Supreme Court clarifies Rule 2(a) of Customs Tariff Act in Sony India Ltd. Case (2008)

Date of the Judgment: September 23, 2008

Citation: Civil Appeal No. 8236 of 2002

Judges: Hon’ble Mr. Justice Ashok Bhan, Hon’ble Mr. Justice V.S. Sirpurkar

The Supreme Court of India addressed the question of whether imported components of Colour Television (CTV) sets should be treated as complete CTV sets for the purpose of assessment under the Customs Act, 1962. This issue arose from an appeal filed by the Commissioner of Customs, New Delhi, against M/s Sony India Ltd. regarding differential duty demand. The bench, comprising Justice Ashok Bhan and Justice V.S. Sirpurkar, delivered the judgment, with Justice Sirpurkar authoring the opinion.

Case Background

The case originated from an order by the Customs, Excise & Gold (Control) Appellate Tribunal, which allowed an appeal filed by Sony India Ltd. The appeal challenged an order-in-original dated January 30, 1999, passed by the Commissioner of Customs, Inland Container Depot, Tughlakabad, New Delhi. This order had confirmed a differential duty demand of Rs. 42,89,75,196 under Section 28(1) of the Customs Act, 1962, along with a penalty of Rs. 30,19,92,183 under Section 112(a) read with Section 114(a) and interest under Section 28AB of the Act. The Commissioner’s order treated the import of several parts of CTVs by Sony India Ltd. between April 1995 and 1997 as the import of complete CTV sets for assessment purposes.

Timeline

Course of Proceedings

Initially, there was a difference of opinion between the two members of the Tribunal regarding the application of Rule 2(a) of the General Rules for Interpretation under the First Schedule of Import Tariff. The matter was then referred to a larger bench of the Tribunal with the following questions:

• Whether the goods in question are components and cannot be treated as complete color Television sets, and hence the duty demand, confiscation of penalty are unsustainable.
• Whether the issue as to the circumstances under which Rule 2 (a) of the Interpretative Rules can be applied, as to whether the benefit of Notification exempting components only will be available, if the product is considered as complete or finished article by virtue of deemed provision of Rule 2(a), and whether the change effected in Explanatory Notes of HSN will give only prospective application or it will be applicable for the earlier period also, requires to be referred to a Larger Bench.

The larger bench agreed with the view that the components imported by Sony India Ltd. could not be treated as complete CTV sets, thereby setting aside the Commissioner’s order.

Legal Framework

The legal framework relevant to this case includes:

• Section 28(1) of the Customs Act, 1962: This section deals with the recovery of duties not levied or short-levied or erroneously refunded.
• Section 111(m) of the Customs Act, 1962: This section pertains to the confiscation of goods improperly imported.
• Section 111(d) of the Customs Act, 1962: This section relates to the confiscation of goods that contravene any provision of the Customs Act or any other law for the time being in force.
• Section 112(a) of the Customs Act, 1962: This section specifies penalties for improper importation of goods.
• Section 114(a) of the Customs Act, 1962: This section outlines penalties for contravention of provisions other than those relating to evasion of duty.
• Section 28AB of the Customs Act, 1962: This section provides for interest on delayed payments of duty.
• Rule 2(a) of the General Rules for the Interpretation of the First Schedule to the Customs Tariff Act, 1975:
  “Any reference in a heading to an article shall be taken to include a reference to that article incomplete or unfinished, provided that, as presented, the incomplete or unfinished article has the essential character of the complete or finished article. It shall also be taken to include a reference to that article complete or finished (or falling to be classified as complete or finished by virtue of this rule), presented unassembled or dis-assembled.”
• Exim Policy 1992-97: The import and export policy that was in effect during the period of the imports in question.
• Section Note 2 to Section XVI: Pertains to the classification of parts of machines falling under Section XVI.

