2022 (12) TMI 624 - HC - Customs

Rejection of request for waiver of interest while granting immunity from penalty and prosecution - order of Settlement Commission - Export Promotion Capital Goods Scheme - failure to fulfill the export obligation - HELD THAT - The bond was an agreement which is between the Petitioner and the Commissioner of Customs representing the Excellency of President of India. Therefore merely because the said agreement refers to the payment of interest is applicable as per law, it does not mean that the payment of interest ceased to be under the agreement. Though the bond furnished by the Petitioner uses the phrase 'interest as applicable as per law', specifying the interest rate was superfluous in this case. Section 28AA of the Act, states that the interest should be at a such rate below 10% and not extending 36% per annum as per Central Government may by notification in the official gazette. By Notification dated 5 June 1995, amended with effect from 5 September 1995, the interest rate was prescribed and, therefore, was known. Thus, merely because in the case of Rexnord Electronics 2008 (3) TMI 8 - SUPREME COURT , the interest rate was specified, and in the present case, it is stated as applicable as per law, the law laid down in the case of Rexnord Electronics will not cease to apply to this case. Thus the liability of the Petitioner to pay interest in this case originated from the bond furnished by it and it was rightly held by the Settlement Commission as being contractual. The Commission has rendered the finding that liability of the Petitioner to pay interest was under the bond; therefore, Settlement Commission has no jurisdiction to waive interest liability . Impact of economic crisis / recession in East Asian countries - frustration of contract beyond the control of the petitioner - HELD THAT - , the Commission held that the economic recession and financial crisis are not such an unique phenomena, and are generally anticipated by prudent businessmen. The Commission rightly observed that those in business are expected to be ready to overcome such a situation. Though the Petitioner had started the unit after two years or that had sought for cancellation of the bank guarantee will not be sufficient when the Petitioner failed to discharge his liability for a period of the license. The Commission has observed that the Petitioner derived substantial financial benefits at the cost of the exchequer for enjoying the amount saved on duty for almost a decade. Petition dismissed.

Summary

Issues Involved:
1. Immunity from levy of interest under Section 127H of the Customs Act.
2. Frustration of contract under Section 56 of the Indian Contract Act, 1872.

Issue-wise Detailed Analysis:

1. Immunity from Levy of Interest under Section 127H of the Customs Act:

The Petitioner challenged the Settlement Commission's order dated 22 March 2011, which refused to grant a waiver of interest. The Petitioner argued that the bond executed did not specify a rate of interest, unlike in previous cases such as Rexnord Electronics and Controls Ltd, where the bond specified the interest rate, making it contractual. The Petitioner contended that since the bond mentioned "interest applicable as per law," the obligation to pay interest was statutory, not contractual, and thus, the Settlement Commission had the power to waive the interest.

However, the court held that the bond was an agreement between the Petitioner and the Customs Authority, and the reference to "interest as applicable as per law" did not alter its contractual nature. The court referred to Section 28AA of the Customs Act, which allows the Central Government to prescribe interest rates, and noted that the interest rate was known through the Notification dated 5 June 1995. The court concluded that the liability to pay interest originated from the bond, making it contractual. Consequently, the Settlement Commission correctly followed the decision in Rexnord Electronics and held that it had no jurisdiction to waive the interest liability.

2. Frustration of Contract under Section 56 of the Indian Contract Act, 1872:

The Petitioner argued that the economic crisis in East Asian countries during the relevant period frustrated the contract, making it impossible to fulfill the export obligations. The Petitioner cited the Division Bench decision in Union of India v Cus & C.Ex. Settlement Commission, Kolkata, where Section 56 was applied due to a super cyclone in Orissa.

The court rejected this argument, noting that the recession in East Asian countries was limited in duration and scope. The Settlement Commission observed that economic recessions are common and generally anticipated by prudent businessmen. The court agreed with the Commission's view that the Petitioner should have been prepared to overcome such situations. The court also noted that the Petitioner enjoyed substantial financial benefits at the cost of the exchequer.

The court found that the Settlement Commission's findings regarding the duration and impact of the economic crisis were reasonable and not perverse. The court distinguished the Petitioner's case from the super cyclone case, noting that the circumstances were not comparable.

Conclusion:

The court concluded that no case was made out for interference with the impugned order of the Settlement Commission. The Writ Petition was dismissed, and the rule was discharged with no costs.