PROCEDURAL LAPSE – LIABLE FOR PENALTY?

Procedural lapses are minor errors or deviations from established rules and processes in legal, administrative, or business contexts that do not fundamentally alter the substantive outcome of a case or transaction, but can sometimes lead to penalties or require condonation. While minor lapses are often excused if core conditions are met, more serious or deliberate procedural flaws that cause prejudice or undermine substantive rights may lead to negative consequences. 

The Rules and procedures of an Act or rules and regulations made there under are very much essential for implementing the objectives of the main Act. The non-compliance of the rules providing procedures can result in penalties. The procedural lapses may be condoned if substantial compliance is met. However, the lapses that pose a risk to revenue or deviate from substantive law are not condonable. Various case laws highlight that minor procedural lapses such as clerical mistakes, omission etc.

Substantial benefit cannot be denied to assessee on the basis of procedural irregularity when under the Rule 11 of Central Excise Rules, 2001, there is no obligation of printed serial number on the invoices.Sanathan Textiles P. Ltd. Versus CCE, Vapi - 2013 (4) TMI 406 - CESTAT AHMEDABAD

Section 158(2)(ii) of the Customs Act, 1962 (‘Act’ for short) provides that any person who contravenes any provision of a rule or regulation or abets such contravention or who fails to comply with any provision of a rule or regulation with which it was his duty to comply, shall be liable to a penalty which may extend to Rs.2 lakhs (before 01.08.2019 – Rs. 50000/-).

In M/s Paramount Surgimed Limited Versus Commissioner of Customs, Jaipur-1 - 2025 (10) TMI 336 - CESTAT NEW DELHI, the petitioner is an importer and therefore it registered with the Customs Department. The appellant availed exemption on the item entry 290, vide Notification No. 50/2017-Customs, dated 30.06.2017. To avail the said exemption the appellant is to file quarterly return with the Department. The appellant failed to file the quarterly return for the period from July 2017 to September 2017, which was to be filed on or before 10.10.2017. Therefore, the Department decided to levy penalty under Section 158 of the Act against the appellant and issued a show cause notice on 10.06.2019 to the appellant for contravention of sub-rule 3 of Rule 6 of Customs (Import of Goods at Concessional Rate of Duty) Rules, 2017 (‘Rules’ for short), as proposed under Section 158 of the Act. A penalty of Rs.25000/- has been imposed on the appellant on 07.10.2019.

Further the Authority imposed penalty of Rs.25000/- for each quarter from October 2017 to March, 2019. Total penalty is Rs.1,75,000/-. The appellant filed appeal against the said order before the First Appellate Authority. The First Appellate Authority confirmed the order of the lower authority on 17.03.2020. Therefore, the appellant filed the present appeal before the CESTAT.

The appellant submitted the following before CESTAT-

• Section 158 of Customs Act alleging contravention of Rule 6(3) has wrongly been invoked. 
• Rule 6 (3) provides that the importer who has availed the benefit of an exemption notification shall submit a quarterly return, in the Form appended to these rules, to the Deputy Commissioner of Customs or, as the case may be, Assistant Commissioner of Customs having jurisdiction over the premises where the imported goods shall be put to use for manufacture of goods or for rendering output service, by the 10^th day of the following quarter.
• The appellant had filed the quarterly returns for the period July 2017 to September 2017 in CGST-Division-C, Bhiwadi on 3.11.2017.
• The appellant had provided the information regarding import at concessional rate of duty as per the provisions of Notification No. 68/2017. 
• The Assistant Commissioner issued certificates in this regard, which are the sufficient evidences showing fulfilment of the condition of Rule 6(3).
• The appellant had applied for acceptance of continuity bond of Rs. 5 lakhs and bank guarantee of Rs. 25,000/- and again filed the quarterly return for the period July 2017 to March 2018, April 2018 to June 2018, July 2018 to September 2018 and October 2018 to December 2018 in the department in the month of December. 
• The impugned order has been passed without considering the above said documents.
• Therefore, the impugned order is liable to be set aside and the appeal to be allowed.

The Department submitted the following before CESTAT-

• The Commissioner (Appeals) has observed an admission of the appellant in their reply to Show Cause Notice dated 8.7.2019 about not filing the stipulated returns in time and that all the returns were not filed on 27.6.2017 i.e. after the issuance of show cause notice on 10.06.2019.
• Since the said admission is the sufficient proof for non-compliance of Rule 6(3) there is no infirmity in the order under challenge.
•  The appellant had availed the concessional customs duty on Fluff Pulp which was conditional upon following the procedure outlined in the Rules.
• The Deputy Commissioner (Preventive), Customs Commissionerate, Jaipur, vide their letter dated 26.03.2019 revealed that returns for July 2017 to December 2018 were filed along with the letter dated 5.3.2019. Thus, it is clear that the returns were not submitted by the specified due date.
• Though the returns were not submitted by the specified due date, the returns did not contain the unit’s name, seal and the name and signature of the concerned authority. 
• These failures amount to contravention of the aforesaid Notification No. 68/2017 in which situation Section 158 of the Act provides the imposition of penalty.

Therefore, the department prayed for the dismissal of the present appeal.

The CESTAT heard the submissions of both the parties and perused the returns for all quarters in dispute. The CESTAT observed that the alleged contravention seems to be procedural in nature. The CESTAT analysed Rule 6(3). The appellant has relied upon various certificates issued by Assistant Commissioner, CGST Division – C, Bhiwadi Alwar showing that the returns for the period in question were filed by the appellant but not before the Assistant Commissioner of Customs having jurisdiction over the appellant’s premises. This is sufficient to hold that the alleged non-compliance is purely a procedural lapse on part of appellant.

The CESTAT observed that in case of exemption notifications, it is for the importer to prove its entitlement and he has to follow the procedure as prescribed in the notification. In case of contravention of any provision of such exemption notification the burden on assessee is to prove the absence of the following-

• Fraud;
• Gross and wilful neglect; and
• Intent to evade the payment of duty.

The CESTAT held that the bona fide procedural lapse has wrongly been dealt with as the act of such contravention which invites the penalty. Therefore, the CESTAT allowed the appeal setting aside the impugned order which imposed several penalties on the appellants.