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Commissioner Of Customs, Amritsar v. Parker Industries

Punjab & Haryana High Court

Nov 7, 2006

Judgment

Subsequent
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Summary of Opinion — Custom Act Appeals Nos. 1 to 5 of 2006

Factual and Procedural Background

This order disposes of Custom Act Appeal Nos. 1 to 5 of 2006 together because common questions of fact and law arise. The appeals were preferred by the revenue against the Tribunal's order dated 7-2-2005 in relation to stay applications connected with A. No. C/638-42/04-NB(S).

The revenue's case is that the respondent (the original DEPB holder) forged Bank Certificate of Exports and Realisation (BCE & R) to obtain Duty Entitlement Pass Books (DEPB) and thereby secured duty exemption improperly. When the fraud was discovered, the Joint Director General of Foreign Trade cancelled the DEPBs issued to the respondent by order dated 16-1-2002. One DEPB was transferred by the respondent to M/s. Shiraj International Company, Amritsar, which imported goods on that basis.

Proceedings were initiated against M/s. Shiraj International Company but no penalty was imposed on it because the transferee's plea of being a bona fide purchaser without notice of fraud was accepted by the adjudicating authority. The adjudicating authority nonetheless directed recovery of duty and imposed penalty on the respondent-assessee (original DEPB holder). On appeal the Tribunal accepted the respondent's plea that no penalty could be imposed on the original holder where the transferee had not been penalised and on the ground that the licence was valid until cancellation.

Legal Issues Presented

Whether the CESTAT was justified in applying the ratio of the law laid down by the Bombay High Court in Taparia Overseas (P) Limited v. UOI (2003 (161) E.L.T 47 (Bom.)) for granting relief upon penalty to the original DEPB holder who committed fraud, without distinguishing that Taparia Overseas dealt with the beneficiary (i.e., transferee) of the DEPB to whom a forged DEPB was transferred by the original holder?
Whether the CESTAT was justified in allowing the same treatment to the committee of the fraud and the beneficiary of the DEPB who purchased it in a bona fide manner?
Whether the CESTAT was justified in absolving the respondents (i.e., original holder of the DEPB who obtained it by fraudulent means and then transferred it), holding that the licences were valid at the time of import, ignoring that the penalty was imposed in fitness to mala fide acts of the respondents?
Whether the CESTAT order is non-speaking in nature because it was passed at the stage of hearing the stay application without discussing the merits of the revenue's case as brought in the show cause notice and discussed in the Order-in-Original, on the basis of the facts of the case?

Arguments of the Parties

Revenue's Arguments

The Tribunal erred in treating the original DEPB holder (respondent) at par with the transferee. The respondent committed fraud by forging BCE & R to obtain DEPB, and although the transferee may have imported bona fide without notice of fraud, that does not absolve the fraudulent original holder from penal liability.
The Tribunal should not have absolved the respondent simply because the transferee was not penalised; the original allottee who committed fraud must be held accountable for fraud and its consequences.
Reliance was placed on Calcutta High Court authority (ICI India Limited v. Commissioner of Customs (Port), Calcutta, 2005 (184) E.L.T 339) and on this Court's prior decision in Golden Tools International v. Joint DGFT, Ludhiana, 2006 (199) E.L.T 213, upholding cancellation of DEPB and levy of penalty under Section 11(2) of the Foreign Trade (Development and Regulation) Act, 1992.

