How To Deal with Section 114AA (Customs Act) Penalty; Drafting Grounds forArguments: Part 1

[Ansh Mishra]

1. What we will discuss:

i. Overview of Section 114AA of the Customs Act, 1962

A detailed explanation of the provisions under Section 114AA of the Customs Act, 1962.

ii. Circumstances for Imposition of Penalty

Identification of the types of cases and specific scenarios in which a penalty under Section 114AA is imposed.

iii. Strategies for Contesting the Penalty

Analyzing effective approaches to counter the penalty, supported by relevant judicial precedents and legal arguments.

iv. Drafting Legal Grounds for Appeals or Responses

A comprehensive guide on how to frame legal grounds when preparing an appeal or reply, ensuring it is well-supported

by applicable legal principles.

2. OVERVIEW OF SECTION 114AA OF THE CUSTOMS ACT, 1962

a. Definition:

114AA. Penalty for use of false and incorrect material. —If a person knowingly or intentionally makes, signs or uses, or causes to be made, signed or used, any declaration, statement or document which is false or incorrect in any material particular, in the transaction of any business for the purposes of this Act, shall be liable to a penalty not exceeding five times the value of goods.

Now by the plain reading of this section there are two essentials:

(a) Knowledge or Intent (Mens Rea):

This element focuses on the mental state of the person involved. Any importer, exporter, customs broker, or any individual connected to a transaction governed by the Customs Act, 1962 must have mens rea—meaning they must knowingly or intentionally engage in the wrongful act. Specifically, this involves the act of using or signing any statement or document in relation to the transaction. It is important to note that the offence is not considered committedat this stage, as it represents the preparatory phase or planning stage. The individual cannot be penalized based solely on this element unless the second element is also present.

(b) Use of False or Incorrect Material:

This element represents the practical execution of the earlier plan, where an individual connected to the transaction knowingly uses forged, false, or incorrect documentation in relation to the transaction governed by the Customs Act, 1962. It is at this stage that the actual violation occurs.

Now both the essentials are required to penalize any person related to the business transaction under the Customs Act

(for the purposes of this article, the individual referred to above will hereinafter be denoted as "the victim.")

3. CIRCUMSTANCES FOR IMPOSITION OF PENALTY ALONG WITH STRATEGY AND GROUNDS

a. FAKE BAGGAGE DECLARATION AND CHA INVOLVEMENT:

In cases where a baggage declaration is filed for a company and is either mis-declared or not declared at all, not only is the freight forwarder who filed the airway bill liable, but the Customs House Agent (CHA) can also be held responsible. The department argues that it is the CHA's duty to ensure the baggage declaration is accurate.

In such scenarios, the following defenses can be considered:

i. Non-Declaration of Goods (e.g., Gold Bars): If a person carries undeclared goods, such as gold bars, and fails to declare them, they cannot be penalized under Section 114AA, as the section applies to wrong declarations, not to goods that are not declared at all. Relevant case references include (i) SHRI WAQAR VERSUS COMMISSIONER OF CUSTOMS (PREVENTIVE) , LUCKNOW - 2023 (9) TMI 1263 - CESTAT ALLAHABAD & (ii) IN RE : ABDUL KALAM AMMANGOD KUNHAMU - 2020 (3) TMI 579 - GOVERNMENT OF INDIA, MINISTRY OF FINANCE

ii. Penalty under Section 114AA: If penalty under Section 114AA is proposed but no proceedings have been initiated against the CHA under the Customs Brokers Licensing Regulations, 2013, the penalty is not imposable. Refer to the case of G. NARAYAN & CO. VERSUS COMMISSIONER OF CUSTOMS MANGALORE - 2021 (3) TMI 560 - CESTAT BANGALORE

iii. CHA's Knowledge of the Offence: Just because the CHA filed the Bill of Export does not automatically imply that they were aware of any offence without corroborating evidence. Refer to M/S. UNITED CUSTOM HOUSE AGENCY, SHRI RAJ KUMAR SHAW, PROPRIETOR, M/S. SUNDARY FASHION, AND SHRI PRAKASH GHOSH, PROPRIETOR, M/S. OVERSEAS SHIPPING AGENCY, PRIVATE LIMITED VERSUS COMMISSIONER OF CUSTOMS (PREVENTIVE) , KOLKATA - 2022 (9) TMI 862 - CESTAT KOLKATA

