2025 (2) TMI 219 - HC - Customs

Levy of penalty imposed on the petitioner company for not achieving positive Net Foreign Exchange Earnings (NFE) within the stipulated time - grant of extension of three months to achieve positive NFE (Net Foreign Exchange) - whether the penalty imposed by the respondent authority to Rs. 17.10 lakhs is justified in the facts of the case or not? - HELD THAT - It appears that the petitioner company could not achieve the positive NFE in the year 2008-09 on account of heavy rains and cyclone in the area the goods lying in the unit of the petitioner company were severely damaged and were not worthy of exports and amounted to wastage as a result the petitioners had to clear such goods as wastage by way of the Domestic Tariff Area Sale. In such case when the petitioner company has achieved positive NFE subsequently in the year 2011-12 and on undertaking given by the petitioner company to achieve positive NFE for the block period the petitioner has been permitted to carry out export and import transactions and ultimately the petitioner company achieved positive NFE which was submitted along with the letter dated 02.03.2012 before the respondent. It would therefore germane to refer the condition of achieving NFE by the SEZ unit as per Rule 53 as it existed prior to 2019. As per sub-rule (2) of Rule 54 of the SEZ Rules SEZ unit is liable for penal action under the provisions of the FTDR Act in case the Approval Committee come to the conclusion that the a unit has not achieved positive Net Foreign Exchange Earning or stipulated Value Addition as specified in Rule 53 or such unit has failed to abide by any of the terms and conditions of the Letter of Approval or Bond-cum-Legal Undertaking. In the facts of the case on hand there is no dispute that the petitioner unit has achieved positive NFE for the block of 5 years i.e. from 2005-06 to 2009-10. Therefore no penalty could have been imposed upon the petitioner unit more particularly when Rule 54 (2) of the SEZ Rules only stipulates for achieving the positive NFE. It is also pertinent to note that the petitioner unit has also provided valid reasons for not achieving positive NFE due to heavy rains during the year 2008-09. This fact is also taken note of by the Development Commissioner at the relevant point of time which is reflected in the order passed by him in the first round of litigation wherein the statement of the Development Commissioner is recorded to the effect that the petitioner unit achieved positive NFE. Conclusion - Considering the facts of the case and the explanation tendered by the petitioner for not achieving positive NFE and in view of Rule 54 (2) of the SEZ Rules read with sections 11 and 13 of the FTDR Act it is opined that a token penalty of Rs. 10, 000/- is required to be imposed upon the petitioner for temporary breach of condition of not achieving positive NFE. The impugned order imposing penalty as well as the Appellate Authority confirming the amount of Rs.17.11 lakhs is modified and the penalty amount is reduced to Rs. 10, 000/- only which shall be paid by the petitioner within a period of four weeks from the date of receipt of this order - petition allowed in part.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment include:

1. Whether the penalty imposed on the petitioner company for not achieving positive Net Foreign Exchange Earnings (NFE) within the stipulated time was justified.

2. Whether the petitioner company was granted an extension to achieve positive NFE and whether it complied with this requirement within the extended period.

3. The appropriateness of the quantum of penalty imposed by the respondent authority and upheld by the Appellate Authority.

ISSUE-WISE DETAILED ANALYSIS

1. Justification of Penalty Imposed for Not Achieving Positive NFE

Relevant Legal Framework and Precedents: The requirement for achieving positive NFE is governed by Rule 53 of the Special Economic Zones Rules, 2006, which mandates that a unit must achieve positive NFE cumulatively over a period of five years from the commencement of production. Rule 54 provides for penal action if a unit fails to meet this requirement.

Court's Interpretation and Reasoning: The Court noted that the petitioner company faced extraordinary circumstances, such as heavy rains and a cyclone, which severely damaged goods intended for export. This situation led to a temporary inability to achieve positive NFE.

Key Evidence and Findings: The petitioner company argued that it achieved positive NFE within an extended period, as evidenced by communications with the respondent authority. However, the respondent disputed the existence of any formal extension.

Application of Law to Facts: The Court considered the explanations provided by the petitioner for the temporary shortfall in NFE and the subsequent achievement of positive NFE.

Treatment of Competing Arguments: The respondent argued that no formal extension was granted and that the penalty was justified. The Court, however, found merit in the petitioner's explanation and evidence of achieving positive NFE.

Conclusions: The Court concluded that the penalty was not justified given the petitioner's eventual compliance with the NFE requirement and the extraordinary circumstances faced.

2. Grant of Extension and Compliance with NFE Requirement

Relevant Legal Framework and Precedents: The SEZ Rules and the Foreign Trade (Development and Regulation) Act, 1992, provide the framework for monitoring compliance with NFE requirements.

Court's Interpretation and Reasoning: The Court examined whether the petitioner was granted an extension to achieve positive NFE and whether it complied within the extended period.

Key Evidence and Findings: The petitioner provided evidence of an undertaking to achieve positive NFE by a specified date, which was accepted by the respondent authority.

Application of Law to Facts: The Court found that the petitioner achieved positive NFE within the timeframe it claimed was extended, based on the undertaking and subsequent communications.

Treatment of Competing Arguments: The respondent maintained that no formal extension was documented, but the Court found sufficient evidence of an informal understanding.

Conclusions: The Court determined that the petitioner complied with the NFE requirement within the extended period, negating the basis for the penalty.

3. Appropriateness of the Quantum of Penalty

Relevant Legal Framework and Precedents: The imposition and quantum of penalties are guided by the provisions of the FTDR Act and SEZ Rules.

Court's Interpretation and Reasoning: The Court assessed whether the penalty amount was justified given the circumstances and compliance by the petitioner.

Key Evidence and Findings: The penalty was initially set at Rs. 114 lakhs but was reduced to Rs. 17.10 lakhs by the respondent authority, citing leniency.

Application of Law to Facts: The Court considered the justification for the reduced penalty and the lack of clarity in its quantification.

Treatment of Competing Arguments: The petitioner argued for further reduction due to compliance and financial hardship, while the respondent defended the penalty as lenient.

Conclusions: The Court found the penalty excessive given the petitioner's compliance and reduced it to a token amount of Rs. 10,000.

SIGNIFICANT HOLDINGS

Preserve Verbatim Quotes of Crucial Legal Reasoning: "Considering the facts of the case and the explanation tendered by the petitioner for not achieving positive NFE and in view of Rule 54 (2) of the SEZ Rules read with sections 11 and 13 of the FTDR Act, we are of the opinion that a token penalty of Rs. 10,000/- is required to be imposed upon the petitioner for temporary breach of condition of not achieving positive NFE."

Core Principles Established: The Court established that penalties should be proportionate to the circumstances and compliance efforts of the entity involved. Extraordinary circumstances affecting compliance should be duly considered.

Final Determinations on Each Issue: The Court modified the penalty imposed on the petitioner from Rs. 17.10 lakhs to Rs. 10,000, recognizing the petitioner's eventual compliance with the NFE requirement and the mitigating circumstances faced.