Holding

The Court held that the four imported components constituted a synthetic shoe in SKD condition, the bifurcation was a sub‑terfuge to evade duty, and therefore the respondents were liable to duty under tariff heading 64.04 and not entitled to the exemption under Notification No. 45/94‑Cus.

Summary

The Commissioner of Customs alleged that Mis. Phoenix International Ltd (PIL) and its subsidiary Mis. Phoenix Industries Ltd (PIND) split the import of synthetic shoe components—uppers by PIL and soles, insoles and sock liners by PIND—to evade customs duty and obtain a concessional rate under Notification No. 45/94-Cus. The Department issued show‑cause notices, clubbed the imports, and assessed duty at 50% plus CVD 15% under tariff heading 64.04, rejecting the exemption claim. The Tribunal had allowed the importers, but the Supreme Court examined the intent, the sub‑terfuge, and the applicability of para 156(A) of the EXIM Policy 1992‑97. It held that the four items together constituted a synthetic shoe in semi‑knocked‑down (SKD) form, that the bifurcation was a fictitious arrangement to bypass licence requirements, and that the exemption was inapplicable. Consequently, the Court affirmed the Department’s assessment and remitted the question of differential duty and penalties to the Commissioner for determination.

Issues considered

Whether shoe uppers, soles, insoles and sock liners imported by two separate companies can be clubbed and treated as a single import of a synthetic shoe in SKD condition.
Whether the importers mis‑declared the goods as components to evade customs duty.
Whether para 156(A) of the EXIM Policy 1992‑97 applies, requiring a specific licence for SKD synthetic shoes.
Whether the exemption under Notification No. 45/94‑Cus dated 1‑Mar‑1994 is applicable to the imported items.
Whether rule 8 of the Customs Valuation (Determination of Price of Imported Goods) Rules, 1988 should be invoked for valuation.
Whether the respondents are liable to customs duty at 50% plus CVD 15% under tariff heading 64.04.

Legislation cited

Customs Act, 1962s. 111(d)(l)(m), s. 112(a), s. 28(1)
Customs Tariff Act, 1975

Subjects

customs duty evasionclubbing of importssemi‑knocked‑down (SKD)EXIM Policy 1992‑97Notification 45/94‑CusCustoms Valuation Rulestariff heading 64.04sub‑terfuge

Judgment

A COMMISSIONER OF CUSTOMS, NEW DELHI
~
v.
MIS. PHOENIX INTERNATIONAL LTD. & ANR.

SEPTEMBER 20, 2007
B
[S.H. KAPADIA AND B. SUDERSHAN REDDY, JJ.)

Customs TariffAct, 1962-TariffHeading 64. 04-Customs duty,
evasion of-Company P IL importing synthetic shoe uppers and
c Company PIND importing soles, insoles and sock liners as
components/parts-Department's case that PIL owner of PIND and
items imported constituted synthetic shoes in semi knocked down form,
thus, duty evaded-Correctness of-Held: PIL carried out the entire
manufacturing activity offinished products-synthetic shoes for
D domestic and export markets and was the real importer ofall the items,
thus Department rightly clubbed the items-Items imported constituted
complete shoe in SKD condition, thus, to be assessed as complete .......
finished goods under Tariff Heading 64.04 and exemption under
Notification not applicable-Bifurcation by importation of items by
two companies was subterfuge to evade duty, thus, para l 56(A)
E
violated-Hence, importers liable to pay customs duty at 50% plus
CVD at 15% ad valorem-However, issue regarding re-quantification
ofdifferential duty, redemption fine and penalties payable by importer
remitted back-Exim Policy 1992-97-Para 156 (A)-NotificationNo.
i
45194 Cus dated 1.3.94-Customs Act, 1962. -""'i
F
Mis. PIL imported synthetic shoe uppers and M/s. PIND
imported soles and insoles as components/parts. Appellant-
Department found that the two companies evaded customs duty. It
issued show cause notices to the respondents-two companies alleging
that M/s. PIL were the owners of Mis. PIND; that Mis. PIND was
G
a dummy unit of Mis. PIL; that the goods imported were not parts/ ~
components but were semi knocked down (SKD) goods, liable to be
assessed as complete finished goods under tariff Heading 6404.19
of the First Schedule of the Customs Tariff Act, 1975 and liable to

H 126
COMMISSIONER OF CUSTOMS, NEW DELHI v. 127
MIS.PHOENIXINTERNATIONALLTD.
basic customs duty at 50% ad valorem and countervailing duty at A
15% ad valorem; that synthetic shoes were imported without specific
import licence; that Mis. PIL resorted to subterfuge of importing ,
uppers of "Reebok" shoes in their own name and the remaining
three components in the name of Mis. PIND to bypass restriction
imposed by para 156(A) of the EXIM Policy 1992-97 and claim the B
benefit of Notification No. 45194-Cus dated 1.3.94; that the value
given in the import invoices did not represent the correct transaction
value since a single consignment meant for one importer-Mis. PIL
was deliberately split up into two parts and, valuation had to be done
by invoking rule 8 of the Customs Valuation (Determination of Price t
oflmported Goods) Rules, 1988, and thus the consignment of two
companies should be clubbed for the assessment under EXIM Policy
1992-97 and Customs Act, 1962. The Commissioner held that the
imports made by Mis. PIND of soles, insoles and sock liners should
be treated as imports by Mis. PIL, however, in view of elaborate
manufacturing process of support shoes, the clubbed items did not I'.)
J_ constitute synthetic shoes in SKD condition so as to contravene para
156(A) of the EXIM Policy 1992-97; that all imports attracted duty
·at the rate applicable to the footwear and not at the rate applicable
to components/parts; that no duty was demandable in respect of
synthetic uppers, imported by Mis. PIL, however, all the components E
imported by Mis. PIND attracted duty at the rate applicable to fully-
finished footwear, and as such the exemption under notification 451
94-Cus dated 1.3.94 was not applicable, thus the respondent was
liable to pay duty. Respondent-importers filed appeals. Tribunal
allowed the same. Hence the present appeals. F
Allowing the appeals, the Court
HELD: 1. The respondents were guilty of violating para 156(A)
of the EXIM Policy 1992-97; that they were liable to be assessed
under tariff Heading 64.04 and, thus, were liable to pay duty of G
customs at 50% + CVD at 15% ad valorem; that the respondents
were not entitled to the benefit of concessional rate of duty under
Notification No. 45/94-Cus dated 1.3.94 and that the Department
was right in invoking rule 8 of the Customs Valuation Rules. The
question ofre-quantification of differential duty, redemption fine and H
128 SUPREME COURT REPORTS [2007] 10 S.C.R.