Respondent / Assessee's Arguments

The respondent relied upon Supreme Court authority in East India Commercial Company Limited v. Collector, 1983 (13) E.L.T 1342 (S.C), for the proposition that even if a licence is void on account of fraud, the rights of a transferee are unaffected unless the transferee is not bona fide.
The assessee relied on subsequent Supreme Court decisions (Collector of Customs, Bombay v. Sneha Sales Corporation, 2000 (121) E.L.T 577 (S.C), UOI v. Sampat Raj Dugar, 1992 (58) E.L.T 163 (S.C)) and on decisions of the Bombay and Allahabad High Courts (Taparia Overseas; K. Uttamlal (Exports) Pvt. Limited; Coolade Beverages Limited) and H. Guru Investment, which follow the same view protecting bona fide transferees.
The respondent argued that because the transferee (M/s. Shiraj International Company) was found to be a bona fide transferee and was not penalised, the original holder should not be treated differently in respect of penalty when the licence was valid until cancellation.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Taparia Overseas (P) Limited v. UOI, 2003 (161) E.L.T 47 (Bom.)	The Bombay High Court applied the principle that rights of a bona fide transferee of a DEPB are not affected by fraud in procurement of the DEPB by the original holder.	The assessee relied on this case; the Court observed that such decisions support protection of innocent transferees but do not extend to exonerate an original holder against whom a finding of fraud has been recorded.
East India Commercial Company Limited v. Collector, 1983 (13) E.L.T 1342 (S.C)	Held that even if a licence was void on account of fraud, the rights of a transferee were not affected unless the transferee had not acted bona fide.	Relied upon by the assessee to argue parity with the transferee; the Court distinguished this principle as applicable only to innocent transferees and not to original fraudulent holders.
Collector of Customs, Bombay v. Sneha Sales Corporation, 2000 (121) E.L.T 577 (S.C)	Followed the East India principle protecting bona fide transferees.	Recognised as authority relied upon by the assessee; the Court held it does not exonerate the original holder who committed fraud.
UOI v. Sampat Raj Dugar, 1992 (58) E.L.T 163 (S.C)	Followed the East India principle regarding transferee protection where transferee acted bona fide.	Noted among decisions relied upon by the assessee; the Court found such authorities inapplicable to absolve the fraudulent original holder.
K. Uttamlal (Exports) Pvt. Limited v. UOI, 1990 (46) E.L.T 527	Bombay High Court decision following the view protective of innocent transferees.	Identified as supportive of the transferee-protection principle relied on by the assessee; Court held it did not assist the respondent who had been found guilty of fraud.
Coolade Beverages Limited v. Commissioner of Central Excise, Meerut, 2004 (172) E.L.T 451	Allahabad High Court decision following the transferee-protection principle.	Cited by the assessee; Court treated it as supportive only of innocent transferees and not of the original fraudulent holder.
H. Guru Investment (North India) Pvt. Limited v. CEGAT, New Delhi, 1998 (104) E.L.T 8	Decision cited as following the principle protecting bona fide transferees.	Mentioned among authorities relied on by the assessee; Court distinguished such authorities from the present case involving a recorded finding of fraud against the original holder.
ICI India Limited v. Commissioner of Customs (Port), Calcutta, 2005 (184) E.L.T 339	Calcutta High Court decision relied upon by the revenue in support of cancellation of DEPB and imposition of penalties where DEPBs were obtained by fraud.	Relied on by the revenue; the Court accepted the relevance of such authorities to support that fraudulently obtained DEPB imports amount to contravention attracting penalties under Section 11 (as applied) and that cancellation/penalty could be imposed.
Golden Tools International v. Joint DGFT, Ludhiana, 2006 (199) E.L.T 213 (this Court)	Upheld cancellation of DEPB and levy of penalty under Section 11(2) of the Foreign Trade (Development & Regulation) Act, 1992; discussed the proposition that fraud vitiates claims based on forged documents and DEPBs obtained by such falsehoods can be cancelled and penalised.	Relied upon by the revenue and cited at length; the Court in the present case adopted the reasoning that fraud avoids judicial acts, cancellation of licences obtained by fraud is permissible, and penalties under the applicable provisions can be levied.
S.P. Chengalvaraya Naidu v. Jagannath, (1994) 1 SCC 1 : AIR 1994 SC 853	Authority for the maxim that "fraud avoids all judicial acts" and exposition on what constitutes fraud in law.	Quoted in Golden Tools and relied upon in the present analysis to support the proposition that a claim founded on falsehood cannot be entertained and that fraudulent procurement of DEPBs justifies cancellation and penalties.
Commissioner of Customs v. Essar Oil Ltd., (2004) 11 SCC 364	Held that there is fraud in law if a party knowingly makes false representations and injury results therefrom even if motive may not have been bad.	Referred to in the Golden Tools discussion and adopted to show that making false representations to obtain DEPBs is fraud in law, supporting cancellation and penalty measures.
Delhi Development Authority v. Skipper Construction Company (P) Limited, (1996) 4 SCC 622 : AIR 1996 SC 2005	Concerned resulting trust and equity; held that properties earned by smuggling or illegal activities will be forfeited to the State, illustrating equity principles applied when benefits are derived from illegality.	The Court invoked this authority by parity to hold that a person committing fraud must restore the benefits obtained and cannot claim exoneration simply because benefits were transferred to an innocent transferee.

