Bona fide transferee protection for DEPB and DFIA scrips prevents duty denial despite later fraud cancellation.

Bona fide transferees of transferable DEPB/DFIA scrips are described as entitled to customs exemption where they purchased the instruments for value without notice of fraud, even if the original scrips were later cancelled ab initio. The note states that a licence procured by fraud remains effective until avoided in law, and that transferees who complied with the transfer and use requirements could not be denied duty benefit on the basis of the exporter's later fraud. It further records that duty demand, confiscation, interest and penalties were not sustainable against such transferees, and that prior recovery or settlement with the original exporters did not justify a further demand from the importers.

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Issues: (i) Whether bona fide transferees of transferable DEPB/DFIA licences obtained duty exemption where the original scrips were later cancelled ab initio for fraud by the exporter. (ii) Whether duty demand, confiscation, interest and penalties could be sustained against the transferees, including by invocation of the extended period and notwithstanding prior deposits or settlement by the original exporters.

Issue (i): Whether bona fide transferees of transferable DEPB/DFIA licences obtained duty exemption where the original scrips were later cancelled ab initio for fraud by the exporter.

Analysis: The relevant exemption notifications protected imports made against licences that had been validly endorsed as transferable, and the conditions applicable to the transferee were limited to production and use of such transferable instruments. The Court held that the customs and licensing procedure had already verified the export records and allowed transferability, and the transferees had purchased the scrips for value without notice of any fraud. A licence obtained by fraud is voidable and remains effective until avoided in the manner known to law. The Court applied the settled principle that the transferee of a voidable instrument for value and without notice acquires protection, and treated the DEPB credit as property capable of transfer under the law governing sale of goods.

Conclusion: The transferees were entitled to the exemption and their imports could not be denied duty benefit merely because the original scrips were later cancelled ab initio.

Issue (ii): Whether duty demand, confiscation, interest and penalties could be sustained against the transferees, including by invocation of the extended period and notwithstanding prior deposits or settlement by the original exporters.

Analysis: Since the transferees imported against validly transferable scrips before cancellation and were not shown to have participated in the fraud, confiscation and consequent duty liability could not be fastened on them. The Court further held that the extended period under Section 28 could not justify recovery from the transferees on these facts, and where duty had already been settled or recovered from the exporters, a further demand on the importers was not permissible. In the circumstances, penalties could not survive once the substantive demand failed.

Conclusion: Duty, confiscation, interest and penalties against the transferees were not sustainable.

Final Conclusion: The appeals were allowed and the impugned confiscation, duty demand, interest and penalties were set aside.

Ratio Decidendi: A bona fide transferee for value of a transferable import licence or duty credit scrip takes good title and cannot be denied the customs exemption or fastened with duty merely because the original holder later stands found to have procured the instrument by fraud, unless the transferee is shown to have participated in or had notice of the fraud before import and cancellation.

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