2018 (9) TMI 332 - HC - Customs

Jurisdiction of DGFT - Power to recover customs duty - Whether the order passed by the DGFT as confirmed by the Appellate authority is legal and valid? - Held that - The Customs authorities had not initiated any action for recovery of unpaid duty. Instead, it is the authority under the DGFT which issued show-cause notice and ultimately passed the impugned order. These steps were initiated after discharge of the LUT and bank guarantees. The show-cause notice dated 25.01.2005 which was pursued and which culminated into the final order, referred to and proposed action under section 11(2) of the Act of 1992. Section 11 of the Act of 1992 pertains to contravention of provision of the said Act, rules, orders and foreign trade policy. Subsection (2) of section 11 thus is a penal provision and has certainly not a provision for recovery of unpaid duty. It is hugely doubtful whether the said provision could have been invoked after the entire procedure of granting of license, import of goods under such license and export of finishing product as promised for obtaining the license, was over and culminated into discharge of LUT and bank guarantees given by the petitioner. However, in the present proceedings, we are not inclined to give any final expression or opinion on this aspect. In the present case, having initiated penalty proceedings the said authority asked the petitioner to pay up the customs duty with interest. He referred to section 13 of the Act of 1992 which specifies the Adjudicating Authority for imposing penalty or for confiscation. Thus, with the aid of section 13, he exercised powers for imposing penalty under section 11(2) of the Act. In the process, he ordered recovery of the customs duty of the specified amount with interest. Interestingly, he also provided in the operative portion of the order that immediately upon recovery or payment of the amount, as indicated in the preceding paragraphs, present show-cause notice will be treated as withdrawn and case will stand as closed/discharged/realized? . In clear terms therefore, he imposed customs duty with interest asked, the petitioner to pay the sum upon which, the penalty would be spared. Certainly, the said authority did not have power to act as Customs officer recovering the unpaid customs duty failing which, he would exercise power to impose penalty under section 11(2) of the Act. If the said authority was of the opinion that the petitioner exposed itself to any penalty, he ought to have recorded reasons and imposed the penalty. He certainly could not have, in the guise of penal powers, sought recovery of customs duty which power, in any case, he did not enjoy. Petition allowed - decided in favor of petitioner.

Summary

Issues Involved:
1. Breach of license conditions regarding import limits.
2. Jurisdiction and authority of DGFT to demand customs duty.
3. Validity of penalty imposed under Section 11(2) of the Foreign Trade (Development and Regulation) Act, 1992.
4. Legal implications of discharging LUT and bank guarantees.

Issue-Wise Detailed Analysis:

1. Breach of License Conditions Regarding Import Limits:
The petitioner-company, engaged in manufacturing and exporting textile products, was issued advance licenses permitting duty-free imports of specified goods, including dyes. These licenses contained a condition that the value of imported dyes could not exceed 14% of the FOB value of the exports. The petitioner-company breached this condition by importing dyes in excess of the stipulated limit.

2. Jurisdiction and Authority of DGFT to Demand Customs Duty:
The DGFT issued a show-cause notice to the petitioner-company for breaching the license condition, resulting in non-levy of customs duty amounting to ?16,43,276 plus interest. The petitioner contended that the DGFT had no jurisdiction to demand customs duty, arguing that such authority rested with the Customs authorities. The court noted that the DGFT's action was initiated after the discharge of the LUT and bank guarantees, raising questions about the DGFT's jurisdiction to demand customs duty post-completion of the import-export cycle.

3. Validity of Penalty Imposed Under Section 11(2) of the Foreign Trade (Development and Regulation) Act, 1992:
The DGFT issued a show-cause notice under Section 11(2) of the Act of 1992, which pertains to imposing penalties for contraventions of the Act, rules, or foreign trade policy. The court observed that Section 11(2) is a penal provision and not meant for recovering unpaid customs duty. The DGFT's order demanded the payment of customs duty with interest and stated that upon such payment, the show-cause notice would be withdrawn. The court found this approach to be legally unsustainable, as the DGFT cannot act as a Customs officer to recover unpaid customs duty under the guise of imposing penalties.

4. Legal Implications of Discharging LUT and Bank Guarantees:
The petitioner argued that once the LUT and bank guarantees were discharged, the DGFT's jurisdiction ended, and no further action could be initiated. The court noted that the entire process of granting the license, importing goods, and exporting finished products had culminated in the discharge of the LUT and bank guarantees. The court found it doubtful whether the DGFT could invoke Section 11(2) after this culmination, but refrained from giving a final opinion on this aspect due to other reasons rendering the DGFT's order unsustainable.

Conclusion:
The court quashed the impugned order-in-original and the appellate order, allowing the petitions. It held that the DGFT exceeded its jurisdiction by demanding customs duty under the guise of imposing penalties and that such recovery should have been pursued by the Customs authorities. The court emphasized that the DGFT's authority under Section 11(2) is limited to imposing penalties and does not extend to recovering customs duty.