Court's Reasoning and Analysis

The Court considered rival submissions, the record and the authorities cited. It noted that the Tribunal did not record any finding that the respondent-assessee did not commit the alleged fraud. The Tribunal's finding that the transferee (M/s. Shiraj International Company Limited) acquired the DEPBs bona fide and without notice of fraud was not in dispute; the correctness of that finding was not challenged.

The Court analysed the legal effect of recognising a bona fide transferee's protection while distinguishing that protection from the position of the original allottee who procured the DEPB by fraud. The Court held that the transferee-protection authorities (East India and follow-on decisions) support protection only for innocent transferees and do not justify treating an original fraudulent holder on parity with such transferees.

Applying principles from authorities that sustain cancellation and penal consequences where claims are based on forged documents (including Golden Tools and ICI India), the Court reasoned that fraudulently obtained DEPBs lead to duty-free imports that are tantamount to contravention under the relevant statutory framework (in particular the operation of Section 3(3) of the Foreign Trade Act read with the Customs Act provisions and Section 11 as applied). The Court also relied on the equity principle in Delhi Development Authority v. Skipper (resulting trust and forfeiture of benefits from illegality) to support the principle that a person who committed fraud must restore benefits and cannot escape liability merely because the transferee was innocent.

Given that (a) the respondent had a recorded finding of fraud which had not been set aside, and (b) the transferee's innocence does not absolve the original fraudulent actor, the Court concluded that the Tribunal erred in treating guilty and innocent parties at par. The judgments relied upon by the respondent were held to be inapplicable to absolve the original fraudulent holder; they only support protection of an innocent transferee.

Holding and Implications

FINAL HOLDING: The appeals are allowed; the impugned order of the Customs, Excise and Service Tax Appellate Tribunal is set aside and the order of the adjudicating authority (which had imposed duty recovery and penalty on the respondent) is restored.

Implications:

Direct effect on the parties: The respondent (original DEPB holder who was found to have committed fraud) remains liable to duty recovery and penalty as determined by the adjudicating authority; the Tribunal's relief to the respondent is vacated.
Legal principle applied: Protection afforded to bona fide transferees by earlier authorities does not extend to absolve an original holder against whom a finding of fraud has been recorded. A fraudulent original holder is accountable for the consequences of procuring DEPBs by fraud, even if a transferee was innocent.
Broader precedent: The Court applied and reconciled existing authorities (both those protecting bona fide transferees and those upholding cancellation and penalties where claims are based on forged documents) to support its result. The opinion does not purport to state that it is creating a novel legal principle beyond applying and distinguishing existing authorities; the immediate effect is the restoration of the adjudicating authority's order against the respondent in these appeals.

Show all summary ...

1. This order will dispose of Custom Act Appeal Nos. 1 to 5 of 2006, as common questions of facts and law are involved between the same parties. Facts have been noticed from Custom Act Appeal No. 1 of 2006.

