CESTAT Ahmedabad Upholds Dropping of Duty Demand in Dhaval Agri Exports Sesame Seed Dispute

Overview of the Dispute

The Customs, Excise & Service Tax Appellate Tribunal (CESTAT), West Zonal Bench, Ahmedabad, dealt with three interlinked customs appeals in relation to imports and exports undertaken by M/s. Dhaval Agri Exports LLP (DAE) and its CEO Shri Jay Sureshbhai Chandarana under the Advance Authorization Scheme. The core controversy revolved around:

  • Duty-free import of raw sesame seeds under Notification No. 96/2009-Cus dated 11.09.2009
  • The actual user condition attached to the Advance Authorizations
  • Allegations of diversion of duty-free imported raw sesame seeds into the domestic market
  • Permissible process loss under the then-prevailing SION norms (1%) versus later revised norms (33%)
  • Exports made under the drawback scheme rather than under Advance Authorization
  • Subsequent issuance of EODCs (Export Obligation Discharge Certificates) by DGFT
  • The legal effect of DGFT’s Policy Interpretation Committee ruling dated 12.01.2018

The Tribunal ultimately upheld the Commissioner’s decision to drop proceedings against DAE and its CEO, rejected the Revenue’s appeals, and treated the assessee’s own appeal as infructuous in light of its findings.

Appeals Before the Tribunal

Nature of Appeals

Three matters reached CESTAT Ahmedabad:

  • Customs Appeal No. 10985 of 2017 – filed by Dhaval Agri Exports, largely connected with conversion of shipping bills and treatment of drawback exports.
  • Customs Appeal Nos. 12919 of 2018 and 10674 of 2022 – departmental appeals challenging the Order-in-Original dated 10.08.2018, by which the Commissioner, Customs, Mundra, had dropped the show cause notice and exonerated DAE and its CEO.

The departmental appeals asserted that significant quantities of raw sesame seeds imported duty free under 10 Advance Authorizations were not utilized for manufacture and export of hulled sesame seeds, but were instead allegedly diverted into the domestic market.

Factual Matrix as Alleged by the Department

Imports and Exports Under Advance Authorization

DRI’s investigation established that DAE had imported:

  • 19944.560 MT of raw sesame seeds under 21 Advance Authorizations (AAs) during the period 24.12.2012 to 23.07.2014, availing exemption under Notification No. 96/2009-Cus.

Of these:

  • Export obligations under 11 Advance Authorizations were stated to have been completed by exporting 8331.752 MT of hulled sesame seeds (corresponding to 8413.070 MT of raw sesame seeds, based on 1% process loss under then-prevailing SION).

The controversy specifically related to the remaining 10 Advance Authorizations, under which:

  • DAE imported 11531.490 MT of raw sesame seeds;
  • Exported only 1369.940 MT of hulled sesame seeds (taken as 1383.290 MT raw equivalent with 1% loss);
  • The Department contended that the assessee should have exported 11417.306 MT hulled sesame seeds in terms of applicable SION, but had not done so.

At the time of the search on 05.09.2014, the stock as per the books of imported raw sesame seeds stood at 620.608 MT. Comparing total imports, exports (under AAs and drawback), and book stock, DRI calculated that 9527.592 MT of raw sesame seeds imported duty-free were not traceable to authorized use and were allegedly diverted into the local market.

Search, Panchnama and Shortage

On 05.09.2014, DRI conducted a search at DAE’s premises at Rajkot. The following key aspects emerged:

  • Physical stock of sesame seeds in the factory (including imported and indigenous, at all stages – raw, in-process, rejected, hulled) was noted to be 942.525 MT.
  • Records reflected book stock of 620.608 MT of imported raw sesame seeds as on 04.09.2014.
  • DAE had admittedly exported 9701.346 MT of hulled sesame seeds under Advance Authorization up to the date of search, and also claimed to have exported 8140.649 MT of hulled sesame seeds under drawback (rather than under Advance Authorization).

The Department, relying on then-prevailing SION norms permitting only 1% process loss, inferred that a shortage of imported raw sesame seeds existed, which it treated as evidence of diversion.

Show Cause Notice and Proposed Demand

A detailed Show Cause Notice dated 21.10.2015 was issued to DAE and its CEO, alleging violation of:

  • Notification No. 96/2009-Cus dated 11.09.2009
  • Para 4.1.5 of the FTP 2009-14

The SCN proposed:

  • Confiscation of 9527.592 MT of raw sesame seeds, valued at Rs. 1,27,57,35,460/-
  • Recovery of Customs duty of Rs. 46,09,99,766/-
  • Recovery of interest under the Customs Act 1962
  • Appropriation of Rs. 2,13,41,127/- already paid
  • Penalty on DAE under Section 112(a) and Section 114A of the Customs Act 1962
  • Penalty on Shri Jay Sureshbhai Chandarana under Section 112(b)

Advance Authorization Conditions and Actual User

The Revenue placed strong reliance on:

  • Notification No. 96/2009-Cus dated 11.09.2009
  • Para 4.1.5 of the FTP 2009-14

Key conditions highlighted were:

  • Condition (x) of Notification No. 96/2009-Cus – stipulating that the Advance Authorization and materials imported thereunder are non-transferable and the materials shall not be transferred or sold, except permitted job work.
  • Para 4.1.5 of the FTP 2009-14 – emphasizing that materials imported against Advance Authorization are subject to actual user condition and are not transferable even after completion of export obligation (subject to limited exceptions).

The Department argued that any sale, diversion or non-use of imported raw sesame seeds in the manufacture of resultant export products constituted a breach of the actual user condition and disentitled the assessee to exemption.

Process Loss Under SION and Later Revision

At the time of the disputed imports and exports, the applicable SION permitted 1% process loss in hulled sesame seed exports. The Revenue contended:

  • DAE’s earlier exports under 11 Advance Authorizations showed a consistent process loss of about 1%, aligning with SION.
  • For the 10 contested Advance Authorizations, the sudden claim of 13% process loss, exactly matching the alleged shortage, was not credible.
  • `Public Notice No.