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Delco Precitone Jewellers (P) Ltd. v. Commr. Of Cus., New Delhi
Summary of Opinion
Factual and Procedural Background
The first appellant, M/s. Delco, is a 100% export oriented unit (EOU) located in the Special Export Oriented Complex, Jhandewalan (JJC), engaged in manufacture of studded jewellery. Under Customs Notification No. 3/88-Cus., dated 14-1-1998 (issued under Section 25(1) of the Customs Act), certain goods including gold could be imported duty-free for use in manufacture of jewellery for export by 100% EOUs in the JJC, subject to conditions. M/s. Metal and Minerals Trading Corporation (MMTC) was the nominated agency to import gold for supply to the jewellery units in JJC, and obtained a private bonded warehouse licence and executed a general bond subject to conditions, including that MMTC would produce to the satisfaction of the Assistant Collector of Customs proof of actual use of imported goods by EOUs and that the Assistant Collector’s decision would be final and binding on MMTC.
MMTC imported 180 kgs of gold bars during January 1991 to June 1994 without payment of duty for supply to EOUs at JJC. Out of this, 65 kgs were issued to M/s. Delco for manufacture of jewellery for export under an agreement under which Delco manufactured and exported jewellery “on the account of MMTC.” M/s. Delco used the 65 kgs to manufacture studded jewellery and exported the jewellery “on the account of M/s. MMTC” without payment of duty under the Notification.
Following a visit by Customs Officers to the EOU premises, the Department issued a show cause notice charging that the appellants had unauthorisedly removed from JJC 12 kgs of duty-free gold valued at Rs. 40,68,890/- (CIF), and that they were liable to penalties under Section 112 of the Customs Act, 1962. The appellants replied. The Commissioner of Customs adjudicated the matter and, by order dated 29-1-1999, imposed penalties of Rs. 4,00,000; Rs. 50,000; and Rs. 50,000 on appellants No. 1, 2 and 3 respectively under Section 112. Those penalties are under challenge in the present appeals.
Legal Issues Presented
- Whether the Department proved the charge of unauthorised and clandestine removal of 12 kgs of duty-free gold from the EOU premises so as to justify imposition of penalties under Section 112 of the Customs Act.
- Whether penalties under Section 112 can be validly imposed when the show cause notice and the adjudication do not specify which of clause (a) or clause (b) of Section 112 is attracted (i.e., whether there was adequate application of mind and specificity in framing the charge).
- Whether, for imposition of penalty under Section 112, there was a requisite finding that the goods in question were liable to confiscation under Section 111 of the Act.
- Whether the second and third appellants could be penalised when there was no specific allegation against them in the show cause notice and no specific findings against them in the adjudication.
Arguments of the Parties
Appellants' Arguments (as advanced by their consultant)
- The appellants contended there was no evidence on record to substantiate the charge of unauthorised removal; specifically, no statements were recorded from appellants, no panchanama was drawn at the time of the officers' visit, and no documentary material was seized to prove the charge.
- They argued that the Customs Officers did not observe the relevant procedure of law and principles of natural justice when breaking open the appellants' premises.
- The appellants maintained that the alleged shortage of 12 kgs was due to operational variations beyond their control (contest as to correctness of the 12 kgs figure was raised).
- They relied on the Madras High Court decision in B. Lakshmi Chand v. Government of India (quoted para (3)) to submit that penalties under Section 112 cannot be imposed where the authority has failed to indicate which clause of Section 112 is attracted and has not applied its mind.
Respondent's Position (as represented by the JDR)
- The learned JDR reiterated the observations and findings of the adjudicating authority (i.e., supported the Commissioner's decision and its conclusions).
- The JDR suggested that these appeals be heard along with pending appeals between MMTC and the Department before the Tribunal (the controversy between MMTC and the Department concerning duty liability was pending in appeal before the Tribunal).
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| B. Lakshmi Chand v. Government of India (Madras High Court) | The principle (as quoted from para (3) of the judgment) that simply quoting Section 112 without reference to clause (a) or (b) and without setting out essential ingredients results in ambiguity; there is a failure to apply the mind as to which clause is attracted, and where the authority's power and discretion are exercised on an irrational and ambiguous basis the court will strike down the orders. | The bench relied on this authority to hold that the Commissioner’s order, which did not refer to or apply any specific clause (a) or (b) of Section 112, was unsustainable; the cited precedent supported the conclusion that the adjudicating authority had not applied its mind properly and that the penalties could not be sustained on that basis. |
Court's Reasoning and Analysis
The court examined the impugned order, the record and the submissions of counsel. The court found the appellants' submissions largely uncontroverted and proceeded to address whether the charge of unauthorised and clandestine removal of 12 kgs of gold was proved.
The court observed that there was "absolutely no evidence on record" to support the finding reached by the lower authority. Specifically, no statements from the appellants, no panchanama at the time of the officers' visit, and no documentary evidence were recorded or produced to substantiate the alleged clandestine removal. The court noted that the adjudicating authority appeared to have expected the appellants to prove that they had not clandestinely removed gold (i.e., to produce proof of a negative), whereas the burden lay on the Department to establish the positive case of unauthorised removal by cogent evidence.
