COMMISSIONER OF CUSTOMS, NEW DELHI v. M-S PHOENIX INTERNATIONAL LTD. & ANR

Citation: [2007] 10 S.C.R. 126

Court: Supreme Court of India

Bench: S.H. KAPADIA, B. SUDERSHAN REDDY

Case summary

COMMISSIONER OF CUSTOMS, NEW DELHI v. M-S PHOENIX INTERNATIONAL LTD. & ANR.pdf

Judgment text

COMMISSIONER OF CUSTOMS, NEW DELHI ~ v. MIS. PHOENIX INTERNATIONAL LTD. & ANR. SEPTEMBER 20, 2007 [S. H. KAPADIA AND B. SUDERSHAN REDDY, JJ. ) Customs TariffAct, 1962-TariffHeading 64. 04-Customs duty, evasion of-Company PIL importing synthetic shoe uppers and Company PIND importing soles, insoles and sock liners as components/parts-Department's case that PIL owner ofPIND and items imported constitutedsynthetic shoes in semi knocked downform, thus, duty evaded-Correctness of-Held: PIL carried out the entire manufacturing activity offinished products-synthetic shoes for domestic and export markets and was the real importer ofall the items, thus Department rightly clubbed the items-Items imported constituted complete shoe in SKD condition, thus, to be assessed as complete ....... finished goods under Tariff Heading 64.

04 and exemption under Notification not applicable-Bifurcation by importation ofitems by two companies was subterfuge to evade duty, thus, para l 56(A) violated-Hence, importers liable to pay customs duty at 50% plus CVD at 15% ad valorem-However, issue regarding re-quantification ofdifferential duty, redemptionfine andpenaltiespayable by importer remitted back-Exim Policy 1992-97-Para 156 (A)-NotificationNo. i 45194 Cus dated 1. 3. 94-Customs Act, 1962. -""'i Mis. PIL imported synthetic shoe uppers and M/s. PIND imported soles and insoles as components/parts. Appellant- Department found that the two companies evaded customs duty. It issued show cause notices to the respondents-two companies alleging that M/s. PIL were the owners of Mis. PIND; that Mis. PIND was dummy unit ofMis. PIL; that the goods imported were not parts/ ~ components but were semi knocked down (SKD) goods, liable to be assessed as complete finished goods under tariffHeading 6404.

19 of the First Schedule of the Customs TariffAct, 1975 and liable to MIS. PHOENIXINTERNATIONALLTD. basic customs duty at 50% ad valorem and countervailing duty at 15% ad valorem; that synthetic shoes were imported without specific import licence; that Mis. PIL resorted to subterfuge ofimporting , uppers of "Reebok" shoes in their own name and the remaining three components in the name of Mis. PIND to bypass restriction imposed by para 156(A) ofthe EXIM Policy 1992-97 and claim the benefit of Notification No. 45194-Cus dated 1. 3. 94; that the value given in the import invoices did not represent the correct transaction value since a single consignment meant for one importer-Mis. PIL was deliberately split up into two parts and, valuation had to be done by invoking rule 8 ofthe Customs Valuation (Determination ofPrice t oflmported Goods) Rules, 1988, and thus the consignment of two companies should be clubbed for the assessment under EXIM Policy 1992-97 and Customs Act, 1962.

The Commissioner held that the imports made by Mis. PIND ofsoles, insoles and sock liners should be treated as imports by Mis. PIL, however, in view of elaborate manufacturing process ofsupport shoes, the clubbed items did not I'. ) J_ constitute synthetic shoes in SKD condition so as to contravene para 156(A) ofthe EXIM Policy 1992-97; that all imports attracted duty ·at the rate applicable to the footwear and not at the rate applicable to components/parts; that no duty was demandable in respect of synthetic uppers, imported by Mis. PIL, however, all the components imported by Mis. PIND attracted duty at the rate applicable to fullyfinished footwear, and as such the exemption under notification 451 94-Cus dated 1. 3. 94 was not applicable, thus the respondent was liable to pay duty. Respondent-importers filed appeals. Tribunal allowed the same. Hence the present appeals. Allowing the appeals, the Court HELD: 1.

