2015 (10) TMI 329 - AT - Customs

Over valuation of export goods - merchant exporters inflated the FOB value of their exports significantly and obtained the DEPB Scrips/DFIA Licenses against such exports. - duty benefits under Notifications 40/2006 and 89/2005 are sought to be denied - The demand of duty has been confirmed against the importers i.e. transferees of the scrips under Section 28 alongwith confirmation of penalties under Section 28AB. Penalties have also been imposed on the exporters and importers under Section 112/114A. Held that -vIn the first Notification, we find no restriction on the transferee for import of goods on the basis of licenses transferred to him. The only condition applicable to the transferee is in para (2) that benefit will be allowed only if the Certificate bears endorsement of transferability by the Licensing Authority. Similarly in the second notification 89/2005-Cus relating to DEPB, the only condition relevant to the importer is condition No. (vii) which states that where benefit of exemption of duty is claimed by the person who is not Duty Entitlement Passbook Holder, such benefit shall be permissible only against specific amount of credit transferred by the DEPB holders. - in terms of the notifications there is no failure on the part of transferees availing duty benefits under these scheme. Procedure for transferability of the License/material imported against such scrips. - Held that - authorities themselves are also responsible to the extent of not having checked the fraud at the time of exports. We should not be affected in our findings only by the fact that grant of benefit to transferees will encourage fraudsters. Transfer of DEPB scrips in the present cases will governed by the provisions of the statute, that is the Sale of Goods Act. In such a situation the Mumbai High Court decision in the case of Taparia Overseas will prevail. Resultantly, applying the ratio of Taparia, we are convinced that effect of misrepresentation in the present cases has not rendered the transaction between the original license holders and the transferees void ab-inito but rendered it voidable at the instance of the party (in this case importer) defrauded and transaction continues to be valid until the party defrauded has decided to avoid it. In the present case the licences/scrips were transferred to the appellant importers who had no knowledge of the misrepresentation by the exporters in obtaining them. The Bills of Entry were filed by the appellant importers well before the cancellation of licenses, thus imports were made under valid licenses. Therefore goods could not be subjected to levy of Customs duty for imports under Licences nor could availment of credit in DEPB scrips be denied. In view of analysis above based on judicial pronouncements, we set aside the confiscation, demands of duty and interest and penalties. In some cases, the exporter had deposited duty at the investigation stage on behalf of the importer also. In such cases too, the question of demanding duty to the extent of amount already deposited does not arise. In cases where the importer bought the goods on High Sea sales basis, misrepresentation of their part has not been proved. In any case we have stated in paras above that the transferees in cases of all appeals had no knowledge of mis-representation by the exporters. The confiscation of goods imported by the appellants who are transferees of the licenses/scrips does not arise - The demands of duty against them and penalties are set aside. - Decided in favor of assessee.

Issues Involved:
1. Overvaluation of export goods and fraudulent acquisition of DEPB Scrips/DFIA Licenses.
2. Liability of transferees for duty and penalties.
3. Validity and transferability of licenses obtained by fraud.
4. Applicability of extended period of limitation under Section 28 of the Customs Act.
5. Confiscation of goods and imposition of penalties.
6. Effect of subsequent cancellation of licenses on imports made prior to such cancellation.
7. Applicability of judicial precedents and statutory provisions.

Detailed Analysis:

1. Overvaluation of Export Goods and Fraudulent Acquisition of DEPB Scrips/DFIA Licenses:
The Directorate of Revenue Intelligence (DRI) investigated cases where exporters significantly inflated the FOB value of their exports to obtain DEPB Scrips/DFIA Licenses fraudulently. These scrips were then sold to various transferees who used them to import goods and avail duty credit/exemption under notifications such as 89/2005-Cus and 40/2006-Cus. The investigation revealed that this fraudulent activity resulted in a loss of revenue to the government.

2. Liability of Transferees for Duty and Penalties:
The appellants argued that they were bona fide transferees of the licenses, having acquired them for valuable consideration without notice of any fraud. They contended that licenses obtained by fraud are voidable, not void ab initio, and remain valid until canceled by the licensing authority. Therefore, the subsequent cancellation of the licenses should not affect imports made prior to such cancellation. They relied on several judicial precedents to support their contention that the rights of bona fide transferees are protected.

3. Validity and Transferability of Licenses Obtained by Fraud:
The court examined whether licenses obtained by fraud could be considered valid until canceled. The appellants cited multiple judgments, including East India Commercial Company Ltd. vs. CC, UOI vs. Sampat Raj Dugar, and CC vs. Sneha Sales Corporation, which held that licenses obtained by fraud are voidable and remain valid until avoided. The court agreed with this contention, noting that the licenses were valid and subsisting at the time of acquisition and import, and the subsequent cancellation could not affect the imports made earlier.

4. Applicability of Extended Period of Limitation Under Section 28 of the Customs Act:
The appellants argued that the extended period of limitation could not be invoked against them as there was no evidence of fraud or willful suppression on their part. They relied on judgments such as Commissioner vs. Banani Cement Ltd. and Kamani Oil Industries vs. CC, which held that the extended period of limitation is not applicable in the absence of fraud or misstatement by the transferee. The court found merit in this argument and held that the larger period of limitation could not be invoked against the appellants.

5. Confiscation of Goods and Imposition of Penalties:
The court examined whether the goods imported by the appellants were liable to confiscation and whether penalties could be imposed on them. It was noted that the only condition relevant to the transferee under the notifications was that the license should be valid and transferable. Since the licenses were valid at the time of import, the court held that the goods could not be confiscated, and no penalties could be imposed on the appellants.

6. Effect of Subsequent Cancellation of Licenses on Imports Made Prior to Such Cancellation:
The court held that the subsequent cancellation of licenses could not affect imports made prior to such cancellation. It relied on the Supreme Court judgments in East India Commercial Company Ltd. vs. CC and Sneha Sales Corporation, which held that licenses obtained by fraud are voidable and remain valid until canceled. The court also noted that the customs authorities had verified the exports and allowed the transfer of licenses, and the appellants could not be held responsible for any fraud committed by the original license holders.

7. Applicability of Judicial Precedents and Statutory Provisions:
The court referred to several judicial precedents, including East India Commercial Company Ltd. vs. CC, UOI vs. Sampat Raj Dugar, and CC vs. Sneha Sales Corporation, which supported the appellants' contention that licenses obtained by fraud are voidable and remain valid until canceled. The court also noted that the introduction of Section 28AAA in the Customs Act, which provides for recovery of duty from the person to whom the instrument is issued, indicated that the law did not previously allow for recovery from transferees.

Conclusion:
The court set aside the confiscation of goods, demands of duty, and penalties against the appellants. It held that the licenses were valid at the time of import, and the subsequent cancellation could not affect the imports made earlier. The court also found that the extended period of limitation could not be invoked against the appellants, and no penalties could be imposed on them. The appeals were allowed, and the court ruled in favor of the appellants.

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