Mehur Metal Industries vs Government of India

These petitions under Article 226 of the Constitution involve an interpretation of the Customs and Central Excise Duties (Drawback) Rules, 1971 - hereinafter referred to as the "Rules".

A proper appreciation of the issues arising requires the setting out of this background. The Minerals and Metals Trading Corporation of India Ltd. (MMTC) had imported prime quality stainless steel sheets into the country. It paid customs duty of Rs. 45 per kg. on the sheets. A certain quantity of the goods were purchased by petitioners at Rs. 51.00 per kg. Petitioners utilised the sheets for manufacture of utensils and exported the finished product. The Central Government, acting under rule 3 of the aforementioned Rules, had fixed 80 paise per kg. as the drawback rate. Pleading that the same was far low, petitioner pleaded for a raise under rule 7. The plea was accepted and the rate raised to Rs. 60.30 and Rs. 60.80 per kg. on two different lots exported. At a later date, the Government reduced the drawback rate to Rs. 44.85 per kg. The reason given for the slashing was that the price paid to the MMTC was below even the landed cost. Petitioner''s protests not having yielded a result, it challenges the reduction and its follow-up in these two petitions. The factual matrix and the points requiring decision being almost identical, it will be convenient to dispose the petitions under a common judgment.

Petitioners contend that the rules require the rate of drawback to have a nexus with only one factor, viz., the duty chargeable at the time of import. What price the exporter paid to the importer for the acquisition of the imported material is irrelevant to the fixing and revision of the rate or amount of drawback. The Central Government had no right to adjust an alleged excess of drawback received by petitioners towards its later claims. The said Government required to be corrected by appropriate writs solicited in these petitions.

Respondents have not filed returns. At the hearing, Mr. Rege submitted that the price paid for the imported material had a bearing on the quantum determined as drawback whether under rules 3, 4 or 7. The rise given to petitioners was out of all proportion to the limits permissible. Errors flowing from non-application of mind and even downright negligence or collusion could be revised under rule 4, not to speak of rule 14. The reduction of the drawback rate in petitioners'' case was wholly justified, seeing that it acquired the sheets for Rs. 51 per kg., when the import duty was as much as Rs. 45 per kg. The retrospective adjustment was covered by rule 14.

The crucial questions are, whether the rules did not permit a reduction of the rate determined under rule 7 and whether the price paid to the importer by the exporter was of no relevance to the subject ?

A look into the relevant provisions of the rules is instructive. The rules have been framed under the rule making power conferred upon the Central Government by Section 75 of Customs Act, 1962, (C. Act) and Section 37 of the Central Excises and Salt Act, 1944 (CESTA). Drawback is defined in rule 2(a) as "the rebate of duty chargeable on any imported materials........ used in the manufacture of such goods in India". Rule 3 makes drawback determinable by the Central Government, subject to the C. Act, CESTA and also the rules. Two factors to be taken into consideration for determining the amount or rate of drawback, are :

(i) the average amount of duties paid on the imported materials.... which are used in manufacture of goods; and

(ii) the average amount of duties paid on materials wasted in the process of manufacture and catalytic agents.

Rule 4 permits the Central Government to revise the amount or rate determined under rule 3. In words, the power of revision has not been confined. The rate determined under rule 3 or 4 may be raised upon a representation of the exporter. The primary case, that a person invoking rule 7 has to establish, is, that the drawback rate is "less than three-fourths of the duties paid". Rule 14 permits of an order directing repayment of erroneous or excess payment of drawback. It says -

"Where an amount of drawback has been paid erroneously or the amount so paid is in excess of what the claimant is entitled to, the claimant shall, on demand by an officer of customs repay the amount so paid erroneously or in excess, as the case may be etc., etc........"

M/s. Thaker submits that the drawback rate once fixed under rule 7, cannot be revised. In support of this contention, she relied upon rule 4 which permits revision of the drawback amount or rate determined under rule 3. But, does this mean that the rate fixed under rule 7 cannot be revised at all ? To answer this question, it will be necessary to look into section 75 of the C. Act. To the extent relevant, sub-section (1) of this section permits the Central Government to allow drawback on duties of customs chargeable on imported materials, where the materials have been used for manufacture and export of finished goods. The drawback is to be in accordance with and subject to the rules made under sub-section (2). Sub-section (2) enables the Central Government to make rules for various purposes and sub-rule (a) thereof lays down that the rules may provide -

"for the payment of drawback equal to the amount of duty actually paid on the imported materials used in the manufacture of the goods or as is specified in the rules as the average amount of duty paid on the materials of that class or description used in the manufacture of..........."

This would show that the drawback has an inseverable connection with duties of customs chargeable as also duties actually paid on the imported material. In the instant case the rate determined under rule 3 for stainless steel was 80 paise per kg. Petitioner wanted a raise and according to rule 7 he had to establish that the drawback rate fixed under rules 3/4 was "less than 3/4ths of the duty paid". The duty paid on the sheets was at the rate of Rs. 45 per kg. Government could not in all conscience grant a rate representing more than what had been paid by way of duty. That is what it did when the rate was fixed at Rs. 60.30/60.80 per kg. M/s. Thaker says that the above formulation loses sight of the quantity of sheets lost in the manufacture of utensils and, in the case of the utensils exported, petitioner wasted as much as one-third. As against this, is the fact that petitioner paid a pittance of Rs. 51 per kg. inclusive of duty. That petitioner was lucky in getting the material cheap is of course no ground for disentitling him of the benefit admissible. Rule 7 limits the drawback to 3/4ths of duty paid on the imported material. The rules provide for a drawback of duty paid and the upper limit of such drawback is 3/4ths of the sum paid. The quantity of material consumed in the manufacture has to be reckoned for determination of the rate as per rule 3 or rule 4. But such rate when revised vide rule 7, cannot be higher than 3/4ths of the duty paid. No credit can be given under rule 7 for the material wasted or consumed in the making of the exportable goods. The rules provide for a scheme of drawback and not a cash subsidy or incentive to exporters. The two operate in distinct and different spheres. Therefore, when the price is less than the duty paid, that factor cannot be ignored.

It was next argued that the rate of Rs. 60.30/Rs. 60.80 had been fixed after a verification, and, that in any case there was no provision for a review thereof. This contention is at variance with the amplitude of the power conferred under rule 14. That power can be invoked where the amount so paid is the result of an error or in excess of the claimant''s entitlement. That there can be a demand for repayment of a drawback paid wrongly or in excess of the entitlement, presupposes the existence of a power to reconsider the amount determined upon an application made under rule 7. Therefore, it is not correct to say that refixation of the drawback was illegal. Once this conclusion is reached it follows that the order for adjustment fits into the purview of rule 14. The petitions fall and hence the order :-

Rule in both petitions, discharged with parties being left to bear their own costs.