A penalties, payable by the respondents, is remitted to the
Commissioner of Customs who would decide the issue in accordance
with law. [Para 13] [144-G-H; 145-A]
2.1. It is clear that the entire device of bifurcation by
importation of one item by M/s. PIL and three items by Mis. PIND
B was a subterfuge/fictitious arrangement was created to show that
two independent companies had imported separate parts of the
footwear in order to bypass the restriction "imposed by para 156(A)
of the EXIM Policy 1992-97 and obtain the benefit of the Notification
No. 45/94-Cus dated 1.3.94. Under the said paragraph, importation
C of synthetic shoes in SKD condition could only be against specific
import licence. Mis. PIL was aware of the restrictions. It was the
only real importer of all the four items. Mis. PIL had funded Mis.
PIND with interest free loans. Mis. PIND was the factory of Mis.
PIL. When there is an allegation of subterfuge, the court has to
D examine the circumstances surrounding the import to ascertain
whether the importer had entered into fictitious arrangement to
evade customs duty. The intention behind the act ofimportation has
to be probed. In the instant case, the most clinching circumstance is
that there is manufacture of the finished. products-"synthetic shoe"
E for domestic and export markets. Mis. PIL manqfactured export
quality synthetic shoes on their own account whereas those sold in -
the domestic market by M/s. PIND was also manufactured by Mis
PIL for Mis PIND. Further, General Manager Mis PIL, on behalf
ofimporter stated that synthetic uppers (imported by Mis PIL), soles,
insoles and sock liners (imported by M/s PIND) did constitute
F complete shoe in SKD condition and in order to circumvent 156(A)
the entire device was arranged by the importer to evade duty.
[Para 11) [141-H; 142-A-E, F]
2.2. In the reply to the show cause notices there were no det~ils
G supplied by the importer regarding the number of units under Mis.
PIL. The statement of General Manager in the preliminary enquiry
shows that there were three units in Noida under Mis. PIL. No details
of the turnover have been furnished. No details of the number of
employees have been furnished. The bifurcation of the turnover
H between manufacture of synthetic shoes exported and shoes sold in
COMMISSIONER OF CUSTOMS, NEW DELHI v. 129
MIS. PHOENIX INTERNATIONAL LTD.
the domestic market was not given. The functional connectivity 9f A
I the three units was not given. No reason have been given as to why
Mis. PIL did not import all the four items particularly when Mis. PIL
has been in complete charge of manufacturing. However, the
clinching circumstance is that Mis. PIL was not only manufacturing
export quality synthetic shoes but it also manufactured as job-worker B
of Mis. PIND domestic quality synthetic shoes. Soles, insoles and
sock liners were imported by Mis. PIND and supplied as raw.:.
material to Mis. PIL who manufactured the synthetic shoes which
,.___
were routed through Mis. PIND to Mis. Reebok India for sale in
the domestic market. In the circumstances, the complete
manufacturing activity was in the hands of Mis. PIL. They c
manufactured synthetic shoes sold in the export market and they.
also manufactured synthetic shoes which were sold in the domestic.
market. The shoe uppers constituted an important part of the
footwear. That part was imported under the advance licence by Ml
s. PIL. The same company got the outer soles, insoles and sock D
liners in the name of Mis. PIND. It is M/s. PIL which ultimately
manufactured synthetic shoes. The tribunal did not consider these
circumstances. In cases of the instant nature, the Tribunal should
look at the entire composite picture in order to ascertain the real
intention behind the arrangement on which the importer relies. E
Lastly, the shoe uppers were imported by Mis. PIL whereas soles,
insoles and sock liners were imported by Mis. PIND and given to
Mis. PIL who along with 28 other items (peripherals), procured
'r domestically, manufactured the finished product, viz., synthetic
>- shoes. The entire device was undertaken to show that what was F
imported were parts and not the footwear in the SKD condition.
Therefore, Mis. PIL was the only real importer of all the four items
and, the Department was right in clubbing.
[Para 11] (142-F, H; 143-A-H]
2.3. If the transaction of Mis. PIND and Mis. PIL are looked G
-. at separately then the question of subterfuge cannot be examined.
In the instant case, interest-free loans had been advanced by
Mis. PIL to Mis. PIND. The real importer and also the manufacturer
was M/s. PIL. The entire transaction was completed by M/s. PIL.
No reason has been given as to why Mis. PIL could not have imported H
130 SUPREME COURT REPORTS [2007] 10 S.C.R.