2. This appeal has been preferred by the revenue against the order dated 7-2-2005 passed by the Customs, Excise and Service Tax Appellate Tribunal, New Delhi (for short, ‘the Tribunal’) in C/Stay 2921-2925/04-NB(S) in A. No. C/638-42/04-NB(S), proposing following questions of law:—

“(i) Whether the CESTAT is justified in applying ratio of the law laid down by the Bombay High Court in the case of Taparia Overseas (P) Limited v. UOI reported as 2003 (161) E.L.T 47 (Bom.) for granting relief upon penalty, to original DEPB holder who committed fraud without distinguishing the fact that in the case of Taparia Overseas Hon'ble Bombay High Court decided the matter in respect of beneficiary of the DEPB i.e, to whom forged DEPB was transferred by the original DEPB holder?

(ii) Whether the CESTAT is justified in allowing same treatment to the committee of the fraud and beneficiary of the DEPB who purchased it in bona fide manner?

(iii) Whether the CESTAT is justified in absolving the Respondents i.e, original holder of the DEPB, who obtained it by fraudulent means and then transferred it, holding that the licences were valid at the time of import ignoring the fact that the penalty was imposed in fitness to mala fide acts of the respondents?

(iv) Is it not that the CESTAT order is not speaking in nature? The order has been passed at the stage of hearing the stay application, without discussing merits of the case of the Revenue as brought forward in the show cause notice and discussed in the Order-in-Original, on the basis of facts of the case?

3. Case of the revenue is that the assessee forged Bank Certificate of Exports and Realization (BCE & R) with a view to avail benefits under Duty Entitlement Pass Books (DEPB) under which an exporter is entitled to duty exemption. When the fraud committed came to light, the Joint Director General of Foreign Trade (JDGFT) cancelled the DEPBs issued in favour of the respondent vide order dated 16-1-2002. The assessee transferred one of the DEPBs to M/s. Shiraj International Company, Amritsar, who effected imports on that basis. Though, proceedings were initiated against M/s. Shiraj International Company, but no penalty was imposed as their plea that they were bona fide transferee of DEPBs for consideration, without notice of any allegation of fraud, was accepted. Finding recorded by the adjudicating authority in its order dated 28-4-2004 is as under:—

“However, I find nothing on record to infer that M/s. Shiraj International Co. Amritsar had purchased the freely transferable DEPB scrip otherwise than in a bona fide manner and utilized the same towards debit/exemption of duty and there is nothing to suggest of his having colluded with the exporter who obtained the DEPB scrips by fraudulent manner. Therefore, I do not hold them liable to penal action under Section 112 of the Customs Act, 1962”

4. However, duty was directed to be recovered and penalty was imposed on the respondent-assessee. On appeal to the Tribunal accepted the plea of the assessee that since penalty was not imposed on the importer for importing goods against invalid DEPBs, no penalty could be imposed on the assessee-respondent and that the licence was valid till cancellation.

5. Learned Counsel for the revenue submitted that the Tribunal was in error in treating the case of the respondent, who was guilty of forging BCE & E and thereby illegally securing DEPB, which was transferred to M/s. Shiraj International Company Limited which led to illegal import at par with M/s. Shiraj International Company (transferee of the DEPB). The transferee may be acting bona fide without notice of the fraud and may not be liable to penalty but the respondent who committed the fraud could not be treated at par and is liable tc penal action.

6. Learned Counsel for the assessee relied upon judgments of the Hon'ble Supreme Court in East India Commercial Company Limited v. Collector, 1983 (13) E.L.T 1342 (S.C), wherein it was held that even if a licence was void on account of fraud, this did not affect rights of a transferee unless the transferee had not acted bona fide. Reliance was also placed on judgments of the Hon'ble Supreme Court in Collector of Customs, Bombay v. Sneha Sales Corporation, 2000 (121) E.L.T 577 (S.C) and UOI v. Sampat Raj Dugar, 1992 (58) E.L.T 163 (S.C), wherein the view taken in East India Commercial Company Limited's case (supra) was followed. The said view was also followed by the Bombay High Court in Taparia Overseas (P) Limited v. UOI, 2003 (161) E.L.T 47, K. Uttamlal (Exports) Pvt. Limited v. UOI, 1990 (46) E.L.T 527 and Allahabad High Court in Coolade Beverages Limited v. Commissioner of Central Excise, Meerut, 2004 (172) E.L.T 451 and H. Guru Investment (North India) Pvt. Limited v. CEGAT, New Delhi, 1998 (104) E.L.T 8.

