2025 (2) TMI 26 - AT - Customs

Demand of duty - appellants who imported/cleared goods without payment of duty by using DEPB scrips which were later found to be obtained by fraudulent means - time limitation - penalty u/s 114A of the Customs Act 1962. HELD THAT - It is an admitted fact that the DEPB licenses used by the appellants were obtained fraudulently by M/s. Bilwa Labs by mis-declaring Potassium Chloride (Muriate of Potash) as Industrial Salt. In similar set of facts this Tribunal in M/S. ITC FILTRONA LIMITED (PRESENTLY KNOWN AS M/S. ITC ESSENTRA LIMITED) VERSUS THE COMMISSIONER OF CUSTOMS BANGALORE 2024 (10) TMI 577 - CESTAT BANGALORE has held that There are no reason to interfere with the impugned order as far as the demand of duty is concerned. However since the appellants were not aware of the fact that the goods imported by them were based on the fraudulently obtained DEPB scrips the question of imposing penalty on them does not arise. Penalty - HELD THAT - The demand of duty along with interest is upheld and for the reasons that at the time of import the appellant was not aware of the fraudulently obtained DEPB licenses the question of imposing penalty does not arise hence penalty set aside. Appeal allowed in part.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment are:

a. Whether the appellants, who imported goods using DEPB scrips later found to be fraudulently obtained, are liable for the payment of duty.

b. Whether the demand for duty is time-barred under the applicable legal provisions.

c. Whether the appellants are liable to penalties under Section 114A of the Customs Act, 1962, for using fraudulently obtained DEPB scrips.

ISSUE-WISE DETAILED ANALYSIS

Issue a: Liability for Duty Payment

The relevant legal framework includes the Customs Act, 1962, particularly concerning the use of DEPB scrips for duty exemption. The Tribunal examined whether the appellants, as bona fide purchasers of DEPB scrips, could be held liable for duties when the scrips were obtained fraudulently by the original holder, M/s. Bilwa Labs.

The Court referenced the principle that "fraud vitiates everything," as established by the Supreme Court in cases such as Munjal Showa Ltd. vs. Commissioner of Cus. & Ex, Delhi. This principle implies that any benefits derived from fraudulent acts, including duty exemptions, are void ab initio. The Tribunal noted the established legal precedent that transferees of fraudulently obtained licenses are also liable for duty, as seen in Eastern Silks Indus. Ltd. vs. Commr. of Cus. (Airport/Admn.), Kolkata.

Despite the appellants' claim of bona fide purchase, the Tribunal concluded that the fraudulent nature of the DEPB scrips invalidated the duty exemption, thus upholding the duty demand.

Issue b: Time-Bar of Duty Demand

The appellants argued that the demand was time-barred, citing the absence of collusion or willful suppression on their part. The Tribunal analyzed the applicability of the extended period of limitation under Section 28 of the Customs Act, 1962, which can be invoked in cases of fraud.

Referring to the Supreme Court's ruling in Tata Iron & Steel Co. Ltd. v. C.C., Mumbai, the Tribunal affirmed that the extended period of limitation is applicable when fraud is involved, regardless of the transferee's knowledge. The Tribunal concluded that the demand for duty was not time-barred, as the fraudulent nature of the scrips justified the invocation of the extended period.

Issue c: Liability for Penalty under Section 114A

The Tribunal considered whether penalties under Section 114A of the Customs Act, 1962, were applicable to the appellants, given their lack of knowledge about the fraudulent nature of the DEPB scrips.

The Tribunal acknowledged the principle that penalties require knowledge or intent of wrongdoing. Given the appellants' bona fide belief in the validity of the scrips, the Tribunal found that imposing penalties was unwarranted. This aligns with the Tribunal's previous decisions, which differentiate between duty liability and penal liability based on the transferee's knowledge.

SIGNIFICANT HOLDINGS

The Tribunal upheld the duty demand and interest against the appellants, affirming the principle that fraudulently obtained benefits are void. The Tribunal cited the Supreme Court's interpretation that fraud vitiates all transactions, including those involving duty exemptions.

However, the Tribunal set aside the penalties imposed under Section 114A, recognizing the appellants' lack of knowledge about the fraudulent nature of the DEPB scrips. This decision underscores the distinction between liability for duty and penalties, emphasizing the requirement of intent or knowledge for penal sanctions.

The final determination was that the appeals were partially allowed, confirming the duty demand and interest while setting aside the penalties.