The respondents were guilty ofviolating para 156(A) of the EXIM Policy 1992-97; that they were liable to be assessed under tariff Heading 64. 04 and, thus, were liable to pay duty of customs at 50% +CVD at 15% ad valorem; that the respondents were not entitled to the benefit of concessional rate of duty under Notification No. 45/94-Cus dated 1. 3. 94 and that the Department was right in invoking rule 8 of the Customs Valuation Rules. The question ofre-quantification ofdifferential duty, redemption fine and penalties, payable by the respondents, is remitted to the Commissioner ofCustoms who would decide the issue in accordance with law. [Para 13] [144-G-H; 145-A] 2. 1. It is clear that the entire device of bifurcation by importation ofone item by M/s. PIL and three items by Mis.

PIND was a subterfuge/fictitious arrangement was created to show that two independent companies had imported separate parts of the footwear in order to bypass the restriction "imposed by para 156(A) ofthe EXIM Policy 1992-97 and obtain the benefit ofthe Notification No. 45/94-Cus dated 1. 3. 94. Under the said paragraph, importation ofsynthetic shoes in SKD condition could only be against specific import licence. Mis. PIL was aware of the restrictions. It was the only real importer ofall the four items. Mis. PIL had funded Mis. PIND with interest free loans. Mis. PIND was the factory of Mis. PIL. When there is an allegation of subterfuge, the court has to examine the circumstances surrounding the import to ascertain whether the importer had entered into fictitious arrangement to evade customs duty. The intention behind the act ofimportation has to be probed. In the instant case, the most clinching circumstance is that there is manufacture ofthe finished.

products-"synthetic shoe" for domestic and export markets. Mis. PIL manqfactured export quality synthetic shoes on their own account whereas those sold inthe domestic market by M/s. PIND was also manufactured by Mis PIL for Mis PIND. Further, General Manager Mis PIL, on behalf ofimporter stated that synthetic uppers (imported by Mis PIL), soles, insoles and sock liners (imported by M/s PIND) did constitute complete shoe in SKD condition and in order to circumvent 156(A) the entire device was arranged by the importer to evade duty. [Para 11) [141-H; 142-A-E, F] 2. 2. In the reply to the show cause notices there were no det~ils supplied by the importer regarding the number ofunits under Mis. PIL. The statement ofGeneral Manager in the preliminary enquiry shows that there were three units in Noida under Mis. PIL. No details of the turnover have been furnished. No details of the number of employees have been furnished.

The bifurcation of the turnover between manufacture ofsynthetic shoes exported and shoes sold in MIS. PHOENIX INTERNATIONAL LTD. the domestic market was not given. The functional connectivity 9f I the three units was not given. No reason have been given as to why Mis. PIL did not import all the four items particularly when Mis. PIL has been in complete charge of manufacturing. However, the clinching circumstance is that Mis. PIL was not only manufacturing export quality synthetic shoes but it also manufactured as job-worker of Mis. PIND domestic quality synthetic shoes. Soles, insoles and sock liners were imported by Mis. PIND and supplied as raw. :. material to Mis. PIL who manufactured the synthetic shoes which ,. ___ were routed through Mis. PIND to Mis. Reebok India for sale in the domestic market. In the circumstances, the complete manufacturing activity was in the hands of Mis. PIL. They manufactured synthetic shoes sold in the export market and they.

also manufactured synthetic shoes which were sold in the domestic. market. The shoe uppers constituted an important part of the footwear. That part was imported under the advance licence by Ml s. PIL. The same company got the outer soles, insoles and sock liners in the name of Mis. PIND. It is M/s. PIL which ultimately manufactured synthetic shoes. The tribunal did not consider these circumstances. In cases ofthe instant nature, the Tribunal should look at the entire composite picture in order to ascertain the real intention behind the arrangement on which the importer relies. Lastly, the shoe uppers were imported by Mis. PIL whereas soles, insoles and sock liners were imported by Mis. PIND and given to Mis. PIL who along with 28 other items (peripherals), procured 'r domestically, manufactured the finished product, viz. , synthetic >- shoes. The entire device was undertaken to show that what was imported were parts and not the footwear in the SKD condition. Therefore, Mis.

