The machining centres that moved to a trader's warehouse
In March 2024 a manufacturer with a valid sales tax registration imported six CNC machining centres under HS 8457.10, each with a declared and accepted customs value of PKR 16 million. The concessionary notification gave 0% customs duty and sales tax exemption for machinery imported for installation in the importer's own factory, on the conditions that the machinery is not sold or otherwise disposed of for five years and that any change of location or status is intimated to Customs. The normal rates are customs duty 10% and sales tax 18%. A post-clearance audit in February 2026 traces two of the machines, by serial number matching the GDs, to the warehouse of an unrelated trading company which bought them for PKR 45 million in November 2025. Nothing was ever intimated to Customs. The importer replies that the transaction was a sale-and-lease-back to raise working capital, that the machines will return to the factory after two years, and that no duty should be payable because the machines are still in Pakistan and still in production use.
1. Was the exemption lost, and if so, at what moment and on what legal basis? Address the sale-and-lease-back argument.
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A concession in a notification is conditional, not a permanent rebate. The exemption attaches to the goods only while the conditions are met; once a condition is breached, the goods become chargeable at the rates that would have applied at the time of importation.
The breach here is clear and dated. The machinery was sold in November 2025, within the five-year period, without intimation. Both conditions are independent: even a sale that Customs might have approved required prior intimation, and none was given. The machines also left the importer's factory and are in a trader's warehouse, so the 'installed in own factory' basis has gone.
The lease-back argument fails on substance. A sale-and-lease-back is still a sale and disposal; the condition does not say 'sold outright'. The buyer is not the registered manufacturer, and the machinery is not installed in a production facility. Whether the machines return in two years is irrelevant to a condition measured at the date of disposal. At most the lease-back explains motive and is mitigation on penalty, not a defence on duty.
Only the two disposed machines are affected. The remaining four, if still installed and used, retain the concession. The audit should therefore document serial numbers, dates and the buyer's records before drafting anything.
2. Draft the recovery. Which amounts, from whom, within what limitation, and what must precede the demand?
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Quantum on the two machines:
- Customs value: 2 × 16,000,000 = PKR 32,000,000.
- Customs duty at 10%: PKR 3,200,000.
- Sales tax at 18% of (32,000,000 + 3,200,000) = 18% × 35,200,000 = PKR 6,336,000.
- Total recoverable: PKR 9,536,000, plus penalty and default surcharge as applicable.
From whom: the importer, as the person who availed the concession and breached its conditions. The purchasing trader should be joined as a beneficiary/transferee so that the order binds it and the machines can be proceeded against if the importer does not pay.
Limitation: the short levy arises from a breach of a condition and non-disclosure, so the extended limitation for short levy on account of misdeclaration or concealment applies; the notice must be issued within that period. Clearance was in March 2024 and the breach was detected in February 2026, so the department is comfortably within time.
What must precede the demand: a show-cause notice stating the goods, the condition breached, the amounts and the proposed penalty; a hearing; and a reasoned order by the adjudicating authority. Confidentiality of the audit working papers should be maintained, but the evidence relied on, including serial numbers and the purchase record, must be disclosed to the importer. Penalty under section 156 and a fine in lieu of confiscation under section 181 can be considered, but the duty is a recovery, not a punishment, and both may be imposed in one order.
3. What are the importer's options after the order, and how would you answer the argument that the penalty should be waived because the transaction was disclosed in audited accounts?
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After the order the importer can file an appeal to the Collector (Appeals) within 30 days under section 193, with an application for suspension of recovery; further appeal lies to the Appellate Tribunal. It can also seek alternate dispute resolution where the case falls within the permitted categories, though cases requiring interpretation of a notification's conditions are usually unsuitable for ADR. Payment under protest preserves the refund route if the appeal succeeds.
The audited-accounts argument goes to penalty, not to duty. Disclosure in financial statements shows the sale was not concealed from the auditors, but the condition required intimation to Customs. The breach is therefore admitted, not excused. On penalty, the factors I would weigh are: the notification was read and accepted at import, the importer is a registered manufacturer, there was no attempt to move the machines covertly out of Pakistan, and the buyer's records are traceable. Those support a reduced penalty under section 156 and a modest redemption fine, while the duty and sales tax remain fully recoverable.
What should not be done is to regularise the past by accepting a fresh intimation now. A post-facto letter cannot restore a concession lost in November 2025. The correct disposition is recovery with reasoned mitigation, and a written caution about future compliance with condition-based notifications.