2013 (9) TMI 661 - HC - Customs

Export Promotion Capital Goods Scheme - Export obligation - Levy of interest for failure to comply with the export obligation - Held that - interest has not been demanded by the authorities under the Customs Act, in terms of any of the provisions of the Customs Act. On the contrary, interest has been demanded by the second respondent viz., Deputy Director General of Foreign Trade. There is no controversy before this Court that under the Foreign Trade (Development and Regulation) Act, 1992 and the Foreign Trade (Regulation) Rules, 1993, there is no specific provision empowering the second respondent to demand interest for the failure of the exporter to fulfil his export obligation. It is on this ground, the learned counsel for the petitioner contended that the demand for interest in terms of the bond is illegal - at the time when the petitioner applied for licence, he was required to execute a bond and accordingly, he executed the bond, thereby, undertaking to pay interest at the rate of 24%, in the event of failure to fulfil the export obligation. Admittedly, the petitioner had failed to fulfil the export obligation, though, he had imported goods by using the licence. It is also admitted that he paid less duty in terms of the licence by making use of the Scheme. When it is not in controversy that the petitioner had failed to fulfil the export obligation, then, the second respondent is entitled to enforce the terms of the bond. Interest payable as per the terms of the Customs Act is different from the interest payable under the bond executed in terms of the Foreign Trade (Development and Regulation) Act, 1992. If any interest is to be levied under the terms of the Customs Act, undoubtedly, the procedure contemplated under the Customs Act is to be followed by the customs authority to demand customs duty together with interest. But, under the Foreign Trade (Development and Regulation) Act, 1992, though, there is no specific provision for demanding interest in case of violation of terms and conditions of the licence issued under the Act, in terms of the bond such interest could be demanded - Decided against assessee.

Summary

Issues Involved:
1. Legality of the demand for interest by the Deputy Director General of Foreign Trade.
2. Validity of the bond executed by the petitioner for payment of interest.
3. Applicability of the Customs Act and Foreign Trade (Development and Regulation) Act, 1992 concerning the demand for interest.

Detailed Analysis:

1. Legality of the demand for interest by the Deputy Director General of Foreign Trade:
The petitioner contended that neither the Customs Act nor the Foreign Trade (Development and Regulation) Act, 1992, empowered the Deputy Director General of Foreign Trade to demand interest for failure to fulfill export obligations. The court, however, found that while the Foreign Trade (Development and Regulation) Act, 1992, does not explicitly provide for such interest, Rule 6(2)(b) of the Foreign Trade (Regulation) Rules, 1993, allows the licensing authority to require the execution of a bond to comply with the terms of the license. Thus, the demand for interest is legally backed by the bond executed under this rule.

2. Validity of the bond executed by the petitioner for payment of interest:
The court noted that the petitioner executed a bond agreeing to pay interest at the rate of 24% in case of failure to fulfill export obligations. The petitioner argued that this condition was void for lack of legal sanction. The court rejected this argument, stating that the bond was executed under the authority of Rule 6(2)(b) of the Foreign Trade (Regulation) Rules, 1993, which provides the legal backing for such bonds. Therefore, the bond and its terms, including the interest clause, were valid and enforceable.

3. Applicability of the Customs Act and Foreign Trade (Development and Regulation) Act, 1992 concerning the demand for interest:
The court clarified that the interest demanded was not under the Customs Act but under the bond executed as per the Foreign Trade (Development and Regulation) Act, 1992. The court referred to the Supreme Court judgment in Rexnord Electronics and Controls Limited vs. Union of India, which distinguished between interest payable under the Customs Act and interest payable under a bond executed as per the Foreign Trade (Development and Regulation) Act, 1992. The court held that the demand for interest under the bond was a contractual obligation and not within the purview of the Customs Act.

The court dismissed the petition, upholding the demand for interest by the Deputy Director General of Foreign Trade as legally valid and enforceable under the terms of the bond executed by the petitioner.