7. Learned Counsel for the revenue relied upon judgment of the Calcutta High Court in ICI India Limited v. Commissioner of Customs (Port), Calcutta, 2005 (184) E.L.T 339 and judgment of this Court dated 22-12-2005 in Golden Tools International v. Joint DGFT, Ludhiana, 2006 (199) E.L.T 213, wherein this court upheld cancellation of DEPB and levy of penalty under Section 11(2) of the Foreign Trade (Development and Regulation) Act, 1992. This court observed:—

“12. We are of the view that both the petitions are bereft of any merit. The entire claim of the petitioners was based on falsehood. It is not in dispute that furnishing of bank certificate of exports and realisation of export proceeds was a pre-requisite for issue of DEPB. Admittedly, the bank certificates furnished were fabricated documents. The observations of the former Lord Chief Justice of England, Sir Edward Coke, more than three centuries ago, that “fraud avoids all judicial acts, ecclesiastical or temporal”, noticed by the Supreme Court in S.P Chengalvaraya Naidu v. Jagannath, (1994) 1 SCC 1 : AIR 1994 SC 853, are apt for the instant case. The Apex Court has also observed that an act of deliberate deception with the design of securing something by taking unfair advantage of another is a “fraud”. “Fraud” is a cheating intended to get an advantage. A person whose case is based on falsehood has no right to seek relief in equity. Recently in Commissioner of Customs v. Essar Oil Ltd., (2004) 11 SCC 364, their Lordships of the Supreme Court have observed that it is a fraud in law if a party makes representations, which he knows to be false, and injury enures therefrom although the motive from which the representations proceeded may not have been bad. Therefore, at the outset, we reject the stand of the petitioners that since the goods were in fact, exported, and the proceeds were realised, no contumacious conduct could be attributed to them and perhaps it was a misadventure on the part of their representatives. It does not matter whether the forged certificates were fur-nished by the petitioners or their representatives. What is material is that representations were made to the Directorate of Foreign Trade either by them or on their behalf; the Joint Director of Foreign Trade acted on these representations and issued the DEPBs. The petitioners were fully aware that remittances had not been received, through the bankers whose certifi-cates had been furnished. It clearly shows the fraudulent motive. Being the ultimate beneficiaries of the DEPBs, they cannot be heard to say that they are innocent.

13. There is no substance in the plea that a DEPB cannot be cancelled after it has outlived its life. Sub-section (4) of Section 9 of the Act, confers upon the Director General or the authorized officer power to suspend or cancel any licence granted under the Act. Suspension is an interim measure, pending passing of a final order, but cancellation envisages annulment, a complete abolition of the right for the exercise of which a licence is granted. The power to suspend or cancel the licence vested in the Director General is determined by reference to the language used in the statute and not by reference to any predilections about the legislative intent. We are unable to read into Section 9(4) of the Act anything which would indicate that expression “cancel” means only revocation of a licence which is otherwise valid and operative and that too retrospectively. In our opinion, the power to cancel a licence includes cancellation of both, whether unutilised or utilised.

14. True, the cancellation of a licence entails severe consequences but in a case, like the present one, where the claim at the threshold was based on a forged document, in absence whereof an application for issue of DEPB was not maintainable, cancellation of the pass books cannot be said to be a harsh punishment, disproportionate to the malfeasance committed, as is sought to be pleaded on behalf of the petitioners. We do not find any equity in favour of the petitioners.

