2021 (7) TMI 781 - HC - Customs

Court upholds authorities' decision on SEZ Rules non-compliance, show cause notice, and penalty

The court dismissed the petition, affirming the authorities' findings of non-compliance with SEZ Rules, the correctness of issuing the show cause notice, ... Positive Net Foreign Exchange obligation - Annexure-I of the Special Economic Zone Rules, 2006 (annual monitoring of performance) - show cause prior to completion of block period - penalty under section 11 of the Foreign Trade (Development and Regulation) Act, 1992 - submission of incorrect APRs - breach of conditions of Letter of ApprovalPositive Net Foreign Exchange obligation - Annexure-I of the Special Economic Zone Rules, 2006 (annual monitoring of performance) - show cause prior to completion of block period - Whether issuance of the show cause notice before expiry of the entire five year block period was contrary to the SEZ Rules and impermissible - HELD THAT: - The Court held that Annexure I to the SEZ Rules prescribes annual monitoring and specifically contemplates issuance of a show cause notice where a unit remains NFE negative by the end of the 3rd year and continued negative performance in the 5th year may invite penal action. Therefore the contention that a notice could only be issued after completion of the full five year block was contrary to the statutory scheme in Annexure I and was unsustainable. The show cause notice in the present case was in fact issued after the block period had ended, and in any event the exclusion of data beyond four years would not have altered the admitted negative NFE position for the block period. [Paras 10, 11]The challenge to issuance of the show cause notice on the ground that the full five year period must expire before any notice is unfounded and is rejected.Penalty under section 11 of the Foreign Trade (Development and Regulation) Act, 1992 - submission of incorrect APRs - breach of conditions of Letter of Approval - Whether the findings that the petitioner breached the Letter of Approval, submitted misleading APRs and was liable to penalty under section 11 were perverse and liable to be interfered with - HELD THAT: - The authorities below found that the petitioner failed to achieve the projected exports and positive NFE, admitted negative NFE for earlier years, carried forward cumulative NFE improperly from an earlier block to mask the negative position, and failed to reflect sale of capital equipment in the APR. Those factual findings were sustained on review. Given the petitioner had accepted the terms and conditions of the Letter of Approval which made achieving positive NFE a statutory obligation and given the finding of submission of incorrect information, the imposition and confirmation of penalty under section 11 was not shown to be illegal or perverse. The petitioner's plea for parity or reduction of penalty based on market conditions was considered and rejected by the review authority; no substantial illegality was demonstrated before the Court. [Paras 5, 6, 12, 13, 14]The factual findings of breach, misleading APRs and consequent liability to penalty under section 11 are upheld and the challenge to the quantum and validity of the penalty is rejected.Final Conclusion: The writ petition is dismissed. The High Court finds no merit in the petitioner's objections to the timing of the show cause notice or to the penalties imposed; the authorities below had correctly applied Annexure I of the SEZ Rules and rightly upheld findings of breach and submission of incorrect APRs, and the petition is summarily rejected without costs. Issues Involved:1. Non-compliance with approval conditions and SEZ Rules.2. Issuance of show cause notice before the end of the block period.3. Imposition of penalty and reasonableness of the penalty amount.Issue-wise Detailed Analysis:1. Non-compliance with approval conditions and SEZ Rules:The petitioner, a limited liability partnership engaged in the business of import, manufacturing, and export of jewellery, received approval to operate under the SEZ Scheme for a period of five years (2010-2015) with the condition to achieve positive Net Foreign Exchange (NFE). The petitioner failed to comply with these conditions, leading to a show cause notice issued on June 24, 2015, for non-functioning of its unit. The notice highlighted that there were no exports for six months prior to its issuance, the unit was in a dilapidated condition, and the petitioner had not achieved even 1% of its projected export turnover. The petitioner was found to have breached multiple provisions of the SEZ Rules, including Rules 22(3), 25, 54(1), and 54(2), and provided incorrect information in the Annual Performance Reports (APRs).2. Issuance of show cause notice before the end of the block period:The petitioner argued that the authorities should have waited until the end of the entire block period (2010-2015) before issuing the show cause notice. However, the court rejected this contention, stating that as per Annexure-I under Rule 54 of the SEZ Rules, a show cause notice can be issued if the unit continues to be NFE negative by the end of the third year. The petitioner’s argument was deemed an unwarranted hairsplitting and was not raised before the lower authorities. The court noted that the show cause notice was issued after the completion of the five-year block period, making the petitioner’s argument baseless.3. Imposition of penalty and reasonableness of the penalty amount:The original authority imposed a penalty of Rs. 5,00,000 on the petitioner under Section 11 of the Foreign Trade (Development and Regulation) Act, 1992, for failing to achieve the positive NFE and providing misleading information. The petitioner’s appeal to the Appellate Authority and the Review Committee was rejected, confirming the findings of non-compliance and incorrect information submission. The petitioner argued for a lesser penalty, citing market conditions and comparing the penalty to that imposed on another entity, Fine Star Diamonds. However, the court found that the petitioner had accepted the statutory obligations under the SEZ Rules and failed to meet them. The petitioner’s conduct of carrying forward cumulative NFE of the earlier block to show positive cumulative NFE was deemed objectionable. The court upheld the penalty, finding no perversity in the authorities’ decisions and rejected the petition without imposing any cost.Conclusion:The court dismissed the petition, affirming the authorities' findings of non-compliance with SEZ Rules, the correctness of issuing the show cause notice, and the appropriateness of the penalty imposed. The petitioner’s arguments were rejected, and the court found no merit in the claims presented.