Skip to content

Collector of Customs Vs. Air Control Systems - Court Judgment

LegalCrystal Citation
CourtCustoms Excise and Service Tax Appellate Tribunal CESTAT Tamil Nadu
Decided On
Reported in(1988)(33)ELT568Tri(Chennai)
AppellantCollector of Customs
RespondentAir Control Systems
.....of customs, madras (vide his order no. s8/72/ 81-gr.i dated 28.2.1981). he noted that the goods imported "would be blended in stainless steel kettles under controlled temperature conditions. laboratory grade bonding agents like sodium hexaphosphate will be added in p.p.m. quantities for blending the product. the blended compound will be transferred to filling machines for filling cans which will then be sealed and labelled and packed for marketing".he found that this process is one of blending and cannot be considered as a manufacturing process; it was also not possible to distinguish the product in the form in which it is marketed in india from the imported material. he also referred to the terms of agreement entered into between the importer and their suppliers in u.s.a. and.....
1. Appeals under Section 129A of the Customs Act, 1962 praying that in1 the circumstances stated therein, the Tribunal will be pleased to set aside the orders of the Central Board of Excise and Customs in (i) No.567-A/81 dated 17.8.1981 in Appeal at Sl. No. 1 and (ii) No. 621-A/1981 dated 3.10.1981 (in appeal at Sl. No. 2).

2. These appeals coming up for orders upon perusing the records and upon hearing the arguments of Shri V. Ramachandran, Senior Departmental Representative for the appellant and upon hearing the arguments of Shri P. S. Krishnan, representative, for the respondent-firm, the Tribunal makes the following : 3. As the facts leading to the two cases are similar and in a large part indentical, we are dealing with the appeals together. Appeal No.CD (T) (MAS) 198/81 (sl. No. 1) : 4. An .importation of three pallets of goods described as Lubricating Oil (Tephguard) valued at Rs. 1,75,632/- by the respondent and claimed clearance under 'Open General Licence as raw material, was not accepted as such by the Collector of Customs, Madras (vide his order No. S8/72/ 81-GR.I dated 28.2.1981). He noted that the goods imported "would be blended in stainless steel kettles under controlled temperature conditions. Laboratory grade bonding agents like sodium hexaphosphate will be added in p.p.m. quantities for blending the product. The blended compound will be transferred to filling machines for filling cans which will then be sealed and labelled and packed for marketing".

He found that this process is one of blending and cannot be considered as a manufacturing process; it was also not possible to distinguish the product in the form in which it is marketed in India from the imported material. He also referred to the terms of agreement entered into between the importer and their suppliers in U.S.A. and held that in terms of the agreement itself, the item imported is not a raw material but only a finished product. In the preparation of the product, Sodium Hexa-meta-phosphate in small quantities is being used; one of the uses of this chemical is as a dispersing agent and it does not enter into chemical reaction with the other ingredients. The active ingredient is only polytetra fluorethylene (PTFE) which is used as an antifrictional component. This is contained both in the imported product and the one obtained after blending in the country and both of them can be used for the above purpose (antifrictional component). He also took note of the fact that the goods have been imported in small containers in a ready-to-market form and the laboratory tests proved that the goods can be used directly in the form in which it has been imported. The import of consumer goods is not permitted in terms of Sl. No. 165 of Appendix 4 of the Import Policy for April-March 1980-81. Hence he considered that the import of the goods was unauthorised, and confiscated them but allowed their clearance on payment of a fine in lieu of confiscation of Rs. 87,258/-.

5. In appeal No. 56/82 the value of the goods imported is Rs. 1,74,515/-. The Collector's order of confiscation is No. S8/97/81-Gr.I dated 28.2.1981. Here, too, for the reasons already referred to in the earlier paragraphs, the goods were confiscated with a fine in lieu of confiscation of Rs. 87,258/-.

6. The cases were taken up in appeal to the Central Board of Excise and Customs. The Board observed in its order No. 567A of 1981 : "Considering the nature of the processing involved and the mode of packing of the goods, there is some difficulty in accepting the appellant's plea that the goods are clearly in the nature of raw materials imported for further processing and ultimate consumption.