Arguments

Arguments by the Appellant (Commissioner of Customs)

• The Revenue asserted that Sony India Ltd. evaded duty on CKD kits of CTVs by misdeclaring them as CTV components, proposing confiscation under Section 111(m) of the Customs Act.
• The Revenue contended that Sony India Ltd. contravened the Exim Policy 1992-97 by importing CKD kits of CTVs without an import license, making the goods liable for confiscation under Section 111(d) of the Act.
• The Revenue heavily relied on Purchase Order No. IN-31PI-10 dated November 27, 1994, treating it as an order for 1500 CKD kits of CTVs for model KV-2185 GE, arguing that the imported components were essentially these 1500 CTVs.
• The Revenue asserted that though Sony India Ltd. was importing CKD kits for assembly in India, attracting higher customs duty, they declared the imports as components, attracting lesser duty.
• The Revenue invoked Rule 2(a) of the General Rules for the Interpretation of the First Schedule to the Customs Tariff Act, 1975, arguing that the imported articles, though incomplete or unfinished, had the essential character of complete CTVs.
• Reliance was placed on the Supreme Court’s decision in Commissioner of Customs, New Delhi vs. Phoenix International Ltd. & Anr. [(2007) 10 SCC 114], arguing that the issue was considered and decided in favor of the Revenue.

Arguments by the Respondent (Sony India Ltd.)

• Sony India Ltd. argued that the Tribunal correctly deduced that the imported components could not amount to CKD kits, as there was no evidence suggesting the components were used in manufacturing CTVs.
• It was contended that the components could not have been used as complete CKD kits of 1500 CTVs, as they required treatment and processing before being used for manufacturing CTVs.
• Sony India Ltd. pointed out that customs duty was paid on the components, and substantial excise duty was paid on the manufacture of CTVs, which belied the claim that these were merely components and not CKD kits.
• The interpretation of Rule 2(a) by the Revenue was disputed, asserting that Rule 2(a) was not applicable in the present case.
• It was argued that the decision in Phoenix International Ltd. Case was not applicable to the facts of the present case, as that decision turned on its own peculiar facts.
• Sony India Ltd. clarified that in the first year of operation, after liberalization in 1991, they wanted to set up a large manufacturing facility for consumer goods, with a gradual increase in indigenization.
• It was stated that they obtained an industrial license from the Secretariat of Industrial Approval (SIA) and applied for import licenses for CRT and PCB, as these were in the restricted list, while other components were freely importable.
• Sony Singapore was used as their indenting agent due to its proximity to approved vendors of Sony Corporation, and components were supplied based on Minimum Order Quantity (MOQ).
• Advanced licenses were issued by the Director General of Foreign Trade (DGFT) for duty-free import of components under notification 79/65-Cus dated March 31, 1995, and a Duty Entitlement Exemption Certificate (DEEC) passbook was maintained.
• The components were assessed under different tariff headings by applying Section Note 2 to Section XVI, and PCBs were further processed to convert them into Motherboards.
• Sony India Ltd. asserted that there was no violation of the Exim Policy, as the goods were not in CKD/SKD condition, and Rule 2(a) could not be invoked, as the import took place over 22 months in 94 lots in containers containing different parts sourced from different countries.
• It was argued that the components did not have the essential character of CTVs, and the goods were not in unassembled or dis-assembled condition.
• Reliance was placed on HSN Explanatory Notes as it stood prior to 1997, and the decision in CCE v. Woodcraft [(1995) 3 SCC 454], stating that complicated processing of imported parts had to be done before they could be fit in the assembly of CTVs.
• It was contended that Section Interpretative Rule 2(a) would not be applicable at all, referring to Rule 1 of Interpretative Rules and the decision in Simplex Mills v. Union of India [2005 (181) ELT 345 (SC)].

Issues Framed by the Supreme Court

The Supreme Court addressed the following issues:

1. Whether the components imported by the respondent could be treated as complete CTV sets for the purpose of assessment under the Customs Act, 1962.
2. Whether Rule 2(a) of the General Rules for the Interpretation of the First Schedule to the Customs Tariff Act, 1975, is applicable to the imported components.
3. Whether the imports made in 94 consignments could be clubbed together for the purpose of holding that there was a breach by the importer of the Exim Policy.