PIL was the only real importer of all the four items and, the Department was right in clubbing. [Para 11] (142-F, H; 143-A-H] 2. 3. If the transaction of Mis. PIND and Mis. PIL are looked -. at separately then the question ofsubterfuge cannot be examined. In the instant case, interest-free loans had been advanced by Mis. PIL to Mis. PIND. The real importer and also the manufacturer was M/s. PIL. The entire transaction was completed by M/s. PIL. No reason has been given as to why Mis. PIL could not have imported the outer soles, insoles and sock liners under para 22 ofthe EXIM Policy 1992-97 by payment ofduty at the concessional rate under -\ Notification No. 45/94-Cus dated 1. 3. 94. The obvious intention was to bypass the EXIM Policy 1992-97 and claim benefit ofexemption Notification No. 45/94-Cus dated 1. 3. 94. Lastly, all four items plus 28 other items (peripherals), domestically procured, were used in the manufacturing process undertaken by Mis.

PIL either on its own account (in case of export) or as job-worker (incase of domestic sales) which led to the emergence ofthe final product. Therefore, the importer was liable to be assessed under tariffHeading 64. 04 and consequently not entitled to the benefit of exemption Notification No. 45/94-Cus dated 1. 3. 94. The soles and insoles as also sock liners were imported by Mis. PIL in the name of Mis. PIND; that Mis. PIL had an agreement with Reebok International Ltd. which had its subsidiary in India, viz. , Reebok India to whom synthetic shoes were sold by Mis. PIL through M/s. PIND and, therefore, Department was right in invoking rule 8 ofthe Customs Valuation Rules. [Para 12] [144-B-F] CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 8037- 8047of2007. From the Judgment and Order dated 22. 12. 2000 ofthe Customs, Excise and Goid (Control) Appellate Tribunal, New Delhi in Final Order No. 411-42112000-D in Appeal Nos. C/286/98-D and C/302-311/2000 D With E/Co/239. 257-260/2000 D.

Vikas Singh, ASG. G. Prakash and B. Krishna Prasad for the 1 Appellant. ~ V. Lakshmikumaran, Alok Yadav and M. P. Devanath for the Respondents. The Judgment ofthe Court was delivered by KAPADIA, J. 1. These civil appeals are filed by the Department under Section l 30E of Customs Act, 1962 against order passed by r CEGAT dated 22. 12. 2000 in Final Order No. 411-. 421/2000-D in Appeal Nos. C/286/98-D and C/302-311 of 2000-D with E/Co/239, 257-260/2000-D whereby the Tribunal allowed the appeals of the importers herein (respondents). / M/S. PHOENIXINTERNATIONALLTD. [KAPADIA,J. ] 2. The question of law that arises for determination in these civil '1 appeals is: Whether shoe uppers, outer soles, insoles and sock liners imported by Mis. Phoenix Industries Ltd. (PIND) in the same container could be clubbed so that it could be considered as import ofthe shoe itselfin semi knocked down (SKD) condition?

Whether the importer was guilty ofmis-declaration when the importer declared SKD goods as components? FACTS 3. A synthetic shoe, inter alia, consists of vital parts, namely, synthetic uppers, outer soles, insoles and sock liners Mis. Phoenix International Ltd. (Mis. PIL) were the holders ofQuantity Based Advance Licence under which it was entitled to import synthetic shoe uppers, PVC compounds and natural rubber. Mis. PIL imported synthetic shoe uppers numbering 5215 pairs on 16. 2. 96 declaring CIF value at Rs. 19,52,401. On the same day Phoenix Industries Ltd. (Mis. PIND) imported soles and insoles numbering 5151 pairs worth Rs. 7,07,806 (CIF). Mis. PIL had imported synthetic uppers under DEEC Scheme whereas soles were imported by M/s. PIND under para 22 of the EXIM Policy 1992-97. Both the companies imported respective items as components/parts.

On preliminary enquiry, Department was satisfied that there was an attempt to mislead by importing the above items separately through two different companies as uppers and soles constituted complete synthetic shoes in SKD form. In tl1e preliminary enquiry the Department found that all the cartons were placed in one container with the marking of''Phoenix'' without specifying whether the container was meant for Mis. PIL or Ml s. PIND. Hence, two show cause notices came to be issued dated 7. 5. 96 for the period 21. 6. 95 to 4. 11. 95 and the second show cause notice dated 1. 7. 96 for the month ofFebruary 1996. 4. In the show cause notices it was alleged that the parts imported · in the name oftwo companies were synthetic shoes of''Reebok'' brand in SK.

