2022 (9) TMI 445 - HC - Customs

DEPB scheme - related parties or not - connection between the petitioner and the vendor from whom scrips were purchased or not - misrepresentation and suppression of facts - furnishing of forged certificates from the bank or not - bona fide purchaser who has transacted in the purchase of the scrips for valuable consideration - HELD THAT - The original vendor has purchased the scrips in compliance of the procedure set out under the Handbook of Procedure to the Export Import Policy 1997-2002. The objectives of the Handbook are set out in para 2.1 thereof, that is, to implement the provisions of the Foreign Trade (Regulation, Development and Regulation) Act, 1992 as well as the export policy for the relevant period. It is only upon confirmation of receipt of export realisations that the scrip shall be endorsed to be non-transferable. This is what has transpired in the present case as well. Admittedly and undoubtedly, there is a presumption that the officer endorsing the scrips to be transferable would and should have satisfied himself that the conditions precedent to issuance of the scrips are in order. The endorsement of transferability was made only after such satisfaction by the officer, and the fatal error, in this case, has transpired at this stage, and not at the instance of the petitioner - Separately, the original vendor had forged the bank realisation certificates. In such an event, the fraud is attributable to the original vendor only and not to the petitioner who is a subsequent purchaser. In fact, the impugned show cause notices, in conclusion, attribute fraud only to the original vendor and not to the importer. There is an unambiguous findings of fact to the effect that the appellants in that case (the subsequent purchasers) were engaged in dubious practices and secret arrangements and the nexus between those entities and the fraudulent acts have been clearly established by the revenue in that case. This is absent in this case and in fact, there is not even an allegation of collusion, willful misstatement or suppression of facts in the present case. In the instant case, the scrip had been obtained on the strength of a forged Bank Realisation Certificate (BRC). However, while the scrip itself stands vitiated, the Department had clearly been remis in not just issuing the scrip, but in enforcing the same as 'transferable' six months after the issuance thereof. Moreover, the petitioner has admittedly obtained the scrip, bonafide and for valuable consideration and only after an endorsement of transferability was made upon it by the officers. No fraud has been attributed to it, and rightly so, as it had entered into the transaction with the legitimate expectation that the scrip was genuine, with an endorsement/stamp of departmental approval. Thus, by stating that the exporter had obtained the scrip by misrepresentation and making a misstatement before the authority and thereafter proceeding to make a clear distinction between the exporter and the importer, i.e., the noticee in the present case, the officer makes it abundantly clear that the petitioner has no role whatsoever to play in this transaction and was an innocent and bonafide bystander/ victim in the proceedings. Petition allowed.

Issues Involved:
1. Validity of the orders-in-original passed by the Joint Director of Foreign Trade.
2. Legitimacy of the show cause notices issued by the Joint Director of Customs.
3. Whether the petitioner was a bona fide purchaser of DEPB scrips.
4. Applicability of the extended limitation period under Section 28 of the Customs Act, 1962.
5. Responsibility of the Customs authorities in verifying the validity of DEPB scrips.
6. Impact of fraud by the original vendor on subsequent purchasers.

Issue-wise Detailed Analysis:

1. Validity of the orders-in-original passed by the Joint Director of Foreign Trade:
The petitioner challenged the orders-in-original passed by R1, the Joint Director of Foreign Trade, arguing that they were unaware of any fraud or suppression of facts by the original vendor. The court noted that the orders were based on misrepresentations by the original vendor, who had furnished forged bank certificates to obtain the DEPB scrips.

2. Legitimacy of the show cause notices issued by the Joint Director of Customs:
The petitioner contended that the show cause notices issued by the Joint Director of Customs were invalid as they were issued long after the relevant date of importation. The court observed that the show cause notices were issued on various dates, significantly past the date of the transactions, and thus were barred by limitation.

3. Whether the petitioner was a bona fide purchaser of DEPB scrips:
The petitioner argued that they were a bona fide purchaser of the DEPB scrips, having bought them for valuable consideration without any knowledge of the fraud committed by the original vendor. The court accepted this argument, noting that the petitioner had no connection with the original vendor and had engaged in legitimate export transactions using the scrips.

4. Applicability of the extended limitation period under Section 28 of the Customs Act, 1962:
The court analyzed Section 28 of the Customs Act, which allows an extended period of five years for issuing notices in cases of collusion, willful misstatement, or suppression of facts. The court concluded that since the fraud was attributable only to the original vendor and not to the petitioner, the extended limitation period was not applicable in this case.

5. Responsibility of the Customs authorities in verifying the validity of DEPB scrips:
The court emphasized that the Customs authorities had a duty to verify the validity of DEPB scrips before endorsing them as transferable. The failure of the authorities to detect the forged bank certificates at the time of issuance of the scrips was a critical error, and the burden of this error could not be passed on to the petitioner.

6. Impact of fraud by the original vendor on subsequent purchasers:
The court distinguished between the fraudulent actions of the original vendor and the bona fide actions of the petitioner. It noted that the petitioner had acquired the scrips in good faith and for valuable consideration, with no involvement in the fraud. The court held that the fraud committed by the original vendor did not affect the legitimacy of the petitioner's transactions.

Conclusion:
The court quashed the impugned show cause notices and allowed the writ petitions filed by the petitioner. The court reiterated that the petitioner, as a bona fide purchaser, could not be held liable for the fraud committed by the original vendor. The responsibility for verifying the validity of the DEPB scrips lay with the Customs authorities, and their failure to do so could not be used to penalize the petitioner.

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