At the same time, the clarification given by the D.G.T.D. (Director General of Technical Development) suggests that there was no particular restriction on the importation of the goods, and therefore, it should have been possible for the importers to obtain the required licence for purposes of importation of the goods. It is also evident that the appellants have been licensed to process the goods in question and even as actual users they were entitled to the required licence. On this basis the Board takes a lenient view and directs that the goods be released as raw materials under the open general licence and the amount of fine paid be refunded to the appellant." 7. Government of India, Ministry of Finance, Department of Revenue issued a notice F. No. 374/46/8l.-Cus. II dated 29.1.1982 (in appeal at sl. No. 1) under Section 131(3) of the Act, proposed to review the order of the Board contained in No. 567-A of 1981 dated 17.8.1981 on the basis that - The Central Government is however tentatively of the view that the Board was not correct in allowing clearance of the goods under O.G.L. (open general licence), after taking a view that the goods in question could not be treated to be a raw material. When the Board itself has taken the view that the goods were not a raw material merely because the importers might have obtained an import licence for this purpose does not appear to justify the view that the goods could still be allowed clearance under O.G.L. It appears to Government that the imported material for which the importers are the authorised distributors of the foreign suppliers does not come in the category of a raw material, the import of which is permitted under O.G.L. in terms of Appendix 10 of the Policy for the period AM-81. That being so, the import of this material in the absence of a valid import licence appears to be unauthorised. The Board in allowing clearance of this material under O.G.L. in the circumstances appears to have erred in its decision.

8. By another notice F. No. 374/4/82-Cus. II dated 16.3.1982 (in appeal at sl. No. 2) issued under Section 131(3) of the Act the Government sought to review the order of the Board contained in No. 621-A of 1981 dated 3.10.1981 on the basis that - The Central Government is however tentatively of the view that the Board was in error in taking a lenient view with directions to release the goods under Open General Licence. It appears to Government that the Board itself has admitted the fact that the goods are not in the nature of raw materials imported for further processing and ultimate consumption. It thus appears that the clearance of the goods required an appropriate import licence, which, however, had not been produced by the importers. The agrument of the Board that it should have been possible for the importers to obtain the licence, does not appear to be a valid ground to admit the appeal. The Board in allowing clearance of this material under O.G.L. in the circumstances appears to have erred in its decision." 9. In terms of Section 131 (B)(2) of the Act, these proceedings have been transferred to the Tribunal for being heard as appeals preferred by the Department.

10. It is common ground that what is imported goes under the name TEPHGUARD and is, Polytetrafluoroethylene known by the abbreviation PTFE, the trade mark being TEFLON belonging to the DuPont. The contents of the goods in 12 oz. cans had been emptied out into a large container; a small quantity of Sodium hexaphosphate, laboratory grade, is added and the whole lot blended at controlled temperature. The resultant product is again put into cans, sealed and sold in the market.

11. It is seen from Encyclopaedia Britannica to which we made a reference at the time of hearing, that Poiytetrafluoroethylene is "a strong, tough, waxy, non flammable resin belonging to the family of organic polymers, substances compound of large molecules formed by chemical combination of many small ones (monomers)...". It is distinguished by its complete indifference to attack by almost all chemicals and by its slippery surface. The Condensed Chemical Dictionary (Tenth Edition) also speaks of the "antistick properties" of PTFE (the principal constituent of TEPHGUARD) and the use of PTFE in "gaskets, liners, seals, flexible hose ... piston rings ...". A reference to the literature put out by the American Manufacturer - The Products on the Move Inc., suppliers of the product to the appellant-importer, Air Control Systems, Madras - reads in part as follow : "Simply stated, the once a year application of Tephguard with Teflon results in a Teflon on Teflon operating surface in the engine"...

"By introducing Tephguard into the engine crankcase and thereby coating all the internal parts with a micro-thin layer of Taflon, that portion of energy which was used in overcoming friction is now available for powering the drive train".

12. At the outset the Senior Departmental Representative stated that a perusal of the agreement between Air Control Systems and the suppliers would show that it is one for distributorship of a finished product and not for the manufacture of a consumer product in the country. In this connection he placed reliance on the first, second, third, tenth and nineteenth clauses of the agreement. The first clause grants exclusive right of distribution by mentioning the geographical areas to the appellant; the second clause relates to acceptance of such grant, subject to the conditions of the agreement; the third clause provides that the business, trade mark, trade names and formula of manufacture, are expressly reserved unto the manufacturer the importer shall not change any format, advertising methods, literature, printing, packing and the like without the express written consent of the manufacturer (though it is provided that such consent "shall not be unreasonably withheld"); the tenth clause provides that all Tephguard to be shipped to the importer shall be substantially the same as the formula being sold in the U.S.A. by the exporter; the nineteenth clause provides that the' exporter will back its consumer product guarantee as it appears on the literature and labels by means of a product replacement to be performed on a quarterly basis. From these, he argued that the article imported has to be the same as the one marketed in the United States; even the form of distribution and manner of advertising cannot be changed by the importer; and the importer has got the right to return the goods which do not stand up to guarantee for purposes of replacement.