The court further analyzed the statutory requirements: Section 112 imposes penalty only where the mischief of clause (a) or (b) is attracted, and it is a "peremptory requirement" of Section 112 that the goods in question should be liable to confiscation under Section 111. The impugned order contained no finding that the 12 kgs were liable to confiscation under Section 111, and indeed such a finding could not be made since the alleged quantity did not physically exist. Given the absence of any finding of confiscation, the court concluded there could not have been any offence under clause (a) or (b) to attract Section 112.
The court also applied the principle from the Madras High Court in B. Lakshmi Chand: because the adjudicating authority did not specify which clause of Section 112 was attracted and failed to apply its mind to the essential ingredients, the order suffered from ambiguity and irrationality, and thus could be struck down.
Additionally, the court noted the absence of any specific allegation in the show cause notice and any finding in the adjudication against the second and third appellants, rendering the penalty orders against them conspicuously infirm.
The court acknowledged that a related controversy between MMTC and the Department was pending before the Tribunal, and that the JDR suggested consolidation, but the court was not convinced that joint hearing was necessary because the impugned order before it contained a clear finding by the Commissioner that M/s. Delco had no liability to pay duty on the imported gold.
Holding and Implications
FINAL HOLDING: The bench allowed the appeals and set aside the impugned order of the Commissioner of Customs.
Implications:
- The penalties of Rs. 4,00,000; Rs. 50,000; and Rs. 50,000 imposed on appellants No. 1, 2 and 3 respectively under Section 112 are quashed by this decision (the impugned order is set aside).
- The court found the Department had failed to discharge the burden of proving unauthorised and clandestine removal of the alleged 12 kgs of gold, and there was no finding that the goods were liable to confiscation under Section 111 — a condition for imposing penalty under Section 112.
- There were no specific findings against the second and third appellants, and no specific allegations in the show cause notice against them; the absence of such specificity meant the penalties against them could not be sustained.
- No new precedent was asserted to have been laid down by the court in this opinion; the court relied on existing authority (B. Lakshmi Chand) and factual/record deficiencies to set aside the impugned order.
Note: This summary is limited to and faithful to the content and reasoning expressly contained in the provided opinion. No additional facts or inferences beyond the text have been introduced.
[Order]. - The first of the three appellants (hereinafter referred to as M/s. Delco) is a 100% export oriented unit established for manufacture of studded jewellery in the Special Export Oriented Complex, Jhandewalan (in short, JJC). Under Customs Notification No. 3/88-Cus., dated 14-1-1998 issued by the Central Government under Section 25(1) of the Customs Act, the goods specified in the Annexure thereto, when imported into India for the purposes of use in the manufacture of jewellery for export out of India by 100% EOU established in the above Special Export Oriented Complex were exempt from customs duty and additional customs duty, subject to the conditions laid down under the Notification. Gold was one of the goods specified for such import. M/s. Metal and Minerals Trading Corporation (in short MMTC) was the nominated agency to import gold for being supplied to the jewellery units in JJC including M/s. Delco. MMTC had obtained a private bonded warehouse licence for the said purpose and had also executed a general bond in respect of gold etc. imported and warehoused. The bond was subject to the condition, inter alia, that MMTC would produce to the satisfaction of the Assistant Collector of Customs, proof of actual use of the imported goods by M/s. Delco and other EOUs at JJC in the manufacture of jewellery for export. It was also stipulated (as a condition of the bond) that the decision of the Assistant Collector of Customs regarding the use of the imported goods in the EOUs for manufacture of jewellery for export shall be final and binding on MMTC. In terms of the above provision, M/s. MMTC imported 180 Kgs. of gold bars during the period January, 1991 to June, 1994 without payment of duty for supply to the EOUs at the JJC for the purpose of use in the manufacture of jewellery for export. 65 Kgs. of gold bars out of the said 180 Kgs were issued by them to M/s. Delco for manufacture of jewellery for the purpose of export under the Notification. This was done in terms of an agreement between M/s. Delco and M/s. MMTC, whereunder M/s. Delco was an associate of M/s. MMTC and was, in such capacity, under an obligation to manufacture gold jewellery out of the gold bars supplied by M/s. MMTC and to export such jewellery “on the account of MMTC” in terms of the relevant provisions of the Exim Policy. M/s. Delco used the above quantity of 65 Kgs. of gold bars for manufacture of studded jewellery and exported such jewellery “on the account of M/s. MMTC” without payment of duty in terms of the above agreement read with the provisions of Notification ibid.
2. In the show cause notice issued by the Department to M/s. Delco and the other two appellants subsequent to a visit by Customs Officers to the premises of the EOU, the only charge levelled against the appellants was that they had unauthorisedly removed from the JJC a quantity of 12 Kgs. of duty-free gold valued at Rs. 40,68,890/- (CIF) and, therefore, they were liable to be penalised under Section 112 of the Customs Act, 1962. The appellants contested the allegations by way of a detailed reply to the show cause notice. The Commissioner of Customs, who adjudicated the matter, imposed penalties of Rs. 4 lacs, Rs. 50,000/- and Rs. 50,000/- on appellants No. 1, 2 & 3 respectively under Section 112 of the Customs Act as per order dated 29-1-1999. This order of the Commissioner is under challenge in the present appeals.
