if required.

Documents to be submitted while registering contract are specified in Chapter 5 Para 8 of CBE&C’s Customs Manual, 2001.

Finalization of Contract - After contract is completed, importer has to submit a statement giving details of goods imported with proof of value and quantity within three months of clearance of goods. If necessary, Plant Site Verification may be carried out in case of large project contract exceeding Rs one crore. - Chapter 5 Para 12 and 13 of CBE&C’s Customs Manual, 2001.

Remission on lost/pilfered/damaged goods

Customs Act provides for remission of duty on goods lost/damaged/pilfered before clearance. These provisions have been specifically made because pilferage of goods in ports is very heavy - particularly of small and costly items.

Remission on lost/pilfered goods - Section 23(1) of Customs Act provides for remission of duty on imported goods lost (other than pilferage) or destroyed, if such loss or destruction is at any time before clearance for home consumption. Section 13 provides that if imported goods are pilfered after unloading but before order for clearance is passed by Customs Officer for clearance for home consumption or deposit in a warehouse, no duty is payable on the goods, unless the pilfered goods are restored to importer.

Normal practice is to inspect the goods in the port before payment of duty. The Duty is paid only when imported goods are found to be in order. Shortages should be informed to customs authorities and they should be involved in examination of goods, to prove shortage of goods. In All India Glass Mfgrs Federation v. CC 1991(55) ELT 5 (SC), it was held that damage to goods should be proved before goods are cleared from customs.

No remission after goods are cleared for home consumption – No remission for short delivery can be obtained after goods are cleared from customs. – Partap Steels v. CC 2001(135) ELT 168 (CEGAT).

Remission after goods are warehoused – Remission of duty on goods warehoused is permissible u/s 23, as goods cleared for warehousing are not ‘goods cleared for home consumption’. – Winsome Yarn v. CCE 2001(134) ELT 686 (CEGAT). [In a contrary decision, in Pasupathi Overseas P Ltd. v. CC - 1996(88) ELT 795 (CEGAT), it was held that no remission can be given in respect of warehoused goods. The decision probably needs review]. - - Loss of goods due to theft (pilferage) in warehouse is not covered u/s 23 and remission is not admissible. - Himalaya Granites v. CCE 2001(135) ELT 1212 (CEGAT). [Issue is arguable].

Difference between sections 13 and 23 (1) - Difference in sections 13 and 23 (1) can be summarised as follows :

1. Section 13 deals with pilferage, while section 23 (1) deals with loss or destruction of goods, except pilferage.

2. No duty is payable at all under section 13, but liability revives of duty if goods are restored. However, duty is payable under section 23 (1), but it is remitted by Assistant Commissioner of Customs. Thus, unless remitted, duty has to be paid under section 23 (1).

3. Under section 13, importer does not have to prove pilferage. However, under section 23 (1), burden of proof is on importer to prove loss or destruction.

4. Under section 13, pilferage should be before order for clearance is made, while under section 23 (1), loss or destruction can be any time before clearance.

5. Under section 13, loss must be only due to pilferage. However, under section 23 (1), loss or destruction may be due to fire, accident etc. but not pilferage. e.g. loss by leakage is covered under this section.

6. Under section 13, normally duty is not paid. However, if duty is paid before examination of goods, refund can be claimed if goods are found to be pilfered during examination but before order for clearance is made. Under section 23 (1), if duty is paid, then refund can be obtained only if remission is granted by Customs Authorities. Thus, remission under section 23 (1) is at the discretion of Custom Authorities. [Of course, the discretion has to be exercised judiciously].

7. Section 13 is not applicable for warehoused goods, while section 23 (1) is applicable for warehoused goods also. [as goods transferred to warehouse are not ‘cleared for home consumption’]. As per section 23(2) of Customs Act, importer cannot relinquish the title in goods after order for clearance for home consumption. However, in case of warehoused goods, the owner of warehoused goods can relinquish the title of goods any time before order for home clearance is made. He will be required to pay rent, interest, other charges and penalties that may be payable, but duty will not be payable [proviso to section 68 inserted w.e.f. 14-5-2003]. [Really, this is not permitted as per wording of section 23(2). However, since proviso to section 68 is a specific provision and added later, it will prevail].

Loss after order of clearance but before actual clearance - Section 13 provides that duty on pilfered goods is not payable if the imported goods are pilfered before order of clearance is made. This section is on basis of principle that goods are not in control of importer when they are in port and he should not be penalised if these are pilfered .As the sections 13 and 23 (1) stand today, there is no remedy if goods are pilfered after the order for clearance is made but before the goods are actually cleared.

remission if goods lost after order of clearance but before physical clearance - In CC v. Saw Pipes 2001(137) ELT 244 (CEGAT), it was (indeed rightly) held that ‘clearance for home consumption’ cannot be equated with order of clearance for home consumption. Physical removal of goods which is the ‘clearance for home consumption’ can take place only after such an order is passed. Such clearance therefore is an event distinct and separate from the order permitting clearance. [This decision is relevant for purpose of section 23(1) and not for section 13, as wording used in section 13 is different].

