Customs Broker cannot be penalised under Section 117 of the Customs Act for a disputed classification

The Hon'ble CESTAT, Principal Bench, New Delhi, in M/s Spice Jet, M/s H.C. Khanna & Company Versus Principal Commissioner of Customs, (Air Cargo Complex Import), New Delhi - 2026 (7) TMI 384 - CESTAT NEW DELHI  held that Integrated Drive Generators (IDG) and starter generators imported as parts of aircraft are correctly classifiable under Customs Tariff Heading ('CTH')8501 and are exempt from Basic Customs Duty. The Tribunal further ruled that a Customs Broker cannot be penalised under Section 117 of the Customs Act, 1962 for a disputed classification since declaring the classification is the statutory responsibility of the importer under Section 46.

Facts:

M/s Spice Jet Ltd ('the appellant') filed Bill of Entry No. 5235025 dated 16.02.2018 through their authorised Customs Broker M/s H. C. Khanna & Company ('the CHA') to clear goods declared as Integrated Drive Generator ('IDG') under CTH 8501200, availing the full Basic Customs Duty exemption under Serial No. 544 of Notification No. 50/2017-Cus. The importer also cleared goods declared as starter generators under CTH 8501.

During a post-clearance audit, the Revenue alleged that the imported goods are correctly covered under CTH 8511 as electrical ignition or starting equipment of a kind used for internal combustion engines. The Department claimed that this misclassification resulted in a short levy of duty amounting to Rs. 1,35,76,752/- for the IDGs and Rs. 96,09,622/- for the starter generators.

Consequently, a Show Cause Notice ('SCN') dated 11.11.2020 was issued proposing recovery of the differential duty under Section 28(4) of the Customs Act, 1962 along with interest, and the imposition of a penalty on the importer under Section 114A. The Notice also proposed a personal penalty on the CHA under Section 117 of the Act for the alleged contravention. The Principal Commissioner confirmed these proposals via an Order-in-Original dated 22.02.2023 ('the impugned order'), leading both parties to file separate appeals before the Tribunal.

Issues:

• Whether Integrated Drive Generators (IDG) and starter generators imported for aircraft are classifiable under CTH 8501 (entitling them to duty exemption) or under CTH 8511 as ignition/starting equipment for internal combustion engines?
• Whether a personal penalty can be legally sustained against a Custom House Agent (CHA) under Section 117 of the Act?

Held:

The Hon'ble CESTAT, Principal Bench, New Delhi, in [M/s Spice Jet, M/s H.C. Khanna & Company Versus Principal Commissioner of Customs, (Air Cargo Complex Import), New Delhi - 2026 (7) TMI 384 - CESTAT NEW DELHI], held as under:

• Relied on its own recent decision in Interglobe Aviation Ltd., C.G. Logistics Limited Versus Principal Commissioner of Customs, New Delhi - 2026 (5) TMI 779 - CESTAT NEW DELHI  to observe that the identical issue of classification for aircraft IDGs and starter generators has already been conclusively decided in favour of the importer.
• Observed that CTH 8501 covers general-electric motors and generators, whereas CTH 8511 is highly specific to ignition or starting equipment used in conjunction with spark-ignition or compression-ignition internal combustion engines. Since aircraft utilize gas turbine engines, CTH 8511 is legally inapplicable.
• Determined that the correct eight-digit classification for the Integrated Drive Generator is CTI 8501 62 00 and for the starter generator is CTI 8501 32 20, thereby making both items fully eligible for the benefit of Notification No. 50/2017-Cus.
• Clarified that under Section 46(4) and 46(4A) of the Customs Act, 1962, the absolute responsibility for the truth and correctness of a classification declaration rests solely upon the importer and not the customs broker.
• Emphasised that Custom House Agents (CHAs) are not inspectors tasked with weighing the absolute commercial genuineness of transactions or information received from clients.
• Held that in the total absence of any evidence showing active involvement or fraudulent connivance on the part of the CHA, a penalty under Section 117 of the Act cannot be sustained for a bona fide classification which has anyway been found to be correct.

Hence, the tribunal set aside the impugned order and allowed both the appeals.

Relevant Sections & Regulations:

Section 46(4) of the Customs Act, 1962 - (4) The importer while presenting a bill of entry shall make and subscribe to a declaration as to the truth of the contents of such bill of entry and shall, in support of such declaration, produce to the proper officer the invoice, if any, 1[and such other documents relating to the imported goods as may be prescribed].

Section 46(4A) of the Customs Act, 1962: The importer who presents a bill of entry shall ensure the following, namely:- (a) the accuracy and completeness of the information given therein; (b) the authenticity and validity of any document supporting it; and (c) compliance with the restriction or prohibition, if any, relating to the goods under this Act or under any other law for the time being in force.]

Section 114A of the Customs Act, 1962 - Where the duty has not been been levied or has been short-levied or the interest has not been charged or paid or has been part paid or the duty or interest has been erroneously refunded by reason of collusion or any wilful mis-statement or suppression of facts, the person who is liable to pay the duty or interest, as the case may be, as determined under [sub-section (8) of section 28] shall, also be liable to pay a penalty equal to the duty or interest so determined:]

Section 117 of the Customs Act, 1962: Penalties for contravention, etc., not expressly mentioned.-Any person who contravenes any provision of this Act or abets any such contravention or who fails to comply with any provision of this Act with which it was his duty to comply, where no express penalty is elsewhere provided for such contravention or failure, shall be liable to a penalty not exceeding [one lakh rupees].

Heading 8501 of the Customs Tariff Act - Covers electric motors and generators (excluding generating sets).

Heading 8511 of the Customs Tariff Act - Covers electrical ignition or starting equipment used for spark-ignition or compression-ignition internal combustion engines.