D form; that the import orders for synthetic uppers, outer soles and insoles had been placed by the two companies on the same Supplier in Bangkok; that the import orders carried the same number· that both the ' ' import orders were signed by Mr. BhupinderNagpal, General Manager ofMis. PIL; that the import invoices filed by the two companies referred to the same invoice (proforma) dated 2. I I. 95; and that the import orders for synthetic shoe uppers, outer soles and insoles were placed by Mr. Bhupinder Nagpal on behalfofthe said two companies.

According to the show cause notices consumer items were placed in the negative list vide para I56(A) ofthe EXIM Policy 1992-97 and under the said para ofconsumer goods in SKD condition or Ready to assemble condition, were required to be imported under specific import licence; that synthetic shoes constituted a consumer item and, therefore, required specific import licence; that, in the present case goods in SKD condition or Ready to Assemble condition were imported without specific import licence despite knowledge on the part ofMis. PIL that all the components of "Reebok" shoes like synthetic shoe uppers, outer soles, insoles and sock liners were meant to be assembled either by them or in their behalfand fater supplied to Mis. Reebok International Ltd. or Mis. Reebok India. In this connection, the Department placed reliance on the manufacturing agreement between Mis. PIL and Mis. Reebok International Ltd. In the show cause notices it was further alleged that Mis.

PIL were the owners of Mis. PIND. In the circumstances, the show cause notices stated that Mis. PIL had resorted to the above subterfuge of importing uppers of ''Reebok''·shoes in their own name and the remaining three components in the name ofMis. PIND in order to bypass restriction imposed by para I56(A) ofthe EXIM Policy 1992-97. In that connection, the Department alleged that a loan ofRs. I I. 7 crores was advanced by Mis. PIL to Mis. PIND, interest free, during the year ending 31. 3. 95 and a loan ofRs. 7. 7 crores was also advanced to the same company, interest free, during the financial year 31. 3. 94. For that purpose reliance was placed on the balance-sheets of Mis. PIL. Under the above circumstances, the Department alleged, vide the show cause notices, that Mis.

PIL was the 1 importer ofall the components, namely, synthetic shoe uppers, outer soles, insoles and sock liners; that, as per rule 2(a) of the General Rules of Interpretation ofthe First Schedule to the Customs TariffAct, I975 (for short, ''General Rules of interpretation'') the goods imported were not parts/components but were SKD goods, liable to be assessed as complete finished goods under tariffHeading 6404. 19 ofthe First Schedule ofthe Customs Act, 1975 and liable to basic customs duty at 50% ad valorem and countervailing duty at 15% ad valorem. Vide two show cause notices. violation ofpara 156(A) ofthe EXIM Policy 1992-97, was also alleged. In that connection, the Department alleged that Mis. PIL was fully aware that import ofthe above parts of "Reebok" synthetic shoes in the name ofone company may give rise to suspicion and, therefore, the imports were made through the aforestated subterfuge.

Further, according to the show cause notices, the value given in their import invoices did not represent the correct transaction value since a single consignment meant for one importer, namely, Mis. PIL was deliberately split up into two parts and, accordingly, valuation had to be done by invoking rule 8 of the Customs Valuation (Determination ofPrice oflmported Goods) Rules, 1988 (for short, "Customs Valuation Rules"). In this connection, the case of the Department was that there were no imports of "Reebok" components in India by any other company and, therefore, value of comparable goods was not available and, therefore, the Department had no option but to invoke rule 8 of the Customs Valuation Rules. Accordingly, the CIF value was claimed at Rs. 1,566. 39 per pair under rule 8 ofthe Customs Valuation Rules. In the circumstances, vide the show cause notices the impo1ier was called upon to answer why the benefit of Notification No~45/94-Cus dated 1. 3.

94 should not be disallowed; why consignments ofthe two companies should not be clubbed for purposes ofassessment under EXIM Policy 1992-97 and Customs Act, 1962; why CIF value of shoes should not be taken at Rs. l 566. 39 per pair; why synthetic shoe uppers, outer soles, insoles and sock liners be not valued at Rs. 82,25,114(CIF); why the said items should not be confiscated under Section 111(d)(l)(m) ofthe Customs Act, 1962; why the aforestated four items should not be assessed to duty under tariff Heading 6404. 19 of Schedule I to Customs Tariff Act, 1975 as synthetic shoes in SKD form liable to basic customs duty at 50% plus CVD at 15% ad valorem; why benefit under DEEC should not be denied and lastly why penalty under Section 112(A) of Customs Act, 1962 should not be imposed for G contravention. 5. In reply to the show cause notices, it was stated, that the aforestated two companies were separate independent companies; that M/s.

