ENCASHMENT OF BANK GUARANTEE IS NOT A VOLUNTARY PAYMENT OF DUTY.

[Mr. M. GOVINDARAJAN]

                        In case of evasion of duty the Department initiated action by issuing a show cause notice to the assessee.  The assessee is to give reply to the Authority within the date prescribed in the show cause notice.   After giving reasonable opportunity to the appellant the Adjudicating authority will pass order.  He may drop the show cause notice or he may confirm the demand of duty either in full or in part along with interest and also penalty.  In case the assessee pays the duty along with interest before issue of show cause notice no penalty is leviable from the assessee.  In this article we will discuss a different situation.   It is usual to provide bond or bank guarantee in export.   The Department is having the right to encash the bank guarantee if there is a failure on the part of the assessee to pay the duty.   With reference to case laws it will be discussed whether encashment of bank guarantee before the issue of show cause notice is a voluntary payment and not liable to penalty.

                        In ‘Royal Embroideries Private Limited V. Commissioner’ – 2007 -TMI - 3264 – (CESTAT, BANGALORE) the bank guarantee furnished by the importer/assessee was enchased by the department towards the duty payable on the raw material imposed under an advance licence.   This happened when the importer failed to discharge export obligation under the scheme.  The Tribunal held that any fine or penalty was not leviable from the assessee inasmuch as the duty has already been recovered by invoking bank guarantee. 

                        In ‘Bimal Kumar Mehra V. Commissioner of Customs (Import), Mumbai’ – 2011 (270) ELT 280 (Tri. Mum) the appellant as proprietor of M/s Global Art imported a few consignments of mulberry raw silk under a quantity based advance licence registered at Mumbai.  One of these consignments was imported at Mumbai and other consignments were imported at Chennai.  The imports at Chennai port were made on the strength of Transfer Release Advices (TRA) issued from the new customs house, Mumbai.   At the time of import the appellant had executed a bond with the Mumbai Customs and furnished bank guarantee.   The imported goods were cleared duty free in terms of Notification No.80/95-Cus, dated 31.03.1995 which, under the DEEC Scheme, granted exemption from payment of customs duty on the imported raw material subject to certain conditions, the chief condition being that the imported goods should be used in the manufacture of product to be exported in discharge of the export obligation of the importer under the scheme. 

                        The DRI launched investigations in to the post import conduct of the appellant.   On the basis of these investigations, two show cause notices were issued to the appellant one by Commissioner of Customs, Mumbai and the other by the Commissioner of Customs, Chennai invoking the extended period and demand the customs duty under Section 28(1) of the Act together with interest and proposing to confiscate the goods under Section 111(o) of the Act and also penalties under Section 114A and Section 112 of the Act.  The Department also encashed the bank guarantee which would be adjusted against the duty, interest and penalty, if any, imposed.

                        In each show cause notice, there was also a proposal to impose penalty on one Shri Javed Alam under Section 112 of the Customs Act.   The allegation against him was that he had played active role in import of the goods under the DEEC scheme and misuse of the exemption notification through the appellant.  The bank guarantee furnished by the appellant was also financed by the said Shri Javed Alam.  Javed Alam did not reply to the show cause notice and he did not appear before the adjudicating authority.

                        Both the show cause notices were adjudicated by the respective adjudicating authorities, demanding duty, interest, fine in lieu of confiscated goods and also imposed penalty on the appellant and Javed Alam.

                        Appeal was filed against the order of the adjudicating authorities before the Tribunal.  The appellant raised the jurisdiction point and according to him the Commissioner of Customs (Adjudication), Mumbai should have taken up both the cases for joint adjudication as per Notification No. 54/2001-Cus (NT) dated 19.10.2001 and also pointed out certain anomalies between the two impugned orders which arose out of separate adjudication of the two show cause notices.    The appellant further contended that the bank guarantee was encahsed towards duty leviable on the goods by reason of violation of conditions.   The entire amount of duty on the goods imported by the appellant should be held to have been paid on the date of encashment of the bank guarantee.   Where duty was paid prior to issuance of show cause notice, the appellant contended that there could be no redemption fine or penalty.

                        The Department contended that the jurisdiction of the Commissioner was never challenged by the appellant at any earlier stage.  The encashment of the bank guarantee cannot be equated to voluntary payment of duty by the assessee.   The substantive condition of Notification No. 80/95-Cus was violated by the appellant who failed to discharge export obligation in relation to the raw materials imported duty free under the DEEC scheme thereby violating condition (v) of the Notification.  Such breach of condition of the exemption notification would ipso facto render the goods liable to confiscation under Section 111(o) of the Act and consequently the imported would be liable to penalty under Section 112 of the Act. 

                        The Tribunal held in regard to jurisdiction aspect that a jurisdictional objection should be raised at the earliest stage of quasi judicial proceedings.   The appellant could have raised the objection in his replies to the show cause notice.   He has not chosen to raise it even in the present appeals.   Such an objection raised by the appellant at this late stage is only liable to be overruled.

                        In regard to bank guarantee the Tribunal held that there is no dispute that the guarantee was encashed by the department early.   There is nothing on record to show that it was encashed at the instance of the appellant.   The encashment of bank guarantee cannot be deemed to be a voluntary payment of duty by the appellant.   Therefore the appellant cannot claim immunity from penalty or fine on the alleged ground of payment of duty prior to issuance of show cause notices.