15. As regards the applicability of the provisions of sub-section (2) of Section 11 of the Act, it will be useful to refer to Section 3 of the Act, which confers power on the Central Government to make provisions relating to imports and exports. The section reads as follows:

“3. Powers to make provisions relating to imports and exports. — (1) The Central Government may, by order published in the Official Gazette, make provision for the development and regulation of foreign trade by facilitating imports and increasing exports.

(2) The Central Government may also, by order published in the Official Gazette, make provision for prohibiting, restricting or otherwise regulating, in all cases or in specified classes of cases and subject to such exceptions, if any, as may be made by or under the Order, the import or export of goods.

(3) All goods to which any order under sub-section (2) applies shall be deemed to be goods, the import or export of which has been prohibited under Section 11 of the Customs Act, 1962 and all the provisions of that Act shall have effect accordingly.”

Sub-sections (1) and (2) are aimed at facilitating imports and increasing exports by conferring upon the Central Government power to issue orders in the Official Gazette, regulating, prohibiting or restricting in all cases or specified classes of cases, the import or export of goods. The object and purpose of sub-section (3) is to apply the prohibitions imposed under Section 11 of the Customs Act, 1962 to all goods to which any order under sub-section (3) applies and thereby. to apply all the provisions of the Customs Act to the said goods. The provisions of sub-section (3) and the orders passed thereunder have to be read in conjunction with the provisions of the Customs Act, 1962 which form an integrated whole. In other words, the provisions of the Customs Act, 1962 would apply by reason of the operation of legal fiction created by Section 3(3) of the Act to all imports and exports made under any provision notified under the Act.

16. In the instant case, the stand of the respondents in the written statement is that the imports made by the petitioners were cleared without payment of Customs duty on the basis of duty credit allowed in the DEPBs issued under the Act, which were obtained on the basis of forged bank realisation certificates. This factual averment has not been controverted by the petitioners. In the light of this factual scenario, reading the provisions of the said two statutes conjointly, Section 11(2) of the Act would be clearly attracted. We are of the considered view that duty free imports made by the petitioners on the basis of DEPBs', fraudulently obtained, is tantamount to contravention of the provisions as engrafted in Section 11 of the Act and thus, no fault can be found with the orders levying penalties under the said Section.”

8. We have considered the rival submissions and perused the record.

9. The Tribunal has not recorded any finding that the respondent-assessee did not commit any fraud, as alleged. Correctness of the finding that the transferee M/s. Shiraj International Company Limited did not commit any fraud, having obtained DEPB without notice of the fraud, is not in question. Merely because penalty has not been imposed on the transferee on that ground, it is no ground to treat the respondent at par with the said transferee. The original allots tee has to be accountable under the law for committing fraud and also for its consequences. The order of the Tribunal, amounts to treating innocent and guilty at par. Guilt of the respondents stands established and consequences thereof have to follow. The respondent has, thus, been held liable for illegal import as a result of wrongful act of the respondent. Judgments relied upon do not support the case of the respondent and are only in support of an innocent transferee, who may not be aware of fraud, which principle cannot be extended to the respondent against whom finding of fraud has been duly recorded, which has not been set aside or which has not been shown to be illegal.

10. In Delhi Development Authority v. Skipper Construction Company (P) Limited, (1996) 4 SCC 622 : AIR 1996 SC 2005, the Hon'ble Supreme Court considered the concept of resulting trust and equity. It was held that where a person earned properties by smuggling or other illegal activities, all such properties whether standing in his name or in the name of his relations or associates will be forfeited to the State. Though, the question herein is not of forfeiture of property illegally acquired but on parity, a person committing fraud is required to restore the benefits taken and cannot be heard to say that since the benefit was transferred to an innocent person and since an innocent person cannot be punished, such a person should also be exonerated. In view of the above reasons, the questions have to be answered in favour of the revenue and against the assessee.

11. In view of our above conclusion, these appeals are allowed, the impugned order of the Tribunal is set aside and the order of the adjudicating authority is restored.