PIND was incorporated as private limited company in 1992 in the name of. M! s. Welcome Leather Industries Pvt. Ltd. ; that M/s. PIL was ~ incorporated as a private limited company in 1987; that M/s. PIL could not begin its commercial activities for four years and it started its business in 1991 as merchant exporter; that in 1991 M/s. Welcome Leather Industries Pvt. Ltd. decided to sell the company which was acquired by Mfs. PIL; that in 1992 M/s. PIL started manufacturing shoe uppers and, therefore, though both the companies, namely, M/s. PIL and M/s. PIND were under the same management having common majority ofdirectors and shareholders, they were separate independent companies in all -t respects. According to the reply, the two companies were separately assessed under Income Tax Act, Sales Tax Act and Central Excise Duty. The factories ofthe two companies were located at different places. About 500 employees were working in respective companies.

According to the reply filed before the Commissioner, M/s. PIND was engaged in the manufacture ofleather shoes, synthetic shoes, semi-leather shoes, outer soles etc. Mis. PIND were registered as a leather industry. According to the reply, goods manufactured by Mis. PIND including footwear were _j. _ sold in the domestic market. According to the reply, in certain cases footwear was got manufactured by M/s. PIL on job work basis. According to the reply, in some cases Mis. PIND acted as job workers for M/s. PIL. At the same time, in other cases, M/s. PIL were as job workers for Mis. PIND. According to the reply, Mis. PIL handled, during the above period, overseas sales whereas domestic sales were done by Mis. PIND under the authorization ofMis. PIL. As regards the import in question, it was stated that 5251 pairs ofouter soles, insoles and sock '1 ~ liners were imported by Mis. PIND from the foreign Supplier in Bangkok. The importer denied that M/s. PIND was a dummy unit of Mis.

PIL as alleged by the Department. In reply, Mis. PIND objected to the clubbing ofimports as is claimed in the show cause notices. In reply, it was stated that Mis. PIND was 100% fully owned subsidiary of M/s. PIL and, therefore, it was not a dummy company as alleged by the Department. In the alternative, it was submitted that even for the sake of argument )- imports of two companies were clubbed, yet there was no violation of Foreign Trade (Development and Regulation) Act, 1992. In reply, Mis. PIND stated that the concept of "SKD" did not exist in respect of M/S. PHOENIXINTERNATIONALLTD. [KAPADIA,J. ] synthetic shoes; that, in respect ofshoes it was not possible to unassemble -t I the product into parts and, therefore, para 156(A) ofthe EXIM Policy 1992-97 had no application to the facts of the present case. In this connection, it was further stated that in making of shoes a complicated industrial process involving costly machine, workers, technical knowhow etc.

was involved and that the finished goods cannot be manufactured without further processing and, therefore, it is a misnomer to call synthetic shoe uppers, soles, insoles and sock liners as SKD packs of complete shoes. Reliance was placed also in para 7(12) read with 156(A) of the ... - EXIM Policy 1992-97 in respect ofthe contention that ''consumer goods'' has been defined in para 7(12) refers to goods like ceiling fans, cycles etc. ; that para 7(12) refers to "consumer goods" which can directly satisfy human needs without further processing and since synthetic shoes were not capable of being assembled without further processing they did not attract para 156(A) of the EXIM Policy 1992-97.

On the question of applicability ofrule 2(a) ofthe General Rules ofinterpretation, the importer stated that the said rule was meant only for classification ofgoods under the Schedule to the Customs TariffAct, 1975; that, the said rule cannot be used for interpretation of EXIM Policy 1992-97 or the exemption notification No. 45/94-Cus dated 1. 3. 1994 and, therefore, the importer disputed the contention of the Department that because of rule 2(a) of the General Rules of the Interpretation the items imported should be construed as SKD packs of sports shoes, therefore, according to the importer rule 2(a) was not applicable. Further, according to the importer, Notification No. 45/94-Cus dated 1. 3. 1994 gave exemption to the items mentioned in Table A annexed thereto which referred to sole, insole and sock liner and consequently Mis. PINO was entitled to the benefit ofthe said notification.