13. As against this the representative of the respondent pointed out that the first clause itself specifically provides for "any reformulation of the said product if any". This would indicate that reformulation is not prohibited to the importer. But if he does any such reformulation, the benefit thereof will vest in the American exporter because of clause three. Our attention was also drawn to a letter No. PSK/PRJ/TPGD-79 dated 28th June 1979 from P.S. Krishnan, Proprietor and Chief Executive of the importer-firm'to Dr. Gordon O.Dodson, Marketing and Management Specialist, U.S. and International Operations," Products on the Move, Inc., Gainseville which, inter alia, reads as follows : "Mr. S. Krishnan spoke to me this morning in this connection and conveyed your approval to set up a preparation and packing unit in India, importing the base material from yourselves." A telex from Products on the Move Inc., U.S.A. to the importer which reads as follows : Formal approval granted for you to provide final processing, packing and marketing of Tephguard" has also been exhibited. All these would show that processing of the imported material is not prohibited. In fact, it was thought of as early as on 28th June 1979 itself; and as would be evident from what happened later on, only the principal raw material was brought and processed in India. In the light of the wording of the agreement and the correspondence now produced, we agree that the importers' contention that the agreement does not bar processing of the product in India from some stage anterior to the final one.

14. The next point made on behalf of revenue was that blending is not a process of manufacture, particularly when the product to be added - sodium hexa-metaphosphate - is a very small quantity. The representative of the respondent explains that the additive sodium hexa-meta-phosphate is a dispersal agent and it is used only in P.P.M.(parts per million) quantities. It is not the smallness of the quantity used that matters but the results achieved. As it will be seen from the literature, what is sought to be achieved by the product is to effect a micro-thin coating of the resin on the moving surfaces of the engine i.e. in the piston rings and the sides of the chamber, so that the slippery surfaces that PTFE provides and the antistick property that it has, is achieved. Incidentally, there is also cleaning of the surfaces of contact and the coating is not corrosive. For this purpose homogeneous bonding of a very high order is needed; hence what is described as blending is a controlled and delicate operation of manufacture to achieve the above desired objectives.

15. At this point, the Senior Departmental Representative stated that according to the Test Report of the Departmental Chemical Examiner,' the goods imported can be used in the form in which they have been brought in. We do not find any support for this statement from the records. The test report, extract of which was sent by the Assistant Collector of Customs (Appraising) to the importer in his letter No.S33/ 214/81. Gr. I dated 26.2.1981 reads as follows : 'The sample is in the form of brownish coloured turbid liquid. It is composed of mineral oil and synthetic resin (fluro-carbon type).

Percentage of mineral oil is more than 70." It is claimed by the appellant that the liquid being turbid shows that the PTFE present therein is in a lumpy form; use of such a fluid in the engine chamber, where pistons move at over 400 R.P.M. will lead to seizure of the engine and its ruin. The dispersing agent, sodium hexa-metaphosphate does the trick of dispersion of PTFE in such a fine form and efficient way that what finally emerges is a micro-thin coating on the moving surfaces which are in contact.

16. In this connection we observe that the importer had addressed a letter No. PSK/TPG/80 dated 22.10.1980 to the Assistant Collector of Central Excise, Madras Division, indicating that they are processing engine protective chemical and other allied products containing Teflon in colloidal form in bituminous petroleum distillates; the compound serves as a dry lubricant in internal combustine engine and other moving parts in industrial machines. Their annual turnover was likely to exceed Rs. 30 lakhs. They sought the advice of the Assistant Collector as to whether they should take any licence for blending of the product from the Central Excise Department. As the importation was expected in the course of another month, they asked for urgent advice.

The literature regarding the product to be manufactured was sent to the Assistant Collector along with a letter dated 27.11.1980. The Assistant Collector in his letter C. No. IV/16/420/80 dated 27.11.1980 observed that the goods are classifiable under Tariff Item 68; if the value of the goods manufactured does not exceed Rs. 30 lakhs there is an exemption provided the machinery installed is below Rs. 10 lakhs; in the circumstances the importers do not come under excise purview. This would show that another branch of the Central Board of Excise and Customs considered the process of blending, explained to them by the importer, as constituting 'manufacture' but did not bring it under Excise control. Though the decision by itself may not be binding on the action sought to be taken by the Customs Bench of the Ministry of Finance, it only goes to show that two views were possible and as we have set out in detail above the so-called operation of blending is in fact one of manufacture of a highly refined and sensitive product.

17. The only other point that has been made all along and emphasised by the Senior Departmental Representative is about the importation in 12 oz. cans which is suggestive of immediate use by a consumer. Attractive as the argument is, the representative of the respondent explains that being the first introduction of a new product in the market to a fairly discriminative user - automobile owners - they thought of using imported cans. In fact opening up the cans to empty the contents of the raw material first, then refilling them with the finished product and re-sealing them, really adds to the cost of the product but was considered worthwhile because of the advertising value involved. As we have noted already what is imported in the can is not what is finally sold to the consumer in India; nor can it be used as such before the manufacturing process loosely referred to as "blending".

