2024 (5) TMI 684 - SC - Customs

Levy of Penalty while waiver of customs duty - While the rehabilitation scheme sanctioned by BIFR provided for a waiver of customs duty and interest, the penalty was specifically imposed under Section 11(2) of the FT Act for non-fulfillment of export obligations - Import of capital equipment at a concessional rate - demand notice - HELD THAT - The Order-in-Original records that Karnataka Biotics did not comply with the export obligation under the license granted under the FT Act. Therefore, the penalty was imposed specifically u/s 11(2). Thus, the waiver granted under the rehabilitation scheme is of no assistance to the appellant as it was only of the customs duty. There is no allegation made by the respondents against the appellant's predecessor of making or attempting to make any export or import in contravention of the FT Act, any Rules or orders made thereunder, or the foreign trade policy. Under the license granted to the appellant s predecessor, there was an obligation to export finished goods by earning foreign exchange equivalent to USD 2,59,948 within a period of five years. The allegation is of the failure to abide by the obligation to export the finished goods within a period of five years. So, there is no allegation of attempting to make an export or import, which is covered by Section 11 (2). Section 11 (2) is a penal provision. It must be strictly construed. Thus, the demand for penalty cannot be sustained. Hence, we set aside the impugned judgments and orders of the learned Single Judge and Division Bench. We also set aside the Order-in-Original by which the impugned penalty was imposed. Accordingly, the appeal is allowed with no orders as to costs.

Summary

Issues Involved:
The issues involved in the judgment are the imposition of a penalty under Section 11(2) of the Foreign Trade (Development and Regulation) Act, 1992, based on non-fulfilment of export obligations under a license, and the legality of the penalty imposed.

Imposition of Penalty under Section 11(2):
The appellant filed a Writ Petition challenging the penalty imposed under Section 11(2) of the FT Act, which was upheld by the Karnataka High Court. The penalty of Rs. 23,38,882 was imposed on Karnataka Biotics for failing to fulfill export obligations under a license, despite obtaining an Export Promotion Capital Goods License allowing concessional import of capital equipment. The appellant argued that the penalty was illegal as non-fulfillment of export obligations is not a ground under Section 11(2) to impose a penalty. The respondents contended that the penalty was justified due to contravention of license terms. The court noted that the penalty was specifically imposed under Section 11(2) for non-compliance with export obligations, despite a duty waiver under a rehabilitation scheme not covering penalties. The court interpreted Section 11(2) strictly, finding no contravention by the appellant or its predecessor warranting the penalty, and thus set aside the judgments and the penalty order.

Legal Interpretation of Section 11(2):
Section 11(2) of the FT Act provides for penalties when there is a contravention of provisions related to exports or imports. The court clarified that this provision applies when there is an actual export or import made in violation of the Act, rules, or policies. In this case, the allegation was about the failure to meet an export obligation within a specified time, not about making an export or import in contravention of the law. As there was no attempt to contravene the export and import policy, the court found the penalty demand unsustainable under Section 11(2). The court emphasized the need for strict construction of penal provisions and ruled in favor of setting aside the penalty and related judgments.

Conclusion:
The Supreme Court allowed the appeal, setting aside the penalty imposed under Section 11(2) of the FT Act, as there was no contravention warranting the penalty. The court highlighted the importance of strict interpretation of penal provisions and ruled in favor of the appellant, with no orders as to costs.