In this connection, it was stated that goods falling under Table A were not governed by Actual User condition. According to the importer the said notification was applicable to the aforestated four items which were used in the leather industry. According to the importer, so long as the aforestated items, namely, outer soles, insoles and sock liners ---. were imported as "parts" by Mis. PIND, exemption under the above notification was applicable. On the question ofvaluation it was stated that the foreign Supplier in Bangkok was unrelated to Mis. PIL and Mis. PINO; that Reebok International Ltd. had no shares in the foreign Supplier company; that the said foreign Supplier was not the sole Supplier ~ ofReebok International Ltd. and, therefore, the transaction value ofthe aforestated four parts should be accepted in terms ofrule 4 ofthe Customs Valuation Rules. Therefore, it was not open to the Department to invoke rule 8 ofthe Customs Valuation Rules.

Accordingly, it was prayed by the importer that the show cause notices be dropped. The reply ofM/s. PIL and the reply of Mis. PINO are almost identical. 6. By o>:der dated 12. 4. 99, the Commissioner held that the imports made by Mis. PINO of soles, insoles and sock liners should be treated -i as imports by Mis. PIL, however, in view ofthe elaborate manufacturing process undertaken in the factory to produce a complete footwear it was not possible to hold that complete footwear in SKD condition or Ready to Assemble condition was imported so as to contravene para 156(A) ofthe EXIM Policy 1992-97; at the same time, the Commissioner held that since the four items had to be dubbed and since the entire operations were undertaken by M/s. PIL and since the four items were essential components ofsynthetic shoes, rule 2(a) ofGeneral Rules ofInterpretation __. L. stood attract.

The Commissioner took the view, in this connection, that rule 2(a) provides for a legal fiction to be applied to the imported goods. It provides for the rate of duty applicable to components to be applied as ifthe components were finished articles. That, since the imports were ofitems which were essential parts of synthetic shoes the said imports were imports ofsynthetic shoes in an unassembled form. Hence, it was held that all imports attracted duty in the present case at the rate applicable '( to the footwear and not at the rate applicable to components/parts. -4 Accordingly, the Commissioner held that no duty was demandable in respect of synthetic uppers, imported by Mis. PIL during the period 21. 6. 1995 to 4. 11. 1995. However, for imports ofsoles, insoles and sock liners made by Mis. PINO, exemption under notification 45/94-Cus dated 1. 3. 94 was not admissible and consequently all the three components imported by Mis.

PINO would attract duty at the rate applicable to fullyfinished footwear under tariffHeading 64. 04. That, there was no exemption )-for footwear under the said notification as it was available only to parts of footwear. That, since all the components imported by Mis. PIND attracted duty at the rate applicable to fully-finished footwear, the said exemption notification 45194-Cus dated 1. 3. 94 was not applicable to the facts ofthis case. 7. In conclusion, the Commissioner passed the following order: "The goods valued at Rs. 78,79,9681- in respect of show cause notice dated 1. 7. 96 representing the imports made in the name of Mis. Phoenix Industries Ltd. attracted confiscation. However, since the goods are not available, no order confiscating the goods can be passed. I confirm the differential duty of Rs. 16,78,891/- in respect ofimports made by Mis. Phoenix International Ltd. and Phoenix Industries Ltd. under two bills ofentry covered under show cause notice dated 7. 5.

96 under Section 28(1) ofthe Customs Act, 1962. The duty is payable by Mis. Phoenix International Ltd. , Noida. I also confirm the differential duty ofRs. 29,14,9331- under the proviso to Section 28(1) ofthe Customs Act, 1962 in respect ofimports made in the name ofMis. Phoenix Industries Ltd. during the period 21. 6. 95 to 4. 11. 95 covered under show cause notice dated 1. 7. 96. This amount is also payable by Mis. Phoenix International Ltd. Thus, the total amount ofduty payable by Mis. Phoenix International Ltd. is Rs. 45,93,8241-. I also impose upon Mis. Phoenix International Ltd. a penalty of Rs. I0,00,000/- (Rupees Ten Lacs only) under Section 112(a) ofthe Customs Act, 1962. Any bank guarantee or deposit made by Mis. Phoenix International at the time ofprovisional release of goods or during the pendency of these proceedings will be adjusted towards payment ofduty demanded and penalty imposed. '' p CONTENTIONS 8. Mr. Vikas Singh, learned Addl.