Duty on pilfered goods is payable by port authorities - Once goods are unloaded from ship/aircraft, they are in custody of port trust authorities or airport authorities till the goods are cleared. They are in position of ‘bailee'. If goods are pilfered after they are unloaded but before they are cleared from the port, the customs duty is payable by port trust authorities or airport authorities under whose custody the goods were lying [section 45(3)]. Thus, though importer does not have to pay duty on pilfered goods, the same is payable by authorities who were custodians of the goods so that Government does not lose any revenue on account of pilferage.

Remission on relinquished goods - If the importer decides to abandon the goods, he shall not be liable to pay any duty [section 23 (2) of Customs Act]. Such situation normally arises if the goods are in very deteriorated condition and importer may feel that it is not worthwhile to pay duty and incur further losses. The importer may also abandon the goods if the assessment of duty is done on much higher side than expected by him. In such case, he may abandon the goods if he feels that it is cheaper to abandon the goods than to pay heavy customs duty. He should relinquish title before (a) an order for clearance of the goods for home consumption or (b) before order permitting deposit of goods for warehousing is made.

However, even if goods are warehoused, the owner of warehoused goods can relinquish the title of goods any time before order for home clearance is made. He will be required to pay rent, interest, other charges and penalties that may be payable, but duty will not be payable [proviso to section 68 inserted w.e.f. 14-5-2003]. The word ‘interest’ is not clear and is likely to lead to litigation. It has been consistently held that when duty is not payable, question of payment of duty does not arise.

Abatement of duty on damaged goods - Section 22 of Customs Act provides for reduction in duty if goods are damaged or deteriorated in any of the following cases : (a) damaged before or during unloading in India (b) damaged by accident after unloading but before examination of goods for assessment by Customs Officer - provided that the accident is not due to wilful act, negligence or default of importer, his employee or agent (c) damaged by accident in warehouse before clearance of goods - provided that the accident is not due to wilful act, negligence or default of importer, his employee or agent. The customs duty chargeable will be in proportion to the value of damaged good to value of goods before damage or deterioration e.g. if value of goods is Rs. 10,000 and after damage, the value is Rs. 2,000, then 20% of the normal customs duty is payable. The value of damaged goods may be decided by Assistant Commissioner of Customs, or if the owner agrees, the damaged goods may be sold by auction and gross sale proceeds of the auction will be deemed to be the value of goods.

Demand of Customs Duty

If it is found that duty is not levied or short levied or erroneously refunded, Customs officer can raise a show cause notice for demanding the duty [section 28].

Period for issue of Show cause Notice for demand - The notice must be issued within six months from relevant date. However, in case of import by an individual for his personal use or by Government or by any charitable, research or charitable Institution or Hospital, the demand can be raised within one year of relevant date. This period can be extended to five years in case the short levy or non-levy or refund was due to collusion, wilful mis-statement, suppression of facts or fraud by importer, exporter, agent or employee of importer/exporter. While counting this period, if Court had granted a stay against issue of notice, that period will not be considered [section 28 (1) of Customs Act].

Relevant date for issue of SCN - Relevant date for calculating the limit of six months, one year or five years is (a) if duty or interest was not levied, date of order of clearance of goods (b) if the duty was provisionally assessed, then date when it was adjusted after final assessment (c) if duty or interest was erroneously refunded - date of refund (d) if duty was paid or interest levied - date of payment of duty or interest [section 28 (3) of Customs Act].

No time limit for assessment – Section 17 does not prescribe any time limit for assessment. Thus, if ship was allowed to leave without assessment on execution of guarantee, assessment can be done without any time limit and time limit u/s 28 does not apply. – Southern India Corpn v. ACCE 2000(123) ELT 251 (Cal HC).

Demand in respect of correction of clerical error - Section 154 of Customs Act provides for correction of - (a) clerical or arithmetical mistakes or (b) errors due to any accidental slip or omission - in any decision or order passed by Central Government, CBE&C or any officer of Customs can be corrected by the said authority.

 Notice can be issued in respect of goods already cleared - Goods are cleared from customs after an order of Assistant Commissioner is issued under section 47 of Customs Act. As per section 128 (2) of Customs Act, if the department is not satisfied with the order, it can file appeal against the order of Assistant Commissioner with Commissioner (Appeals). A question was raised whether, once goods are cleared after issue of order under section 47, a demand can be raised under section 28 or only a review application has to be made under section 128 (2). There were divergent opinions. Finally, Supreme Court, in UOI v. Jain Shudh Vanaspati Ltd. - 1996(86) ELT 460 (SC) = AIR 1996 SC 2696, has held that action can be taken under section 28 of Customs Act, even after goods are released from Customs, by issuing a show cause notice etc. It is not necessary that appeal must be filed by department u/s 128(2) with Commissioner (Appeals) against order of clearance . - similar decision in Seshan Printers v. CC - (1996) 84 ELT 72 (CEGAT) * Component Corporation v. CC 1997(93) ELT 225 (CEGAT).

