Spool heading cannot defeat EPCG licence: CESTAT sets aside Rs 3.07 crore duty on Chiripal Poly

Customs reclassified 60 spools imported for a rolling mill as steel articles, denied the EPCG exemption and demanded Rs 3,07,21,816 with an equal penalty and a Rs 50 lakh fine. The Chandigarh bench holds that goods the DGFT licence treats as capital goods stay exempt whatever heading Customs prefers, and never rules on the heading.

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT) at Chandigarh has quashed a demand of Rs 3,07,21,816 against Chiripal Poly Films Ltd, ruling that spools imported for its rolling mill under an EPCG authorisation stayed eligible for the customs exemption whatever tariff heading Customs gave them.

The final order of 5 November 2026, written by P. Anjani Kumar, Member (Technical), also set aside an equal penalty under Section 114A of the Customs Act, 1962 and a redemption fine of Rs 50 lakh. Somesh Arora, Member (Judicial), sat with him.

The bench found it unnecessary to decide the classification fight that had run through the case, though it said the company's reading of the exclusion for spools carried force.

Sixty spools and a change of heading

Chiripal Poly Films, based at Kathua in Jammu and Kashmir, imported 60 spools for a rolling mill under an authorisation of the Export Promotion Capital Goods (EPCG) scheme. It filed a Bill of Entry, No. 6542707, classifying them under customs tariff heading 8455 9000 as other parts of rolling mills and claimed the exemption notification for EPCG imports.

The Revenue thought the spools were steel articles that belonged under 7326 9099. It alleged mis-declaration and misclassification to get the EPCG benefit unlawfully, and seized the goods on 4 December 2024.

After a show cause notice, the Principal Commissioner of Customs at Sahnewal, Ludhiana, passed an order-in-original on 19 August 2025. It reclassified the goods, denied the exemption, demanded differential duty of Rs 3,07,21,816, imposed an equal penalty under Section 114A and a redemption fine of Rs 50,00,000.

The importer: licence and policy decide capital goods

Paresh M. Dave, appearing for Chiripal, argued that the spools are capital goods for the company under the EPCG scheme and the Foreign Trade Policy (FTP). The policy defines capital goods by function in manufacture, directly or indirectly, he said, and makes no reference to tariff classification.

The spools are not on the negative list in Appendix 5F of the policy, he added. They were made to the rolling mill's requirements, he said, and are crucial to making aluminium foil. The Revenue had neither denied nor disputed that.

He argued that if exemption depended on classification, the EPCG authorisation, which itself lists the goods as other parts, would be redundant. He distinguished KGN Enterprises, relied on by the Commissioner, where goods declared as seed-cleaning machines were really galvanised sheets, nuts and bolts.

On classification, Dave said Note 1(c) to Section 16 of the Tariff excludes bobbins, spools and similar supports only where they merely support other material, not parts essential to a machine.

Heading 7326 is residual, he said, and cannot beat a specific heading for parts of rolling mills. The most specific description wins under Rule 3(a) of the General Rules of Interpretation.

Revenue: licence valid only for the named heading

Appearing for the Revenue, authorised representatives Maheswar Maji and Amita Gupta argued that an authorisation is valid only for the heading it specifies. That is why the Commissioner relied on KGN Enterprises, they said, and the department's position is legally superior as it adheres to the strict terms of the licence.

The importer's expert opinion, they added, contradicts the statute. Section Note 1(c) of Section 16 excludes spools of any material from Chapter 84 and is binding and absolute. They cited Videocon Industries, a 2023 Supreme Court ruling.

The Revenue said Chiripal knowingly declared heading 8455 9000 despite that exclusion, so the extended period under Section 28(4) was rightly invoked. The penalty followed from proven evasion, and the goods were rightly confiscated.

Two questions, one decided

The tribunal framed two questions. The first was whether a difference between the nomenclature and heading in the EPCG authorisation and the Customs Tariff should disentitle the importer to the benefit. The second was the classification itself:

"Whether the impugned goods are classifiable under CTH 7326 9099 as contended by Revenue or under CTH 8455 9000." (para 5)

On the first, it noted that the goods are described as spools for a rolling mill in both the DGFT authorisation and the Bill of Entry. Paragraph 5.1(a) of the Foreign Trade Policy allows import of capital goods at zero customs duty, other than those on the negative list in Appendix 5F.

Paragraph 11.08 defines capital goods as any plant, machinery, equipment or accessories required for manufacture or production, directly or indirectly, and the customs exemption notification adopts that meaning. The Revenue never said the spools sit on the Appendix 5F list.

Customs cannot second-guess the DGFT

The bench noted that the Customs Act has no definition of capital goods. Where the authority issuing the EPCG licence treats goods as capital goods under the policy and Handbook of Procedures, it said, Customs has no reason to disbelieve it because of the heading it reaches under the Tariff.

If Customs wished to deny the exemption, it said, it should have referred the matter to the DGFT for clarification or asked for a change in the classification. Here it neither sought clarification nor got the authorisation modified, rectified or annulled.

Without taking either step, Customs could not have disputed the eligibility of the goods, irrespective of the classification it reached, the bench held. The reasoning sits comfortably with the Chennai bench's decision in JSW Steel Ltd, [2016 (340) ELT 262], it said.

That case concerned the SHIS scheme and goods that Customs said were bolts, nuts and individual parts. The Chennai bench held them capital goods under the policy definition, which is identical to the one in the customs notification, and said the department could not take different stands on the same goods under different schemes.

CESTAT Kolkata relied on it in Jindal Stainless Ltd [2025 (3) TMI 855], the bench noted. Though those disputes concerned the SHIS scheme, it said, the principle covers the EPCG issue here. It concluded:

"eligible for the exemption notification irrespective of the classification" (para 5.2)

A classification fight left undecided

On classification, the bench said there was "considerable force" in the importer's reading of Note 1(c). The words similar supports refer to goods that are supports for any material, not to parts essential in a machine used to manufacture.

The Revenue's reliance on heading 73.26 rested on the Explanatory Notes covering iron and steel articles made by forging, punching, cutting, stamping and similar processes. The Revenue had not shown the spools were made by such simple processes, the bench said.

The importer's contention that spools used to make aluminium foil are produced by more technically complicated processes was not refuted. Yet, since the exemption was available regardless of classification, the bench saw no need to discuss it further.

With the exemption secure, the allegation of mis-declaration with intent to evade duty fell away, the bench held. That meant the duty demand, penalty and redemption fine were all unwarranted.

Order

The tribunal set aside the order-in-original of 19 August 2025 and allowed Chiripal Poly Films' appeal. The Rs 3,07,21,816 duty demand, the equal penalty under Section 114A and the Rs 50 lakh redemption fine do not stand.

The order was pronounced in open court on 5 November 2026, after a hearing on 15 October 2026.