Solicitor General, submitted that after clubbing all the four components the Commissioner had erred in holding that the clubbed items did not constitute synthetic shoes in SKD -,,. ,( condition. That, at the relevant time Para l56(A) warranted all consumer goods in SKD condition to be imported under specific import licence and therefore, the word "SKD" had to be construed in the manner in which the trade dealing in such matter would interpret. That the Commissioner should have held that the imports were in SKD condition and since imports of SKD shoes was a restricted item, the advance licences under which Mis. PIL had made the imports were not applicable to the goods in question. Learned counsel submitted that the Commissioner had erred in holding that the process of manufacturing support shoes was quite elaborate and, therefore, the four items imported did not constitute synthetic shoes in SKD form.

Learned counsel submitted that the Commissioner had erred in holding that there was no violation of Para 156(A) ofthe EXIM Policy. In this connection, learned counsel urged that importation of sports shoes in SKD condition could only be made against special import licence and in order to circumvent the restriction in the EXIM Policy 1992-97 the above device was evolved to bifurcate and import the items separately in the names oftwo different importers, i. e. , shoe uppers were imported by Mis. PIL against advance licence whereas soles, insoles and sock liners were imported by Mis. PIND on payment ofconcessional rate ofduty under para 22 ofthe EXIM Policy 1992-97 read with Notification No. 45194-Cus dated 1. 3. 94. Learned counsel further urged that on clubbing tariffHeading 64. 06 invoked by the importer, was not applicable and, therefore the importer was liable to pay basic customs duty at 50% +CVD at 15% ad valorem under tariff Heading 64. 04.

That, the said device ofbifurcation was to get the benefit of concessional rate of duty under Notification No. 45194-Cus dated 1. 3. 94. That, the entire funding and manufacturing functions were undertaken only by Mis. PIL which had entered into Buy-Back Arrangement with Reebok International Ltd. and, therefore, there was a close relationship between Reebok International Ltd. , Mis. PIL and Ml s. PIND which attracted rule 8 ofthe Customs Valuation Rules. For the aforestated reasons it was urged that the impugned decision ofthe Tribunal deserves to be set aside. 9. Mr. V. Lakshmikumaran, learned counsel appearing on behalfof the respondents, submitted that the Commissioner had erred in treating Mis. PIND as a dummy of Mis. PIL. In this connection, it was urged that the two companies are separate independent entities. They were incorporated on different dates. They are in different business. The domestic market was handled by Mis. PIND whereas export market was looked after by Mis. PIL.

Mis. PIL was the holding company whereas Mis. PIND was a subsidiary company. Both the companies had separate balance-sheets. They were registered separately under Central Excise Act. Mis. PIL had fulfilled its export obligations and in recognition thereofan advance licence was issued in its favour inter alia to import shoe uppers and that even in the DEEC the name of Mis. PIND was also shown as Supporting Manufacturer. It was further contended that para 156(A) of B ' EXIM Policy 1992-97 was not applicable to synthetic shoes. It was applicable to products like bicycles, ceiling fans etc. In this com1ection, learned counsel urged that it is over-simplification to say that ifthese four parts are clipped together it would constitute a sports shoe. Learned counsel invited our attention to the order of the Commissioner which indicates complicated procedure involved in the manufacture ofa sports shoe.

Therefore, it is urged on behalfofthe respondents that in the present case there was no import of footwear in the SKD condition and, therefore, para l56(A) ofthe EXIM Policy 1992-97 was not applicable. Learned counsel urged that even according to the Commissioner there D was no import ofsports shoe in SKD condition and, therefore, there was no violation of para l 56(A) of the EXIM Policy 1992-97. Learned counsel urged that this finding ofthe Commissioner has been confirmed by the Tribunal, therefore, this Court should not interfere with the concurring finding. Learned counsel next urged that Mis. PIND was an independent Unit. It had imported outer soles, insoles and sock liners under para 22 ofthe EXIM Policy 1992-97. It had paid duty at the concessional rate. Learned counsel submitted that in the present case we are concerned with tariffHeading 64. 04 (footwear) as against tariffHeading 64. 06 (parts offootwear).