Interest on delayed payment of duty - Demand, once confirmed, must be paid within three months. Interest is payable from the next month from which duty ought to have been paid [section 28AB of Customs Act as amended w.e.f. 11.5.2001]. The provisions are identical with provisions in Central Excise and hence are not elaborated here.

Other provisions similar to Central Excise - Legal provisions regarding show cause notice, hearing, appealable order etc. are similar to excise. Provisions in respect of Settlement Commission and Advance Ruling are also same as excise. Principle of provisional assessment is also same, though provisions are not identical. Hence, these provisions are not elaborated here.

Section 28 of Customs Act is pari materia with section 11A of Central Excise Act, except that the words ‘with intent to evade payment of duty’ appearing in section 11A do not appear in section 28 of Customs Act.

Recovery of sums due to Government

Section 142 of Customs Act provides that if any duty is demanded or drawback paid is recoverable from a person, it can be (a) deducted from any amount payable by any customs officer to such person (b) detaining and selling goods belonging to such person, which are under control of Customs authorities (c) issuing a certificate to District Collector in whose district any property of the person is situated or where he carries on business. The District Collector can recover the amount as arrears of land revenue. (d) Destraining and detaining any property belonging to the person and selling the same (d) enforcing a bond executed under the Act.

Detention and sale of any property - If the amount due is not paid, Assistant Commissioner of Customs can, on authorisation by a Commissioner of Customs, distrain any movable or immovable property belonging to or in control of such person (from whom any sum is recoverable]. The property can be detained until the amount is paid along with cost of the distress or keeping the property. If amount is not paid, the property can be attached and sold by customs authorities. [section 142 (1)(c)(ii) of Customs Act].

This section has been made applicable to Central Excise also. Since these provisions are discussed under Central Excise, these are not repeated here.

Refund of Duty

Refund may be obtainable if customs duty was paid in excess while clearing the goods.

Time limit for filing refund claim - Refund claim should be lodged within six months. This period is one year in case of imports made by individual for personal use or by Government or by any educational, research or charitable institution. If duty was paid under protest, time limit of 6 months / one year is not applicable. [proviso to section 27(1)]. If duty was paid on provisional basis, period of 6 months / one year will be calculated form the date of adjustment of duty after final assessment [Explanation II to section 27 (1) of Customs Act ].

Refund claim can be of customs duty and interest paid on such duty. [Note that as per section 47 (2) of Customs Act, 1962, if duty is not paid within two days of return of return of bill of entry to make payment of duty, interest is payable. If excess duty is refunded, pro rata interest should also be refunded.]

Refund to Importer/Buyer - Provisions regarding person to whom refund can be granted are as follows :

Who can file refund claim - Refund claim will be normally filed by importer. However, if the goods were sold and if buyer has paid customs duty, he also can file refund claim, if he has not passed on its incidence to another person. Refund claim should be lodged with Assistant Commissioner. Refund, once sanctioned, will be normally paid to Consumer Welfare Fund, unless the importer/buyer proves that he has not passed on the burden to another person [section 27(2) of Customs Act].

Refund claim cannot be filed by Custom House Agent in his own name, without power of attorney - VV Dabke v. CC - 1983 (12) ELT 583 (CEGAT) - followed in Jaswant B Shah v. CC - (1996) 81 ELT 669 (CEGAT).

Refund to buyer/Importer/exporter if no ‘Unjust Enrichment’ - Under proviso to section 27 (2) of Customs Act, refund of customs duty and interest paid on such duty can be made to importer/buyer only in following cases :

These provisions are overriding provisions and are applicable irrespective of any contrary judgment of Appellate Tribunal or any Court or any other provisions of Customs Act and Rules. Thus, refund provision in any other rule will be always subject to the aforesaid provisions of section 27 (2) of Customs Act.

Application for refund of Customs Duty - Application for refund must be made in prescribed form in duplicate. The form has been prescribed in Customs Refund Application (Form) regulations, 1995.

Duty incidence deemed to have been passed to buyer - Refund is available to importer/buyer only if he has borne the incidence. Section 28D of Customs Act that every person who had paid duty shall be deemed to have passed on the incidence to buyer of the goods. (i.e. he is deemed to have recovered the same from buyer). The importer/buyer claiming refund will have to prove that he has not passed on incidence of tax to any other person. [In legal terminology, this means that burden of proof is on importer/buyer claiming the refund that he has not passed on the incidence. Customs department does not have to prove otherwise i.e. that incidence has been passed on to consumer.]

Unjust Enrichment - Provisions in respect of ‘Unjust Enrichment’ are similar to those in respect of Central Excise.

Refund beyond six months/one year - Discussions under Central Excise Law on this topic are fully applicable in customs also. These can be granted only under writ powers of High Courts or SLP with Supreme Court. However, such refunds, even if sanctioned, will be subject to provisions of ‘unjust enrichment'