A the outer soles, insoles and sock liners under para 22 of the EXIM
Policy 1992-97 by payment of duty at the concessional rate under -\
Notification No. 45/94-Cus dated 1.3.94. The obvious intention was
to bypass the EXIM Policy 1992-97 and claim benefit of exemption
Notification No. 45/94-Cus dated 1.3.94. Lastly, all four items plus
B 28 other items (peripherals), domestically procured, were used in
the manufacturing process undertaken by Mis. PIL either on its own
account (in case of export) or as job-worker (incase of domestic
sales) which led to the emergence of the final product. Therefore,
the importer was liable to be assessed under tariff Heading 64.04
and consequently not entitled to the benefit of exemption
C Notification No. 45/94-Cus dated 1.3.94. The soles and insoles as
also sock liners were imported by Mis. PIL in the name of Mis.
PIND; that Mis. PIL had an agreement with Reebok International
Ltd. which had its subsidiary in India, viz., Reebok India to whom
synthetic shoes were sold by Mis. PIL through M/s. PIND and,
D therefore, Department was right in invoking rule 8 of the Customs
Valuation Rules. [Para 12] [144-B-F]
CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 8037-
8047of2007.
E From the Judgment and Order dated 22.12.2000 of the Customs,
Excise and Goid (Control) Appellate Tribunal, New Delhi in Final Order
No. 411-42112000-D in Appeal Nos. C/286/98-D and C/302-311/2000
D With E/Co/239. 257-260/2000 D.
Vikas Singh, ASG. G. Prakash and B. Krishna Prasad for the 1
F Appellant. ~

V. Lakshmikumaran, Alok Yadav and M.P. Devanath for the
Respondents.
The Judgment of the Court was delivered by
G KAPADIA, J. 1. These civil appeals are filed by the Department
under Section l 30E of Customs Act, 1962 against order passed by r
CEGAT dated 22.12.2000 in Final Order No.411-.421/2000-D in
Appeal Nos. C/286/98-D and C/302-311 of 2000-D with E/Co/239,
257-260/2000-D whereby the Tribunal allowed the appeals of the
H importers herein (respondents).
/

COMMISSIONER OF CUSTOMS, NEW DELHI v. 131
M/S.PHOENIXINTERNATIONALLTD. [KAPADIA,J.]
2. The question of law that arises for determination in these civil A
'1 appeals is:
Whether shoe uppers, outer soles, insoles and sock liners imported
by Mis. Phoenix Industries Ltd. (PIND) in the same container
could be clubbed so that it could be considered as import of the
shoe itself in semi knocked down (SKD) condition? Whether the B
importer was guilty of mis-declaration when the importer declared
SKD goods as components?
FACTS
3. A synthetic shoe, inter alia, consists of vital parts, namely, C
synthetic uppers, outer soles, insoles and sock liners Mis. Phoenix
International Ltd. (Mis. PIL) were the holders of Quantity Based Advance
Licence under which it was entitled to import synthetic shoe uppers, PVC
compounds and natural rubber. Mis. PIL imported synthetic shoe uppers
numbering 5215 pairs on 16.2.96 declaring CIF value at Rs.19,52,401. D
On the same day Phoenix Industries Ltd. (Mis. PIND) imported soles
and insoles numbering 5151 pairs worth Rs.7,07,806 (CIF). Mis. PIL
had imported synthetic uppers under DEEC Scheme whereas soles were
imported by M/s. PIND under para 22 of the EXIM Policy 1992-97.
Both the companies imported respective items as components/parts. On E
preliminary enquiry, Department was satisfied that there was an attempt
to mislead by importing the above items separately through two different
companies as uppers and soles constituted complete synthetic shoes in
SKD form. In tl1e preliminary enquiry the Department found that all the
cartons were placed in one container with the marking of'' Phoenix'' F
without specifying whether the container was meant for Mis. PIL or Ml
s. PIND. Hence, two show cause notices came to be issued dated 7.5.96
for the period 21.6.95 to 4.11.95 and the second show cause notice dated
1.7.96 for the month of February 1996.
4. In the show cause notices it was alleged that the parts imported G ·
in the name of two companies were synthetic shoes of''Reebok'' brand
in SK.D form; that the import orders for synthetic uppers, outer soles and
insoles had been placed by the two companies on the same Supplier in
Bangkok; that the import orders carried the same number· that both the
' ' H
132 SUPREME COURT REPORTS (2007] 10 S.C.R.