Learned counsel submitted that apart from the four parts, namely, shoe uppers, outer soles, insoles and sock liners, there are 28 other parts domestically procured and consumed/used in the manufacture ofa sports shoe. He submitted that the process ofmanufacture was an intricate process. It was urged that if an error was to creep in the manufacture of the sports shoe the manufacturer would be liable for damages to be paid to the sportsman to whom injury may take place on G account ofdefect in the manufacture ofthe footwear. Accordingly, it was urged that the four parts, referred to above, did not constitute a sports shoe (footwear) and the Commissioner had erred in denying the benefit ofconcessional rate of duty on the ground that what was imported was in essence a complete footwear falling under tariffHeading 64. 04.

In this connection, learned counsel also submitted that rule 2(a) ofthe General Rules oflnterpretation was not applicable in this case, particularly, when "parts" offootwear came specifically under tariffHeading 64. 06. In this connection, reliance was placed on rule 1 of the General Rules of Interpretation which stated that the classification shall be determined according to the words used in the headings. Learned counsel urged that rule 2(a) ofthe General Rules oflnterpretation in any event cannot be used to interpret Notification No. 45/94-Cus dated 1. 3. 94. It was further contended that under Notification No. 45/94-Cus dated 1. 3. 94 insoles and outer soles fell under Table 'A' annexed to the said notification.

That, items falling under Table 'A' when imported into India for use in the leather industry were entitled to the benefit ofconcessional rate ofduty and, therefore, the Commissioner had erred in holding that insoles and outer soles were not entitled to the benefit ofconcessional rate ofduty as they were used in the manufacture ofsynthetic shoes which did not come under Leather Industry. Learned counsel submitted that Mis. PIND had imported soles, insoles and sock liners under para 22 ofthe EXIM Policy 1992- 97 and, therefore, it was entitled to the benefit of the Notification No. 45/94-Cus dated 1. 3. 94. Lastly, it was urged that in the present case the Conunissioner had erred in invoking rule 8 ofthe Customs Valuation Rules. In this connection, it was urged that in this case the importer had impotted the aforestated items for the sale price. That the import was made by two independent companies.

That the transaction was at arm's length; that there was no additional consideration and, therefore, rule 4 ofthe Customs Valuation Rules was alone applicable and there was no basis whatsoever for the Department to invoke rule 8 of the Customs Valuation Rules. Accordingly, learned counsel submitted that the Tribunal was right in holding that the aforestated items were imported separately by two independent companies and that there was no evidence to show that the footwear in SKD condition was imported and, therefore, in the present case importer was entitled to the benefit ofNotification No. 45/94-Cus dated 1. 3. 94 read with tariff Heading 64. 06 (parts of footwear) and, therefore, the said items were not liable to duty at the rate of 50% and 15% basic and CVD, ad valorem. FINDINGS ·1 10. We find merit in the present civil appeals filed by the Department. For the sake ofconvenience we reproduce para 22 and 156(A) ofthe EXIM Policy 1992-97 which read as follow: "ChapterV .

le> Imports Free 22. Capital goods, raw materials, intermediates; Importability components, consumables, spares, parts, accessories, instruments and other goods may be imported without any restriction except to ' the extent su~h imports are regulated by the Negative List oflmports or any other provision ofthis Policy or any other law for the time being in force. " ~~ 156. RESTRICTED ITEMS A. CONSUMER GOODS SI. No. Description ofltems Nature ofrestriction All consumer goods, Not permitted to be imported howsoever described, of except against a licence or in industrial, agricultural mineral accordance with a Public Notice or animal origin, whether in Issued in this behalf. SKD/CKD condition or ready to assemble sets or in finished form 11. In the case ofexcise duty, the taxable event is ''manufacture''. In the present case, however, we are concerned with the levy ofcustoms duty. That duty is levied on the "act" ofimportation.

Therefore, intention plays an important role in matters in which there is an allegation ofduty evasion. In the present case, the Department has alleged that a device was evolved by the importer showing import ofshoe uppers by Mis. PIL whereas outer soles, insoles and sock liners imported by Mis. PIND. Fl subterfuge was, therefore, created to show that two independent companies had imported separate parts ofthe footwear in order to bypass para 156(A) ofthe EXIM Policy 1992-97. Under the said paragraph, importatfon of synthetic shoes in SKD condition could only be made against specific import licence. Mis. PIL was aware ofthe restrictions. It was the only real importer ofall the four items. Mis. PIL had funded Ml s. PIND with interest free loans running into Rs. 18 crores (approximately). Mis. PIND wa ·