Domestic procurement of packaging materials under Rule 19(2) does not violate Advance Authorisation conditions.

The appellant manufactured Indian Made Foreign Liquor (IMFL), country liquor and excisable products.

It imported Vetted Malt Scotch (VMS) duty-free under Advance Authorisations for incorporation into exported IMFL.

Bottles, caps and labels were procured domestically under Annexure-45 in terms of Rule 19(2) of the Central Excise Rules, 2002.

The Directorate of Revenue Intelligence alleged that the appellant had violated Notification No. 96/2009-Cus. by using domestically procured duty-free packaging materials in the exported goods while counting those exports towards discharge of its Advance Authorisation obligations.

The Department also alleged non-fulfilment of export obligations under certain Advance Authorisations.

A show-cause notice proposed recovery of customs duty and interest, appropriation of amounts already deposited, and penalties under Sections 114A and 114AA of the Customs Act, 1962.

The proposals were confirmed by Order-in-Original No. 14/2019 dated 30 August 2019, leading to the present appeal.

Whether the appellant violated Notification No. 96/2009-Cus. by using domestically procured duty-free bottles, caps and labels under Rule 19(2) of the Central Excise Rules, 2002, while fulfilling export obligations under the Advance Authorisations?

Whether the appellant failed to fulfil its export obligations and was consequently liable for recovery of customs duty, interest and penalties under Sections 28, 28AA, 114A and 114AA of the Customs Act, 1962?

Whether the DRI had jurisdiction to issue the show-cause notice and initiate proceedings for recovery under Section 28 of the Customs Act, 1962?

Notification No. 96/2009-Cus. exempts materials imported under an Advance Authorisation from customs duty subject to fulfilment of the prescribed conditions, including discharge of export obligations by exporting resultant products in respect of which the benefit of Rule 18 or Rule 19(2) of the Central Excise Rules, 2002 has not been availed.

Under the Advance Authorisation Scheme in the Foreign Trade Policy, duty-free imports are permitted for inputs physically incorporated into the exported product.

The notification’s definition of “materials” distinguishes raw materials and components required for manufacture from packaging materials required for packing the resultant product.

The Tribunal relied on R.P. International v. Union of India, 2017 (353) E.L.T. 307 (P&H), concerning the distinction between inputs physically incorporated under the Advance Authorisation Scheme and materials required for production under the DFIA Scheme.

It also considered the principle of strict interpretation of exemption notifications relied upon by the Department, including Dilip Kumar & Co. v. Commissioner of Customs, 2018 (361) E.L.T. 577 (S.C.).

On jurisdiction, the Tribunal applied the Supreme Court’s later review decision holding that DRI officers appointed and assigned the relevant functions of a “proper officer” may issue notices under Section 28 of the Customs Act.

The Tribunal held that the material imported under the Advance Authorisations was VMS, which was physically incorporated into the exported IMFL.

The bottles, caps and labels were packaging materials, not ingredients or components physically incorporated into the liquor.

Since the notification separately identifies packaging materials and requires physical incorporation only in relation to the inputs covered by the Advance Authorisation, the use of domestically procured packaging materials under Annexure-45 did not amount to using an impermissible additional imported input or to violating the notification.

The Tribunal therefore found that the Department had incorrectly treated the packaging materials as equivalent to the imported VMS.

The Tribunal rejected the appellant’s jurisdictional objection, holding that, in light of the Supreme Court’s review judgment and the relevant notifications assigning functions under Section 28 to DRI officers, the show-cause notice was not invalid for want of jurisdiction.

Nevertheless, the demand and penalties could not survive on the merits because the alleged violation of Notification No. 96/2009-Cus. was not established.

It held that the export of IMFL packed using domestically procured bottles, caps and labels did not violate the Advance Authorisation conditions because only the imported VMS was required to be physically incorporated into the resultant product.

Although the DRI’s jurisdiction to issue the notice was upheld, the Order-in-Original dated 30 August 2019 was set aside on merits.

The appeal was consequently allowed.