2025 (4) TMI 120 - AT - Customs

Benefit of duty debit on DEPB scrips obtained fraudulently by the exporter - export of restricted item viz. Potassium Chloride or Muriate of Potash by mis-declaring the same as Industrial Salt without possessing a valid licence - contravention of the provisions of Section 11 of the Customs Act 1962 read with the provisions of Foreign Trade (Development Regulation) Act 1992 - HELD THAT - There were large number of importers who had purchased the DEPB scrips in the market sold by the traders and these scrips were originally sold by the Exporter M/s. Bilwa Labs who had fraudulently obtained these scrips. The fraudulent nature of the Scrips is not in dispute the only dispute is whether the purchasers of these scrips who imported goods debiting these scrips were also not eligible for the benefit. This matter stands settled in larger number of cases and the Supreme Court of India in the case of Munjal Showa Ltd. Versus Commissioner of Cus. C. EX. 2022 (9) TMI 1076 - SUPREME COURT observed that the duty liability due to availing benefits against forged/fake DEPB Scrips upheld. Moreover as rightly stated by the Revenue this Tribunal in the case of M/s. ITC Filtrona Ltd. 2024 (10) TMI 577 - CESTAT BANGALORE held that We do not find any 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. Accordingly we set aside the penalty . Conclusion - i) The duty demands and interest for the extended period upheld emphasizing that fraud vitiates everything rendering the DEPB scrips void ab initio. ii) Penalties imposed on the appellants are set aside as they are not aware of the fraud at the time of purchase. Appeal allowed in part.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment are:

• Whether the appellants are eligible for the benefit of duty debit on DEPB scrips obtained fraudulently by the exporter, M/s. Bilwa Labs.
• Whether the appellants, who purchased the DEPB scrips in good faith from the open market, can be held liable for duty demands due to the fraudulent nature of the scrips.
• Whether the extended period of limitation for duty demands is applicable in this case.
• Whether penalties imposed under Section 114A of the Customs Act, 1962, are justified against the appellants.

ISSUE-WISE DETAILED ANALYSIS

1. Eligibility for Duty Debit on Fraudulently Obtained DEPB Scrips

The appellants argued that they purchased the DEPB scrips from the market under a bona fide belief of their genuineness, verified through the Directorate-General of Foreign Trade's (DGFT) website. They contended that the scrips were registered and validated by customs authorities, and there was no allegation of fraud against them. They relied on precedents such as Leader Valves Ltd and Pee Jay International, where courts ruled in favor of purchasers acting in good faith.

The court, however, emphasized that fraud vitiates everything, rendering the DEPB scrips void ab initio. The Tribunal referenced the Supreme Court's decision in Munjal Showa Ltd., affirming that benefits availed through fraudulent scrips cannot be retained, regardless of the purchaser's knowledge of the fraud.

2. Liability of Purchasers for Duty Demands

The appellants maintained they were not party to the fraud and had exercised due diligence in verifying the scrips' validity. They cited cases where courts did not hold purchasers liable when they acted in good faith. However, the Tribunal held that the fraudulent nature of the scrips invalidated any benefits derived from them, as established in Friends Trading Co. and Eastern Silk Industries Limited. The court concluded that the appellants, as beneficiaries of the fraudulent scrips, were liable for duty demands.

3. Applicability of Extended Period of Limitation

The appellants argued that the demand was time-barred, as they had acted without collusion or suppression of facts, citing Vallabh Design Products and Indian Acrylics Ltd. However, the Tribunal, aligning with the Supreme Court's ruling in Munjal Showa Ltd., held that fraud justifies invoking the extended period of limitation under Section 28 of the Customs Act, 1962.

4. Imposition of Penalties

The Tribunal acknowledged the appellants' lack of knowledge regarding the fraud and set aside the penalties under Section 114A, consistent with the Tribunal's decision in ITC Filtrona Ltd. The court distinguished between duty liability and penalty imposition, noting that the latter depends on the purchaser's knowledge of the fraud.

SIGNIFICANT HOLDINGS

• The Tribunal upheld the duty demands and interest for the extended period, emphasizing that fraud vitiates everything, rendering the DEPB scrips void ab initio.
• Penalties imposed on the appellants were set aside, as they were not aware of the fraud at the time of purchase.
• The Tribunal relied on the Supreme Court's decision in Munjal Showa Ltd. to affirm that benefits obtained through fraudulent means cannot be retained, regardless of the purchaser's knowledge.
• The extended period of limitation was deemed applicable due to the fraudulent nature of the scrips, as supported by precedents like Friends Trading Co. and Eastern Silk Industries Limited.

The appeals were partially allowed, confirming the duty demand with interest while setting aside the penalties.