Customs Duty Exemption on Cutter Suction Dredger: Supreme Court Overrules CESTAT Decision

The Supreme Court of India has recently delivered a crucial judgment in M/s Dharti Dredging and Infrastructure Ltd. v. Commissioner of Customs and Central Excise, Guntur, addressing the issue of customs duty exemption on imported components of a Cutter Suction Dredger. The judgment clarifies the interpretation of exemption notifications and the classification of imported equipment under the Customs Tariff Act, 1975.

Background of the Case

The case arose when M/s Dharti Dredging and Infrastructure Ltd. imported a Cutter Suction Dredger along with its associated accessories, including dredging pumping units, engines, multicats, anchor boats, and other parts. The company classified these items under Chapter Heading 8905 10 00 of the Customs Tariff Act and sought an exemption from customs duty under Notification No. 21/2002-CUS dated 01.03.2002.

The Assistant Commissioner of Customs rejected the claim, arguing that several components, such as the multicats, M.S. pipes, dredging pumping units, and air compressors, could not be classified under the ‘Dredgers’ category and were therefore not eligible for exemption.

Upon appeal, the Commissioner of Customs (Appeals), Guntur, ruled in favor of the importer, holding that these items were integral to the Cutter Suction Dredger and entitled to exemption. However, the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) overturned this ruling, siding with the revenue authorities.

Petitioner’s Arguments (M/s Dharti Dredging and Infrastructure Ltd.)

The petitioner, represented by its legal team, argued:

The dredging pumping units, compressors, and associated equipment were essential for the Cutter Suction Dredger’s operation.
CESTAT erred in classifying these items separately instead of recognizing them as part of the primary dredging equipment.
Previous Supreme Court judgments, such as Commissioner of Customs v. Boskalis Dredging India Pvt. Ltd., had affirmed the classification of such items under ‘Dredgers.’
The imported goods were specifically designed for use in the dredging process and could not function independently.

Respondent’s Arguments (Commissioner of Customs and Central Excise, Guntur)

The customs department countered with the following points:

The items in question were independent machines that could be used outside the Cutter Suction Dredger.
Section XVII of the Customs Tariff Act states that certain components, even if used in marine vessels, should be classified separately.
The Supreme Court’s ruling in Steel Authority of India Ltd. v. Commissioner, Central Excise & Customs supported the view that equipment used for operational assistance does not necessarily qualify as a component.
The classification should be strictly interpreted, and exemptions should not be granted unless explicitly covered under the notification.

Supreme Court’s Judgment

The Supreme Court bench, comprising S. Ravindra Bhat and Dipankar Datta, ruled in favor of the petitioner and set aside the CESTAT decision.

“Each of the units denied exemption by the tribunal is integral for the functioning of a Cutter Dredger. The mere fact that they might be used separately does not exclude them from exemption under the notification.”

Read also: https://judgmentlibrary.com/kerala-building-tax-exemption-supreme-court-clarifies-charitable-purpose-definition/

The Court clarified the following:

Dredging pumping units, compressors, and pipes are essential for the functioning of a Cutter Suction Dredger.
CESTAT erroneously applied Section XVII Note 2(e) of the Customs Tariff Act by treating these items as independent machines rather than integral parts.
The exemption notification should be interpreted in favor of the importer when ambiguity exists.
Past judgments, including Boskalis Dredging India Pvt. Ltd., had already settled the classification of similar dredging equipment.

Key Takeaways from the Judgment

For Importers:

The ruling strengthens the case for businesses importing marine and dredging equipment, reinforcing that essential parts qualify for duty exemption.
Importers should ensure they obtain technical certification from experts to support their exemption claims.

For Customs Authorities:

The judgment reaffirms that classification disputes must be resolved based on industry usage and necessity rather than rigid interpretations of tariff headings.
Future assessments should consider whether the disputed items are indispensable to the functioning of the primary equipment.

For the Legal Framework:

The ruling sets a strong precedent that tax exemptions should be interpreted liberally when ambiguity exists in the law.
CESTAT and lower appellate bodies must align their interpretations with past Supreme Court rulings.

Conclusion

The Supreme Court’s decision in M/s Dharti Dredging and Infrastructure Ltd. v. Commissioner of Customs and Central Excise, Guntur reaffirms the principle that exemptions must be granted when an imported item is indispensable to the primary machinery’s functioning. By overturning the CESTAT ruling, the Court has provided clarity on the classification of dredging equipment and reinforced the importance of aligning taxation policies with industry realities.

Petitioner Name: M/s Dharti Dredging and Infrastructure Ltd..
Respondent Name: Commissioner of Customs and Central Excise, Guntur.
Judgment By: Justice S. Ravindra Bhat, Justice Dipankar Datta.
Place Of Incident: Guntur.
Judgment Date: 28-02-2023.

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