A import orders were signed by Mr. Bhupinder Nagpal, General Manager
of Mis. PIL; that the import invoices filed by the two companies referred
to the same invoice (proforma) dated 2.I I.95; and that the import orders
for synthetic shoe uppers, outer soles and insoles were placed by Mr.
Bhupinder Nagpal on behalf of the said two companies. According to
B the show cause notices consumer items were placed in the negative list
vide para I 56(A) of the EXIM Policy 1992-97 and under the said para
of consumer goods in SKD condition or Ready to assemble condition,
were required to be imported under specific import licence; that synthetic
shoes constituted a consumer item and, therefore, required specific import
c licence; that, in the present case goods in SKD condition or Ready to
Assemble condition were imported without specific import licence despite
knowledge on the part of Mis. PIL that all the components of "Reebok"
shoes like synthetic shoe uppers, outer soles, insoles and sock liners were
meant to be assembled either by them or in their behalf and fater supplied
D to Mis. Reebok International Ltd. or Mis. Reebok India. In this
connection, the Department placed reliance on the manufacturing
agreement between Mis. PIL and Mis. Reebok International Ltd. In the
show cause notices it was further alleged that Mis. PIL were the owners
of Mis. PIND. In the circumstances, the show cause notices stated that
E Mis. PIL had resorted to the above subterfuge of importing uppers of
''Reebok''· shoes in their own name and the remaining three components
in the name of Mis. PIND in order to bypass restriction imposed by para
I56(A) of the EXIM Policy 1992-97. In that connection, the Department
alleged that a loan of Rs. I I. 7 crores was advanced by Mis. PIL to Mis.
PIND, interest free, during the year ending 31.3.95 and a loan ofRs.7.7
F
crores was also advanced to the same company, interest free, during the
financial year 31.3.94. For that purpose reliance was placed on the
balance-sheets of Mis. PIL. Under the above circumstances, the
Department alleged, vide the show cause notices, that Mis. PIL was the 1
importer of all the components, namely, synthetic shoe uppers, outer soles,
G insoles and sock liners; that, as per rule 2(a) of the General Rules of
Interpretation of the First Schedule to the Customs Tariff Act, I 975 (for
short, ''General Rules of interpretation'') the goods imported were not
parts/components but were SKD goods, liable to be assessed as complete
finished goods under tariff Heading 6404.19 of the First Schedule of the
H
COMMISSIONER OF CUSTOMS, NEW DELHI v. 133
MIS. PHOENIX INTERNATIONAL LTD. [KAPADIA, J.]
Customs Act, 1975 and liable to basic customs duty at 50% ad valorem A
and countervailing duty at 15% ad valorem. Vide two show cause notices.
violation of para 156(A) of the EXIM Policy 1992-97, was also alleged.
In that connection, the Department alleged that Mis. PIL was fully aware
that import of the above parts of "Reebok" synthetic shoes in the name
of one company may give rise to suspicion and, therefore, the imports B
were made through the aforestated subterfuge. Further, according to the
show cause notices, the value given in their import invoices did not
represent the correct transaction value since a single consignment meant
for one importer, namely, Mis. PIL was deliberately split up into two parts
and, accordingly, valuation had to be done by invoking rule 8 of the C
Customs Valuation (Determination of Price oflmported Goods) Rules,
1988 (for short, "Customs Valuation Rules"). In this connection, the case
of the Department was that there were no imports of "Reebok"
components in India by any other company and, therefore, value of
comparable goods was not available and, therefore, the Department had D
no option but to invoke rule 8 of the Customs Valuation Rules.
Accordingly, the CIF value was claimed at Rs.1,566.39 per pair under
rule 8 of the Customs Valuation Rules. In the circumstances, vide the show
cause notices the impo1ier was called upon to answer why the benefit of
Notification No~45/94-Cus dated 1.3.94 should not be disallowed; why
consignments of the two companies should not be clubbed for purposes
E
of assessment under EXIM Policy 1992-97 and Customs Act, 1962; why
CIF value of shoes should not be taken at Rs. l 566.39 per pair; why
synthetic shoe uppers, outer soles, insoles and sock liners be not valued
at Rs.82,25, 114(CIF); why the said items should not be confiscated under
Section 111 (d)(l)(m) of the Customs Act, 1962; why the aforestated four F
items should not be assessed to duty under tariff Heading 6404.19 of
Schedule I to Customs Tariff Act, 1975 as synthetic shoes in SKD form
liable to basic customs duty at 50% plus CVD at 15% ad valorem; why
benefit under DEEC should not be denied and lastly why penalty under
Section 112(A) of Customs Act, 1962 should not be imposed for G
contravention.
5. In reply to the show cause notices, it was stated, that the
aforestated two companies were separate independent companies; that
H
134 SUPREME COURT REPORTS [2007] 10 S.C.R.

A M/s. PIND was incorporated as private limited company in 1992 in the
name of.M!s. Welcome Leather Industries Pvt. Ltd.; that M/s. PIL was ~
incorporated as a private limited company in 1987; that M/s. PIL could
not begin its commercial activities for four years and it started its business
in 1991 as merchant exporter; that in 1991 M/s. Welcome Leather
B Industries Pvt. Ltd. decided to sell the company which was acquired by
Mfs. PIL; that in 1992 M/s. PIL started manufacturing shoe uppers and,
therefore, though both the companies, namely, M/s. PIL and M/s. PIND
were under the same management having common majority of directors
and shareholders, they were separate independent companies in all -t
c respects. According to the reply, the two companies were separately
assessed under Income Tax Act, Sales Tax Act and Central Excise Duty.
The factories of the two companies were located at different places. About
500 employees were working in respective companies. According to the
reply filed before the Commissioner, M/s. PIND was engaged in the
manufacture of leather shoes, synthetic shoes, semi-leather shoes, outer
D
soles etc. Mis. PIND were registered as a leather industry. According to
the reply, goods manufactured by Mis. PIND including footwear were _j._
sold in the domestic market. According to the reply, in certain cases
footwear was got manufactured by M/s. PIL on job work basis.
According to the reply, in some cases Mis. PIND acted as job workers
E
for M/s. PIL. At the same time, in other cases, M/s. PIL were as job
workers for Mis. PIND. According to the reply, Mis. PIL handled, during
the above period, overseas sales whereas domestic sales were done by
Mis. PIND under the authorization ofMis. PIL. As regards the import
in question, it was stated that 5251 pairs of outer soles, insoles and sock '1
F liners were imported by Mis. PIND from the foreign Supplier in Bangkok. ~

The importer denied that M/s. PIND was a dummy unit of Mis. PIL as
alleged by the Department. In reply, Mis. PIND objected to the clubbing
of imports as is claimed in the show cause notices. In reply, it was stated
that Mis. PIND was 100% fully owned subsidiary of M/s. PIL and,
G therefore, it was not a dummy company as alleged by the Department.
In the alternative, it was submitted that even for the sake of argument )- -
imports of two companies were clubbed, yet there was no violation of
Foreign Trade (Development and Regulation) Act, 1992. In reply, Mis.
PIND stated that the concept of "SKD" did not exist in respect of
H
COMMISSIONER OF CUSTOMS, NEW DELHI v. 135
M/S.PHOENIXINTERNATIONALLTD.[KAPADIA,J.]