18. This explanation of the importer gains strength by the manner in which he has gone about the importation. They were registered as a small scale industrialist with the Director of Industries, Madras, for the manufacture of industrial chemical-coating protective. They applied to the Director of Industries and Commerce to sponsor their case for the importation of 'Teflon, colloidal (TEPHGUARD)' as a raw material on 19/24.12.1979. In his reply No. 12566/J1/79 dated 2.1.1980 the General Manager, District Industries Centre, Chengalpattu and Kancheepuram 2, informed the respondent that as the material proposed to be imported does not figure either in Appendix 3 or in Appendix 5 of the Import Policy, he (the importer) may take action to procure the materials under O.G.L. (open general licence). The importer did not stop at this but wrote another letter dated 5.1.1980 to J.C.C.I., Madras, seeking that authority's formal approval that they may place orders for supply of the material under O.G.L. The 3.C.C.I., Madras, replied rather guardedly; in his letter No. ITC/14(1940)79-80/Pol. dated 18.1.1980 he observed : "If the item is a raw material as stated by you and if the same does not figure either in Appendix 3 or 5, it will be covered by O.G.L.

i.e. item 1 of Appendix 10....

You are, however, advised to get it confirmed from the Director General of Technical Development (I.P. Cell) New Delhi - 110011.'" 19. Thereupon, the importer addressed a letter on 30.1.1980 to the Industrial Adviser, D.G.T.D. We would like to reproduce this letter as it seems to reveal the working of the mind of the importer at the relevant time : "We are small scale industry with registration No. 18-03-03371 dated 17.12.1979 engaged in the manufacture of Protective Chemical Coatings, based on colloidal Teflon.

The basic raw material viz. TEPHGUARD - Colloidal Teflon is to be imported from our Principals, Products on the Move Inc. Gainesvilla, Texas 76240, U.S.A. We have been given exclusive rights for processing the product and marketing the same in India. The Director of Industries, Tamil Nadu, have advised us to procure the material under O.G.L. as per copy of letter enclosed and we had also approached the Joint Chief Controller of Imports for his approval to import the item viz. "TEPHGUARD - Colloidal Teflon" under O.G.L.

While the Joint Chief Controller has clarified that we can import the material provided the item is a raw material for the end product and not a consumable for process.

The enclosed process outline and manufacturer's leaflet on the end product will clearly show that the item is the basic raw material for the end product.

We would therefore request your recommendation that the item to be imported is really a raw material and not a consumable. As we have to place our order on our Principals for the item before 15.2.1980, we would request your early advice in the matter." 20. Though the letter is a detailed one, setting out as it does all the information that was at the disposal of the importer at that time, the D.G.T.D. did not help out but merely replied that request for Import Policy clarification should have been made by 15th November 1979; he did not give any advice.

21. To complete the picture we would only add that after the importation had taken place and the importer was put on notice regarding alleged irregularity in importation, the party again wrote to Shri A.K. Sen, Member Secretary, Clarification Committee, D.G.T.D. on 12.3.1981, seeking a direct clarification that the materials imported by them -Tephguard-Colloidal Teflon - can be imported under O.G.L. as a basic raw material for the importer's proposed product. The Industrial Adviser of D.G.T.D. was this time more helpful. In his letter No.l(3)/80 I & EP/6 dated 25.3.1981, he observed that the goods may be taken as an item under O.G.L. though he added a rider "subject to the conditions laid down in the Import Policy for 1980-81." Thus the importer has been knocking at every door for guidance regarding the need for a licence; but it so happened that no authority came out fully to tell him that what he was seeking to import is not a raw material which is likely to lead him to trouble '.

22. In the result we find that the importation of the goods as raw material under O.G.L. is justified in the facts of the case and in the light of the Import Policy. The action of the Board in setting aside the order of confiscation passed by the Collector is thus a correct one and does not require any further review. The proceedings initiated by the Government by its notices dated 29.1.1982 and 16.3.1982, referred to supra, are hereby ordered to be dropped.

23. The representative of the respondent pointed out that though an order in his favour had been passed by the Board as early as 17.8.1981/ 3.10.1981 in the respective appeals, the fine paid to the Department still remains with it and is causing them additional loss by way of interest incurred thereon, quite apart from its being not available for productive use. He, therefore, requests for early refund of the fines paid: Accordingly we direct that the redemption fines already collected from the importers be refunded to them within forty-five days from the date of this order.

Save Judgments// Add Notes // Store Search Result sets // Organizer Client Files //