Treatment of the Issue by the Court: “The following table demonstrates as to how the Court decided the issues”

Authorities

The Supreme Court considered the following authorities:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• Commissioner of Customs, New Delhi vs. Phoenix International Ltd. & Anr. [(2007) 10 SCC 114]: The Court distinguished this case, stating that the principles emerging from it would have to be restricted to the facts in that case. Unlike in Phoenix International Ltd. Case, there was no allegation of fraud against the present assessee, nor was there any “subterfuge.”
• Vareli Weaves Pvt. Ltd. v. Union of India [1996 (83) ELT 255 (SC)]: The Court applied the principle that goods must be assessed in the form in which they are imported and presented to the customs, not on the basis of the finished goods manufactured after subjecting them to some process after the import is made.
• Union of India v. Tarachand Gupta & Sons [(1971) 1 SCC 487]: The Court relied on this case, holding that merely because the goods imported, if assembled, would make motor-cycles and scooters in CKD condition, it would not mean that there was breach if the imports were valid.
• CCE v. Woodcraft [(1995) 3 SCC 454]: The Court relied on this case, stating that HSN Explanatory Notes should be referred to for understanding the true scope and meaning of expressions used in the Customs Tariff.
• Simplex Mills v. Union of India [2005 (181) ELT 345 (SC)]: The Court referred to this case, stating that Rule-I gives primacy to the Section and Chapter Notes along with terms of the headings.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following factors:

• The absence of any allegation of fraud or subterfuge against Sony India Ltd.
• The fact that the imported components did not have the essential character of complete CTV sets.
• The components were imported in 94 different consignments over a period of 22 months, making it inappropriate to club them together.
• The complex manufacturing processes required to convert the imported components into CTVs.
• The applicability of HSN Explanatory Notes as it stood prior to 1997, which required consideration of the complexity of the assembly method.

Logical Reasoning

The Court reasoned that the sine qua non for the application of Rule 2(a) is that any imported article, which is “as presented”, must have the essential character of the complete or finished article. Since the components, as presented, did not have the essential character of complete CTV sets, Rule 2(a) was not applicable.

The Court also considered that the components were imported in 94 different consignments over a period of 22 months. Therefore, the clubbing of all 94 consignments of different dates was not permissible, as the goods were brought in separately on the basis of valid import licenses.

The Court emphasized the complex manufacturing processes required to convert the imported components into CTVs. The Court also considered the applicability of HSN Explanatory Notes as it stood prior to 1997, which required consideration of the complexity of the assembly method.

The Court also distinguished the Phoenix International Ltd. Case, stating that the principles emerging from it would have to be restricted to the facts in that case. Unlike in Phoenix International Ltd. Case, there was no allegation of fraud against the present assessee, nor was there any “subterfuge.”

The Supreme Court concluded that the Tribunal’s judgment needed no interference and accordingly confirmed the same and dismissed the appeal.

Key Takeaways

• Rule 2(a) of the General Rules for the Interpretation of the First Schedule to the Customs Tariff Act, 1975, is applicable only if the imported article, as presented, has the essential character of the complete or finished article.
• Components imported in multiple consignments cannot be clubbed together for the purpose of holding that there was a breach by the importer of the Exim Policy.
• HSN Explanatory Notes should be referred to for understanding the true scope and meaning of expressions used in the Customs Tariff.
• The complexity of the assembly method should be considered when determining whether imported components can be treated as complete articles.

Development of Law

The ratio decidendi of the case is that Rule 2(a) of the General Rules for the Interpretation of the First Schedule to the Customs Tariff Act, 1975, is applicable only if the imported article, as presented, has the essential character of the complete or finished article. This clarifies the interpretation and application of Rule 2(a) in cases involving the import of components.

Conclusion

The Supreme Court dismissed the appeal, holding that the components imported by Sony India Ltd. could not be treated as complete CTV sets for the purpose of assessment under the Customs Act, 1962. The Court clarified the interpretation and application of Rule 2(a) of the General Rules for the Interpretation of the First Schedule to the Customs Tariff Act, 1975, and emphasized the importance of considering the essential character of the imported article, the number of consignments, the manufacturing processes, and the HSN Explanatory Notes.