-t
synthetic shoes; that, in respect of shoes it was not possible to unassemble A
I
the product into parts and, therefore, para 156(A) of the EXIM Policy
1992-97 had no application to the facts of the present case. In this
connection, it was further stated that in making of shoes a complicated
industrial process involving costly machine, workers, technical knowhow
etc. was involved and that the finished goods cannot be manufactured a
without further processing and, therefore, it is a misnomer to call synthetic
shoe uppers, soles, insoles and sock liners as SKD packs of complete
shoes. Reliance was placed also in para 7(12) read with 156(A) of the
...-
EXIM Policy 1992-97 in respect of the contention that ''consumer goods''
has been defined in para 7(12) refers to goods like ceiling fans, cycles C
etc.; that para 7(12) refers to "consumer goods" which can directly satisfy
human needs without further processing and since synthetic shoes were
not capable of being assembled without further processing they did not
attract para 156(A) of the EXIM Policy 1992-97. On the question of
applicability of rule 2(a) of the General Rules of interpretation, the importer D
stated that the said rule was meant only for classification of goods under
the Schedule to the Customs Tariff Act, 1975; that, the said rule cannot
be used for interpretation of EXIM Policy 1992-97 or the exemption
notification No. 45/94-Cus dated 1.3.1994 and, therefore, the importer
disputed the contention of the Department that because of rule 2(a) of E
the General Rules of the Interpretation the items imported should be
construed as SKD packs of sports shoes, therefore, according to the
importer rule 2(a) was not applicable. Further, according to the importer,
Notification No. 45/94-Cus dated 1.3 .1994 gave exemption to the items
mentioned in Table A annexed thereto which referred to sole, insole and
sock liner and consequently Mis. PINO was entitled to the benefit of the F
said notification. In this connection, it was stated that goods falling under
Table A were not governed by Actual User condition. According to the
importer the said notification was applicable to the aforestated four items
which were used in the leather industry. According to the importer, so
long as the aforestated items, namely, outer soles, insoles and sock liners G
---. were imported as "parts" by Mis. PIND, exemption under the above
notification was applicable. On the question of valuation it was stated that
the foreign Supplier in Bangkok was unrelated to Mis. PIL and
Mis. PINO; that Reebok International Ltd. had no shares in the foreign
H
136 SUPREME COURT REPORTS [2007] 10 S.C.R.

A Supplier company; that the said foreign Supplier was not the sole Supplier
~
of Reebok International Ltd. and, therefore, the transaction value of the
aforestated four parts should be accepted in terms of rule 4 of the Customs
Valuation Rules. Therefore, it was not open to the Department to invoke
rule 8 of the Customs Valuation Rules. Accordingly, it was prayed by the
B importer that the show cause notices be dropped. The reply of M/s. PIL
and the reply of Mis. PINO are almost identical.
6. By o>:der dated 12.4.99, the Commissioner held that the imports
made by Mis. PINO of soles, insoles and sock liners should be treated -i
as imports by Mis. PIL, however, in view of the elaborate manufacturing
c process undertaken in the factory to produce a complete footwear it was
not possible to hold that complete footwear in SKD condition or Ready
to Assemble condition was imported so as to contravene para 156(A)
of the EXIM Policy 1992-97; at the same time, the Commissioner held
that since the four items had to be dubbed and since the entire operations
D were undertaken by M/s. PIL and since the four items were essential
components of synthetic shoes, rule 2(a) of General Rules of Interpretation __.L.
stood attract. The Commissioner took the view, in this connection, that
rule 2(a) provides for a legal fiction to be applied to the imported goods.
It provides for the rate of duty applicable to components to be applied
E as if the components were finished articles. That, since the imports were
of items which were essential parts of synthetic shoes the said imports
were imports of synthetic shoes in an unassembled form. Hence, it was
held that all imports attracted duty in the present case at the rate applicable
'(
to the footwear and not at the rate applicable to components/parts. -4
F Accordingly, the Commissioner held that no duty was demandable in
respect of synthetic uppers, imported by Mis. PIL during the period
21.6.1995 to 4.11.1995. However, for imports of soles, insoles and sock
liners made by Mis. PINO, exemption under notification 45/94-Cus dated
1.3.94 was not admissible and consequently all the three components
G imported by Mis. PINO would attract duty at the rate applicable to fully-
finished footwear under tariff Heading 64.04. That, there was no exemption )--
for footwear under the said notification as it was available only to parts
of footwear. That, since all the components imported by Mis. PIND
attracted duty at the rate applicable to fully-finished footwear, the said
H
COMMISSIONER OF CUSTOMS, NEW DELHI v. 13 7
MIS. PHOENIX INTERNATIONAL LTD. [KAPADIA, J.]
exemption notification 45194-Cus dated 1.3.94 was not applicable to the A
facts of this case.
7. In conclusion, the Commissioner passed the following order:
"The goods valued at Rs.78,79,9681- in respect of show cause
notice dated 1.7.96 representing the imports made in the name of B
Mis. Phoenix Industries Ltd. attracted confiscation. However, since
the goods are not available, no order confiscating the goods can
be passed. I confirm the differential duty of Rs.16, 78,891/- in
respect of imports made by Mis. Phoenix International Ltd. and
Phoenix Industries Ltd. under two bills of entry covered under show C
cause notice dated 7.5.96 under Section 28(1) of the Customs Act,
1962. The duty is payable by Mis. Phoenix International Ltd.,
Noida. I also confirm the differential duty ofRs.29,14,9331- under
the proviso to Section 28(1) of the Customs Act, 1962 in respect
of imports made in the name of Mis. Phoenix Industries Ltd. during D
the period 21.6. 95 to 4.11. 95 covered under show cause notice
dated 1.7.96. This amount is also payable by Mis. Phoenix
International Ltd. Thus, the total amount of duty payable by Mis.
Phoenix International Ltd. is Rs.45,93,8241-. I also impose upon
Mis.Phoenix International Ltd. a penalty of Rs. I 0,00,000/- E
(Rupees Ten Lacs only) under Section 112(a) of the Customs Act,
1962. Any bank guarantee or deposit made by Mis.Phoenix
International at the time of provisional release of goods or during
the pendency of these proceedings will be adjusted towards
payment of duty demanded and penalty imposed.'' p
CONTENTIONS
8. Mr. Vikas Singh, learned Addl. Solicitor General, submitted that
after clubbing all the four components the Commissioner had erred in
holding that the clubbed items did not constitute synthetic shoes in SKD G
-,,.,( condition. That, at the relevant time Para l 56(A) warranted all consumer
goods in SKD condition to be imported under specific import licence and
therefore, the word "SKD" had to be construed in the manner in which
the trade dealing in such matter would interpret. That the Commissioner
should have held that the imports were in SKD condition and since imports H
138 SUPREME COURT REPORTS [2007] 10 S.C.R.