3. I have carefully examined the impugned order and connected records. I have also heard Shri J.M. Sharma, learned Consultant for the appellants and Shri Y.R. Kilania, learned JDR for the respondent.
4. The penalties were imposed under Section 112 of the Customs Act. Under this provision of law, a penalty is imposable on a person who attracts the mischief of Clause (a) or Clause (b) of the Section. Neither in the show cause notice nor in the impugned order is there any mention of any of these clauses. After pointing out this aspect of the matter, learned Consultant has drawn my attention to the decision of the Madras High Court in the case of B. Lakshmi Chand v. Government of India [ (Mad)]. Ld. Consultant has relied on para (3) of the High Court's judgment; which is as under :-
“Para 3 - I have been taken through the show cause notice and as well as the orders passed by the authorities under the Act in the present case. There is only the bare quoting of Section 112 of the Act and there is no reference to either to Clause (a) or (b) or both of Section 112 of the Act. The essential ingredients have not been specifically set out with reference to either of the clauses. Hence it has got to be held that there was no making up of mind either at the earlier stage or at the subsequent stage of the prosecution of the proceedings and the passing of the orders thereon as to which of the clauses would be attracted in the instant case. The whole matter has been dealt within a sphere of ambiguity. The present case is not a case where a wrong provision has been quoted, so that it can be stated that it was due to a bona fide error, which did not vitiate the jurisdiction of the Authority. As stated above, this is a case where there has been a failure to apply the mind as to which of the clauses is relevant and would be attracted. The power and the discretion given to the Authority functioning under Section 112 of the Act are judicial in character and are open to Judicial review, and if they are found to have been exercised on irrational and ambiguous basis, the court will strike down the orders.”
5. Learned Consultant has further submitted that there is absolutely no evidence on record to substantiate the charge levelled against the appellants in the show cause notice. No statement was recorded from any of the appellants, no panchanama was drawn at the time of visit by the officers to the EOU's premises; and no documentary material whatsoever was resumed to prove the charge against the appellants. It is the further contention of learned Consultant that the Customs Officers had not observed relevant procedure of law and the principles of natural justice in the matter of breaking open the appellants' premises. Ld. JDR has reiterated the observations and findings of the adjudicating authority.
6. I have carefully examined the submissions of learned Consultant in the light of the available records and I have found that the submissions are, by and large, uncontroverted. The main defence of the appellants vis-a-vis the allegation in the show cause notice was that the shortage of 12 Kgs. of gold (this quantity itself was not correct, according to them) alleged by the Department was due to the loss on account of variation of operational factors, which were, according to them, beyond their control. This aspect, however, is not very material for this Bench to decide the matter. The question before me is whether the charge of unauthorised and clandestine removal of 12 Kgs. of gold stands proved. On this question, I note that there is absolutely no evidence on record to support the finding reached by the lower authority. It appears that the adjudicating authority wanted proof from the party for not having clandestinely removed any gold. In other words, the Commissioner wanted a proof of the negative. On the other hand, the burden was on the Department to establish the charge in the show cause notice by means of cogent proof of the positive viz. unauthorised and clandestine removal of duty-free gold from the JJC. I find that the Department has failed to establish any unauthorised and clandestine removal of the gold from the EOU premises. In this view of the matter, the decision of the lower authority imposing penalties on the appellants under Section 112 of the Customs Act cannot be sustained. It is a peremptory requirement of Section 112 for imposition of penalty that the goods in question should be liable to confiscation under Section 111 of the Act. There is no finding in the impugned order to the effect that the 12 Kgs. of gold were liable to confiscation under Section 111 of the Act, nor could there have been any such finding since the said quantity did not physically exist. When this is the position, there could not have been any charge of omission or commission of any act or any abetment thereof, against the appellants to attract the provisions of clause (a) or (b) of Section 112 of the Act. Even apart from this, in view of the decision of the Madras High Court (supra), the order of the lower authority imposing penalties on the appellants without having reached any finding against them specifically with reference to clause (a) or clause (b) of Section 112 cannot be sustained. Yet another conspicuous infirmity of the impugned order is that there is no finding against the second and third appellants. It is pertinent to note, in this context, that there had been no specific allegation in the show cause notice, against them.
7. Learned Consultant has, fairly, submitted that the controversy between MMTC and the Department is presently pending in appeal before the Tribunal, regarding the duty liability involved in the transaction. Learned JDR has, in this context, suggested that these appeals be heard along with the MMTC appeals. But I have not been convinced of the necessity to do so inasmuch as, in the impugned order before me, there is a clear finding by the Commissioner that M/s. Delco have no liability to pay duty on the imported gold.
8. In the light of the observations and findings recorded above, I allow the appeals by setting aside the impugned order of the Commissioner.
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