Customs penalty requires confiscability; Section 112 could not be used after duty demand and confiscation were dropped.

Penalty under Section 112 of the Customs Act could not be imposed on the original exporter for alleged breach of Condition No. (vi) of Notification No. 204/92-Cus., because that condition restricted transferability only where export goods were manufactured using Modvat credit under Rule 56A or Rule 57A. The imported goods were brought by the transferee licence-holder, and any dispute over transferability endorsements had to be pursued under the appellate mechanism of the Foreign Trade (Development & Regulation) Act, 1992. Section 112 also required confiscability under Section 111; since duty demand and confiscation against the importer were dropped, the basis for penalty was absent.

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Issues: Whether penalty under Section 112 of the Customs Act could be imposed on the exporter for allegedly violating Condition No. (vi) of Notification No. 204/92-Cus. by availing Modvat credit and obtaining transferability endorsements on the quantity-based advance licences.

Analysis: Notification No. 204/92-Cus. granted exemption to imports under a quantity-based advance licence subject to conditions governing export obligation and transferability. Condition No. (vi) barred transfer of the licence only where the exported goods had been manufactured availing credit under Rule 56A or Rule 57A of the Central Excise Rules, 1944. The imported goods in question were brought in by the transferee licence-holder, and the Customs authorities could not use proceedings under the exemption notification to punish the original licence-holder for allegedly obtaining transferability endorsements by nondisclosure before the licensing authority. Any challenge to the grant of endorsement lay under the appellate mechanism under the Foreign Trade (Development & Regulation) Act, 1992. Penalty under Section 112 also presupposed confiscability of the imported goods under Section 111 of the Customs Act. Since the duty demand and confiscation proposal against the importer had been dropped, the foundation for invoking Section 112 against the respondents was absent.

Conclusion: Penalty under Section 112 was not sustainable against the respondents and the Revenue's challenge failed.

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