A of SKD shoes was a restricted item, the advance licences under which
Mis. PIL had made the imports were not applicable to the goods in
question. Learned counsel submitted that the Commissioner had erred in
holding that the process of manufacturing support shoes was quite
elaborate and, therefore, the four items imported did not constitute
B synthetic shoes in SKD form. Learned counsel submitted that the
Commissioner had erred in holding that there was no violation of Para
156(A) of the EXIM Policy. In this connection, learned counsel urged
that importation of sports shoes in SKD condition could only be made
against special import licence and in order to circumvent the restriction in
C the EXIM Policy 1992-97 the above device was evolved to bifurcate
and import the items separately in the names of two different importers,
i.e., shoe uppers were imported by Mis. PIL against advance licence
whereas soles, insoles and sock liners were imported by Mis. PIND on
payment of concessional rate of duty under para 22 of the EXIM Policy
D 1992-97 read with Notification No. 45194-Cus dated 1.3.94. Learned
counsel further urged that on clubbing tariff Heading 64.06 invoked by
the importer, was not applicable and, therefore the importer was liable to
pay basic customs duty at 50% + CVD at 15% ad valorem under tariff
Heading 64.04. That, the said device of bifurcation was to get the benefit
of concessional rate of duty under Notification No. 45194-Cus dated
E 1.3.94. That, the entire funding and manufacturing functions were
undertaken only by Mis. PIL which had entered into Buy-Back
Arrangement with Reebok International Ltd. and, therefore, there was a
close relationship between Reebok International Ltd., Mis. PIL and Ml
s. PIND which attracted rule 8 of the Customs Valuation Rules. For the
F aforestated reasons it was urged that the impugned decision of the Tribunal
deserves to be set aside.
9. Mr. V. Lakshmikumaran, learned counsel appearing on behalf of
the respondents, submitted that the Commissioner had erred in treating
G Mis. PIND as a dummy of Mis. PIL. In this connection, it was urged
that the two companies are separate independent entities. They were
incorporated on different dates. They are in different business. The
domestic market was handled by Mis. PIND whereas export market was
looked after by Mis. PIL. Mis. PIL was the holding company whereas
H
COMMISSIONER OF CUSTOMS, NEW DELHI v. 139
MIS. PHOENIX INTERNATIONAL LTD. [KAPADIA, J.]

Mis. PIND was a subsidiary company. Both the companies had separate A
balance-sheets. They were registered separately under Central Excise Act.
Mis. PIL had fulfilled its export obligations and in recognition thereof an
advance licence was issued in its favour inter alia to import shoe uppers
and that even in the DEEC the name of Mis. PIND was also shown as
Supporting Manufacturer. It was further contended that para 156(A) of B '
EXIM Policy 1992-97 was not applicable to synthetic shoes. It was
applicable to products like bicycles, ceiling fans etc. In this com1ection,
learned counsel urged that it is over-simplification to say that if these four
parts are clipped together it would constitute a sports shoe. Learned
counsel invited our attention to the order of the Commissioner which C
indicates complicated procedure involved in the manufacture of a sports
shoe. Therefore, it is urged on behalf of the respondents that in the present
case there was no import of footwear in the SKD condition and,
therefore, para l 56(A) of the EXIM Policy 1992-97 was not applicable.
Learned counsel urged that even according to the Commissioner there D
was no import of sports shoe in SKD condition and, therefore, there was
no violation of para l 56(A) of the EXIM Policy 1992-97. Learned
counsel urged that this finding of the Commissioner has been confirmed
by the Tribunal, therefore, this Court should not interfere with the
concurring finding. Learned counsel next urged that Mis. PIND was an
independent Unit. It had imported outer soles, insoles and sock liners under E
para 22 of the EXIM Policy 1992-97. It had paid duty at the concessional
rate. Learned counsel submitted that in the present case we are concerned
with tariff Heading 64.04 (footwear) as against tariff Heading 64.06 (parts
of footwear). Learned counsel submitted that apart from the four parts,
namely, shoe uppers, outer soles, insoles and sock liners, there are 28 F
other parts domestically procured and consumed/used in the manufacture
of a sports shoe. He submitted that the process of manufacture was an
intricate process. It was urged that if an error was to creep in the
manufacture of the sports shoe the manufacturer would be liable for
damages to be paid to the sportsman to whom injury may take place on G
account of defect in the manufacture of the footwear. Accordingly, it was
urged that the four parts, referred to above, did not constitute a sports
shoe (footwear) and the Commissioner had erred in denying the benefit
of concessional rate of duty on the ground that what was imported was
H
140 SUPREME COURT REPORTS [2007] 10 S.C.R.