iv. Jurisdictional Issues: In certain cases, the court may not have jurisdiction to impose penalties. Refer to (i) ANEES FATHIMA BANDE NAWAZ VERSUS COMMISSIONER OF CUSTOMS, AIR-CC AIRPORT, CHENNAI I - 2018 (8) TMI 1530 - CESTAT CHENNAI and (ii) M/S YOGESH KUMAR VISHNANI VERSUS COMMISSIONER, CUSTOMS (PREVENTIVE) JAIPUR I - 2022 (5) TMI 1370 - CESTAT NEW DELHI for further reference.

v. Non-Declaration Does Not Equal Smuggling: Simply failing to declare goods, such as gold bars, does not automatically equate to smuggling. Refer to COMMISSIONER OF CUSTOMS, LUCKNOW VERSUS MOHD. NAYAB & IMTIYAZ IDRIS - 2017 (1) TMI 3 - CESTAT ALLAHABAD for guidance.

b. WRONG CLASSIFICATION:

i. Bona Fide Action by CHA: If the CHA acted in good faith and merely facilitated the import based on the documents provided by the importer, they should not be held liable for any mis-declaration. Refer to COMMISSIONER OF CUSTOMS (IMPORT) VERSUS M/S. TRINETRA IMPEX PVT. LTD. - 2019 (11) TMI 72 - DELHI HIGH COURT

ii. Wrong Classification Does Not Constitute Mis-Declaration: Misclassification does not necessarily amount to mis-declaration, and as such, the elements under Section 114AA may not apply. Refer to cases such as (i) M/S DAXEN AGRITECH INDIA PVT. LTD. VERSUS PRINCIPAL COMMISSIONER OF CUSTOMS (IMPORT) , TUGHLAKABAD, NEW DELHI - 2023 (12) TMI 1080 - CESTAT NEW DELHI, (ii) M/S VESUVIUS INDIA LTD, ARUN KUMAR GIRI, SHRI THUMMA ANTONY, PLANT MANAGER, M/S VESUVIUS INDIA LTD VERSUS COMMISSIONER OF CUSTOMS - 2019 (11) TMI 499 - CESTAT HYDERABAD, and (iii) M/S. A.V. GLOBAL CORPORATION PVT. LTD. VERSUS COMMISSIONER OF CUSTOMS, NEW DELHI (IMPORT & GENERAL) - 2024 (10) TMI 159 - CESTAT NEW DELHI.

c. NON-COOPERATION AND FAILURE TO RESPOND TO SUMMONS:In certain cases, the department may allege that a person did not respond to summons or did not cooperate with the investigation, leading to a penalty under Section 114AA. However, Section 114AA penalizes individuals only for specific actions, such as being involved with the overseas supplier of goods, and not for failing to cooperate with an

investigation. For reference, see SHRI SUNIL AIDASANI @ VICKY, SHRI SUSHIL AGGARWAL AND SHRI NAVEEN GULABANI VERSUS PRINCIPAL COMMISSIONER OF CUSTOMS (IMPORT) , NEW DELHI - 2024 (5) TMI 80 - CESTAT NEW DELHI

d. LENDING IEC TO ANOTHER PERSON, WHICH WAS THEN USED FOR MIS-DECLARATION:

Lending one's Importer Exporter Code (IEC) to another person and it being subsequently used for mis-declaration does not attract penalty under Section 114AA. Refer to SUKETU JHAVERI VERSUS COMMISSIONER OF CUS. (IMPORT) , NHAVA SHEVA - 2012 (12) TMI 988 - CESTAT MUMBAI for further clarity.

e. MISCELLANEOUS SCENARIO:

In cases where goods exported are perishable in nature and the profit margin is low, a penalty under Section 114AA may not be justifiable. For reference, see M/S. NAAM EXPORTS VERSUS COMMISSIONER OF CUSTOMS, TUTICORIN - 2022 (5) TMI 261 - CESTAT CHENNAI