• Dated 08^th April, 2025

Customs Authorities Barred from Disputing DGFT-Approved Classifications: CESTAT DELHI

Background of the Case:

The case concerns an appeal against an order passed by the Commissioner of Customs, New Delhi. The appellant had imported aluminum foil under eight Advance Authorizations (AAs) issued by the Directorate General of Foreign Trade (DGFT), allowing duty-free import of raw materials under the exemption provided by Notification No. 18/2015-Cus. The dispute arose because the Customs Department alleged that the appellant had misclassified the imported aluminum foil to avail the duty exemption improperly. Consequently, a demand for differential customs duty, along with a significant penalty, was raised, leading to this appeal before the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT).

Appellant's Contentions:

1. Correct Classification of Imported Goods:
• The appellant argued that the imported aluminum foil had indeed been further worked upon (slitting, annealing, packaging) and was, therefore, correctly classified under CTH 7607 19 91, which permits duty-free imports under the Advance Authorization scheme.
2. Export Obligation Fulfillment:
• The appellant emphasized that the DGFT, as the competent licensing authority, had issued Export Obligation Discharge Certificates (EODCs) for seven out of eight Advance Authorizations, certifying that the export obligations had been fully met.
3. Judicial Precedents:
   • The appellant cited various rulings, including PSL Ltd. v. Commissioner of Customs, where courts held that customs authorities should not interfere with DGFT-approved classifications when the goods matched the description in the Advance Authorizations.

Respondent's Contentions:

The Customs Department raised the following objections:

1. Alleged Misclassification:
• The Customs Department argued that the aluminum foil had not undergone sufficient processing and, therefore, should have been classified under CTH 7607 11 90. Since this classification did not permit duty-free imports, the duty exemption under Notification No. 18/2015-Cus was deemed invalid.
2. Discrepancies in Documentation:
   • The Customs Department highlighted inconsistencies in supplier invoices and other documents, including differences in product descriptions and classifications, which further questioned the appellant's claims of proper classification.

Difference between CTH 7607 19 91 and CTH 7607 11 90

The crux of the case lay in the correct classification of the imported aluminum foil. The Customs Tariff provides different classifications based on the processing level of the foil:

• CTH 7607 19 91: Covers aluminum foil that has been rolled and further worked upon, including additional processes like slitting, annealing, and packaging.
• CTH 7607 11 90: Covers aluminum foil that has been rolled but not further worked upon, retaining its basic characteristics.

The Customs Department claimed that the imported goods fell under CTH 7607 11 90, as they believed the goods had not undergone sufficient processing beyond basic rolling. The appellant, however, argued that the foil had undergone processes like annealing, slitting, and packaging, making its classification under CTH 7607 19 91 appropriate and valid.

Court's Final Decision:

After reviewing the evidence and arguments from both sides, the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) ruled in favor of the appellant. The Tribunal found that the DGFT, as the nodal authority overseeing the Advance Authorizations, had already issued Export Obligation Discharge Certificates (EODCs) for seven out of eight Advance Authorizations, confirming that the export obligations had been fulfilled. This certification was binding on the Customs authorities, who could not dispute it based on a classification issue.

The Tribunal emphasized that as long as the imported goods matched the description and the export conditions were met, the duty exemption could not be denied due to minor classification differences. The court also relied on previous judicial rulings, which held that customs authorities should not interfere with DGFT-approved classifications when the goods matched the descriptions in Advance Authorizations.

The Tribunal observed that if the customs authorities believed there had been a violation of the terms and conditions, they should have referred the matter to the DGFT instead of raising demands for differential duty and penalties. Since the export obligations were fulfilled and the amendments had retrospective effect, the customs authorities' objections on the grounds of misclassification could not stand. Based on these findings, the Tribunal set aside the Commissioner's order, which had demanded differential duty and imposed a significant penalty. The appeal was allowed, and the customs authorities were directed not to impose any further penalties or duty demands.

Comment:

The core issue in this case was the classification of aluminum foil under the Customs Tariff. Misclassification, whether intentional or not, can lead to serious consequences, such as demands for differential duty and penalties. However, in this case, since the appellant's classification aligned with the description provided in the Advance Authorizations and was retrospectively validated by the DGFT, the customs authorities' objections lacked merit. This underscores the importance of ensuring that the classification and description in all relevant documents (invoices, Advance Authorizations, Bills of Entry) are consistent and accurate. The issuance of Export Obligation Discharge Certificates (EODCs) by the DGFT is a critical factor that worked in favor of the appellant. Since the EODCs confirmed the fulfillment of the export obligation, they acted as binding evidence that the appellant had met the key conditions under the Advance Authorization scheme. Customs authorities generally cannot challenge these certificates based on minor classification disputes. Therefore, businesses should prioritize fulfilling their export obligations promptly and securing EODCs to strengthen their compliance position. This case reinforces the importance of proactive compliance with both customs and DGFT regulations. Accurate classification, transparent documentation, timely amendments, and fulfillment of export obligations can mitigate the risk of disputes and penalties.

Author: Aindrila Ghosh

Edited by: Shaily Gupta