A in essence a complete footwear falling under tariff Heading 64.04. In this
connection, learned counsel also submitted that rule 2(a) of the General
Rules oflnterpretation was not applicable in this case, particularly, when
"parts" of footwear came specifically under tariff Heading 64.06. In this
connection, reliance was placed on rule 1 of the General Rules of
B Interpretation which stated that the classification shall be determined
according to the words used in the headings. Learned counsel urged that
rule 2(a) of the General Rules oflnterpretation in any event cannot be
used to interpret Notification No. 45/94-Cus dated 1.3.94. It was further
contended that under Notification No. 45/94-Cus dated 1.3.94 insoles
C and outer soles fell under Table 'A' annexed to the said notification. That,
items falling under Table 'A' when imported into India for use in the leather
industry were entitled to the benefit of concessional rate of duty and,
therefore, the Commissioner had erred in holding that insoles and outer
soles were not entitled to the benefit of concessional rate of duty as they
D were used in the manufacture of synthetic shoes which did not come under
Leather Industry. Learned counsel submitted that Mis. PIND had imported
soles, insoles and sock liners under para 22 of the EXIM Policy 1992-
97 and, therefore, it was entitled to the benefit of the Notification No.
45/94-Cus dated 1.3.94. Lastly, it was urged that in the present case the
Conunissioner had erred in invoking rule 8 of the Customs Valuation Rules.
E In this connection, it was urged that in this case the importer had impotted
the aforestated items for the sale price. That the import was made by two
independent companies. That the transaction was at arm's length; that
there was no additional consideration and, therefore, rule 4 of the Customs
Valuation Rules was alone applicable and there was no basis whatsoever
F for the Department to invoke rule 8 of the Customs Valuation Rules.
Accordingly, learned counsel submitted that the Tribunal was right in
holding that the aforestated items were imported separately by two
independent companies and that there was no evidence to show that the
footwear in SKD condition was imported and, therefore, in the present
G case importer was entitled to the benefit of Notification No. 45/94-Cus
dated 1.3.94 read with tariff Heading 64.06 (parts of footwear) and,
therefore, the said items were not liable to duty at the rate of 50% and
15% basic and CVD, ad valorem.

H
COMMISSIONER OF CUSTOMS, NEW DELHI v. 141
MIS. PHOENIX INTERNATIONAL LTD. [KAPADIA,J.]
FINDINGS A
·1
10. We find merit in the present civil appeals filed by the Department.
For the sake of convenience we reproduce para 22 and 156(A) of the
EXIM Policy 1992-97 which read as follow:
"ChapterV .le> B

Imports
Free 22. Capital goods, raw materials, intermediates;
Importability components, consumables, spares, parts,
accessories, instruments and other goods may
be imported without any restriction except to ' c
the extent su~h imports are regulated by the
Negative List oflmports or any other provision
of this Policy or any other law for the time
being in force."

~~ 156. RESTRICTED ITEMS

A. CONSUMER GOODS
SI.No. Description ofltems Nature of restriction E
All consumer goods, Not permitted to be imported
howsoever described, of except against a licence or in
industrial, agricultural mineral accordance with a Public Notice
or animal origin, whether in Issued in this behalf.
SKD/CKD condition or F
ready to assemble sets or in
finished form
11. In the case of excise duty, the taxable event is ''manufacture''.
In the present case, however, we are concerned with the levy of customs
duty. That duty is levied on the "act" ofimportation. Therefore, intention G
plays an important role in matters in which there is an allegation of duty
evasion. In the present case, the Department has alleged that a device
was evolved by the importer showing import of shoe uppers by Mis. PIL
whereas outer soles, insoles and sock liners imported by Mis. PIND. A
Fl
142 SUPREME COURT REPORTS (2007] 10 S.C.R.

A subterfuge was, therefore, created to show that two independent
companies had imported separate parts of the footwear in order to bypass
para 156(A) of the EXIM Policy 1992-97. Under the said paragraph,
importatfon of synthetic shoes in SKD condition could only be made
against specific import licence. Mis. PIL was aware of the restrictions. It
B was the only real importer of all the four items. Mis. PIL had funded Ml
s. PIND with interest free loans running into Rs.18 crores (approximately).
Mis. PIND wa<; the factory of Mis. PIL (See the DEEC certificate). When
there is an allegation of subterfuge, the court has to examine the
circumstances surrounding the import to ascertain whether the importer
c had entered into fictitious arrangement to evade customs duty. The
intention behind the act of importation has to be probed. In this case, the
most clinching circumstance is that there is manufacture of the finished
products, namely, "synthetic shoe" for domestic and export markets. Ml
s. PIL manufactured export quality synthetic shoes on their own account
D whereas those sold in the domestic market by Mis. PIND was also
manufactured by Mis PIL for Mis PIND. Further, in his statement, B.
Nagpal, on behalf of the importer, has categorically stated that synthetic
uppers (imported by Mis PIL), soles, insoles and sock liners (imported
by Mis PIND) did constitute complete shoe in SKD condition. Therefore,
E when we come to the question of "intention" in the present case it
becomes clear that the entire device of bifurcation was arranged in order
to bypass the restriction imposed vide para 156(A) of the EXIM Policy.
The reply of B. Nagpal indicates that, according to the importer, the said
four components did constitute synthetic shoe in SKD condition and in
order to circunwent l 56(A) the entire device was arranged by the importer
F to evade duty. Further, we find that in the reply to the show cause notices
there were no details supplied by the importer regarding the number of
units under Mis. PIL. The statement ofBhupinder Nagpal in the preliminary
enquiry shows that there were three units in Noida under Mis. PIL. One
Unit is in B-1 C Sector 10 manufacturing "Phoenix" brand of shoes for
G exports. There was one more Unit in A-4, Sector 5 manufacturing
"Reebok" brand of shoes for exports. It also undertook manufacturing
of shoes for domestic sales on job work basis at Sector A-37, Sector
60 for Mis. PIND. The third unit was Mis. PIL. No details of the turnover
have been furnished. No details of the number of employees have been
H
COMMISSIONER OF CUSTOMS, NEW DELHI v. 143
MIS. PHOENIXINTERNATIONALLTD. [KAPADIA,J.]
furnished. The bifurcation of the turnover between manufacture of synthetic A
f.
shoes exported and shoes sold in the domestic market was not given.
The functional connectivity of the three units was not given. No reason
have been given as to why Mis. PIL did not import all the four items·
particularly when Mis. PIL, as stated hereinbelow, has been in complete.
charge of manufacturing. The obvious reason behind the said bifurcation B
was to obtain the benefit of the Notification No.45194-Cus dated 1.3.94.
However, the clinching circumstance is that Mis. PIL was not only
manufacturing export quality synthetic shoes but it also manufactured as
job-worker of Mis. PINO domestic quality synthetic shoes. Soles, insoles
and sock liners were imported by Mis. PIND and supplied as raw- C
material to Mis. PIL who manufactured the synthetic shoes which were
routed through Mis. PINO to Mis. Reebok India for sale in the domestic
market. In the circumstances, the complete manufacturing activity was in
the hands of Mis. PIL. They manufactured synthetic shoes sold in the
export market and they also manufactured synthetic shoes which were D
sold in the domestic market. The shoe uppers constituted an important
part of the footwear. That part was imported under the advance licence
by Mis. PIL. The same company got the outer soles, insoles and sock
liners in the name of Mis. PIND. It is Mis. PIL which ultimately
manufactured synthetic shoes. Therefore, the entire manufacturing activity E
was carried out by Mis. PIL. Therefore, it is clear that the above device
of importation of one item by Mis. PIL and three items by Mis. PIND
was a subterfuge/fictitious arrangement intended to deceive the Department
and fraud on para l 56(A) of the EXIM Policy 1992-97. The above
circumstances have not at all been considered by the Tribunal. In cases
of the present nature, the Tribunal should look at the entire composite F
picture in order to ascertain the real intention behind the arrangement on
which the importer relies. Lastly, the shoe uppers were imported by Ml
s. PIL whereas soles, insoles and sock liners were imported by Mis.
PIND and given to Mis. PIL who along witl1 28 other items (peripherals),
procured domestically, manufactured the finished product, viz., synthetic G
shoes. The entire device was undertaken to show that what was imported
were parts and not the footwear in the SKD condition. Therefore, Mis.
PIL was the only real importer of all the four items and, in the
circumstances, the Department was right in clubbing.
H
144 SUPREME COURT REPORTS [2007] 10 S.C.R.

A 12. It was urged vehemently even if the said four items were clubbed
_)(
together it would not result in the manufacture of the synthetic shoes as
an intricate process is required to be adopted before the finished product
stood emerged. As stated above, if the transaction of Mis. PIND and
Mis. PIL are looked at separately then the question of subterfuge cannot
B be examined. In the present case, interest-free loans had been advanced
by Mis. PIL to Mis. PIND. The reai importer was only Mis. PIL. The
manufacturer was also Mis. PIL. The entire transaction was completed
by Mis. PIL. No reason has been given as to why Mis. PIL could not
have imported the outer soles, insoles and sock liners under para 22 of
C the EXIM Policy 1992-97 by payment of duty at the concessional rate
under Notification No. 45194-Cus dated 1.3.94. The obvious intention
was to bypass the EXIM Policy 1992-CJ7 and claim benefit of exemption
Notification No. 45194-Cus dated 1.3.94. Lastly, as stated above, all four
items plus 28 other items (peripherals), domestically procured, were used
D in the manufacturing process undertaken by Mis. PIL either on its own
account (in case of export) or as job-worker (incase of domestic sales)
which led to the emergence of the final product. Therefore, the importer
was liable to be assessed under tariff Heading 64.04 and consequently
not entitled to the benefit of exemption Notification No. 45194-Cus dated
E 1.3.94. Lastly, soles and insoles as also sock liners were imported by
Mis. PIL in the name of Mis. PIND; that Mis. PIL had an agreement
with Reebok International Ltd. which had its subsidiary in India, viz.,
Reebok India to whom synthetic shoes were sold by Mis. PIL through
Mis. PIND and, therefore, the Department was right in invoking rule 8
of the Customs Valuation Rules. Unfortunately, none of these aspects have
F been considered by the Tribunal.
13. We, therefore, set aside the impugned judgment of the Tribunal.
We hold that the respondents were guilty of violating para 156(A) of the
EXIM Policy 1992-97; that the respondents were liable to be assessed
G under tariff Heading 64.04 and, accordingly, they were liable to pay duty
of customs at 50% + CVD at 15% ad valorem; that the respondents were
not entitled to the benefit of concessional rate of duty under Notification
No.45194-Cus dated 1.3.94 and that the Department was right in invoking
rule 8 of the Customs Valuation Rules. Accordingly, we remit only the
H
COMMISSIONER OF CUSTOMS, NEW DELHI v. 145
MIS. PHOENIX INTERNATI ON AL LTD. [KAPADIA, J.]
question of re-quantificatiqn of differential duty, redemption fine and A
penalties, payable by the tespondents herein, to the Commissioner of
Customs, Inland Container Depot, Tughalkabad, New Delhi, who will
decide the said issue in accordance with law.
14. Accordingly, the present civil appeals filed by the Department
stand allowed with no order as to costs. B
N.J. Appeals allowed.

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