2023 (9) TMI 665 - AT - Customs

Customs Tribunal overturns penalties, citing lack of evidence and compliance with RBI circulars.

The Tribunal found no merit in imposing penalties under Section 114 of the Customs Act on the appellants. The impugned order was set aside, and the ... Levy of penalties u/s 114 of the Customs Act, 1962 - overvaluation of export of goods for availment of higher rate of drawback - Penalty on person who partnered with exporter - Penalty on Bank / Approved Banker for abetment - HELD THAT:- The department had not issued any summon(s) to the appellant Shri Sanjay D. Bhalerao for recording of statement(s) with regard to irregular exportation of the subject goods and for ascertaining his specific role with regard to such activities. Though, the impugned order has stated that the appellant had earned 50% of profit out of the export proceeds, but did not elaborate any findings with regard to the actual role played by the appellant in irregular exportation of the goods - in absence of proper substantiation of the case, especially with regard to the appellant herein, the penal provisions contained in Section 114 ibid, cannot routinely be invoked for penalising the appellant. The Indian bank’s role is confined only for scrutinization of documents to be submitted by the exporter and to forward the same to the Russian designated bank. It has also been provided that if no discrepancy report is received from the Russian Bank within seven days, then the documents sent by the Indian bank should be considered as sufficient for lodgment of claim with the RBI - when the appellant’s role starts after exportation of the goods and issuance of the Let Export Order (LEO) and issue of exchange control copy of Shipping Bill by the Customs department, it would not be proper to allege that the appellant had omitted or did some act in relation to improper export of goods. In the present case, since the appellants’ role as a banker has started after physical exportation of the goods, more particularly after issuance of LEO and physical movement of goods from the port of export, it cannot be said that they were involved in improper exportation of goods and consequently, would be exposed to the penal liabilities provided under Section 114 ibid. There are no merits in the impugned order, in so far as it has imposed penalties under Section 114 ibid, on the appellants - appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether penalties under Section 114 of the Customs Act can be imposed on an individual where no specific investigation, service of show-cause notice or recording of statements was made against that individual and the impugned order fails to identify his specific role in the alleged irregularity. 2. Whether an approved banker can be held liable under Section 114 of the Customs Act for alleged irregular exportation where the banker acted in compliance with RBI Circular No.4 (AD (GP) series) dated 19.05.1999 in relation to exports under the Rupee-Rouble (re-payment of state credit) mechanism and its role was limited to document scrutiny and forwarding to the overseas designated bank. 3. Whether precedent exonerating banks from penal consequences under Section 114 is applicable where remittance and export formalities conform to RBI procedures and the bank's actions occur after issuance of Let Export Order (LEO) and physical export of goods. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of penalty where no specific investigation/notice or recording of statements against the accused individual Legal framework: Penal sanction under Section 114 of the Customs Act requires a sufficient factual and legal basis demonstrating involvement in unlawful export/import activities; principles of natural justice require proper service of show-cause notice and an opportunity to be heard; fact-finding normally requires recording of statements and summons where the person's role is material. Precedent treatment: The adjudicatory expectation of specific and substantiated allegations against a person before imposing penalty aligns with established administrative law principles (as reflected in tribunal practice noted in the judgment). Interpretation and reasoning: The impugned order neither recorded statements of the individual nor issued summons; the show-cause notice does not accurately name or list the appellant; the order merely asserts an assumed profit share (50%) without elaborating or proving how that connected the individual to the irregular export activity. The proceedings were initiated and pursued in a casual and unsubstantiated manner with respect to this person. Ratio vs. Obiter: Ratio - Penalty under Section 114 cannot be routinely invoked against a person in absence of specific notice, investigation, or proof of active involvement; such invocation would violate requirements of substantiation and fair procedure. Obiter - The mention of profit share without proof is an insufficient evidentiary basis for penal liability. Conclusion: Penalty imposed on the individual is unsustainable for want of specific investigation, proper notice and demonstrable connection to the alleged irregularity; the penalty must be set aside as to that person. Issue 2 - Liability of an approved banker under Section 114 where bank complied with RBI Circular No.4 in Rupee-Rouble transactions Legal framework: The RBI Circular No.4 (AD (GP) series) dated 19.05.1999 governs documentary formalities and the role of Indian banks in Rupee-Rouble (re-payment of state credit) exports to Russia - specifically, registration of LCs with RBI, scrutiny of exporter documents, forwarding documents to the Russian designated bank, and deeming documents compliant if no discrepancy is reported within seven working days; penal exposure under Customs law must be measured against the actual functions performed by the bank under regulatory mandate. Precedent treatment: Prior tribunal orders have exonerated banks from penal consequences under Section 114 where their role was limited to document scrutiny/forwarding under RBI-regulated procedures and they acted as approved bankers in conformity with RBI directions. Interpretation and reasoning: The Circular confines the Indian bank's role to scrutiny and transmission of documents and contemplates reliance on the overseas bank's discrepancy report (or silence within seven days) as sufficient for lodgment of the claim with RBI. In the present facts, the overseas bank did not report discrepancies within the stipulated period and RBI remitted rupees to the exporter via the approved banking channel. The bank's operational role began after issuance of LEO and physical export; there is no finding that the banker was unregistered with RBI or that it altered or fabricated documents. Given these facts, the bank did not participate in the unlawful exportation of goods but merely complied with prescribed documentary and remittance procedures. Ratio vs. Obiter: Ratio - An approved banker who acts in conformity with RBI Circular No.4 and whose functions are limited to document scrutiny and forwarding (with no evidence of registration failure, document manipulation, or pre-export involvement) cannot be held liable under Section 114 for irregular exportation. Obiter - Emphasis that liability should attach to the party directly involved in unlawful activities affecting the goods, rather than to an approved banker performing regulatory duties. Conclusion: Penalty under Section 114 cannot be imposed on an approved banker in these circumstances; the bank is exonerated from penal consequences. Issue 3 - Applicability of prior tribunal exonerations and their relevance to the present facts Legal framework: Consistency with tribunal jurisprudence is relevant where facts and regulatory compliance are comparable; administrative penalties should be imposed only on those shown to have played an active part in the illegality. Precedent treatment: The tribunal's earlier orders (noted in the proceedings) have cleared banks from penalties where their actions were confined to the statutorily and regulatorily defined banking functions and where there was no nexus shown with unlawful exportation of goods. Interpretation and reasoning: The present facts mirror those earlier decisions: the bank registered and processed documents under RBI's scheme, the overseas bank raised no discrepancy within the prescribed time, and RBI completed remittance through the approved channel. There is no contrary evidence that the bank's actions preceded or facilitated the unlawful export or that the bank acted beyond the scope of its regulated role. The rationale of earlier exonerations - that penal liability should be attached to those directly engaged in unlawful activities with respect to the goods - applies here. Ratio vs. Obiter: Ratio - Prior exonerations of banks are applicable where the bank's role is limited by RBI directions and no evidence ties the bank to pre-export or contrived irregularities; such precedents are followed. Obiter - The decision underscores that administrative and penal provisions are not to be used routinely against intermediaries who merely performed mandated functions. Conclusion: The tribunal's prior exonerations are applicable and support setting aside the penalties against the banker in the present matter. Overall Disposition Given the lack of specific investigation and notice as to the individual, and the bank's compliance with RBI Circular No.4 with no evidence of active involvement in improper exportation (documents were accepted by the overseas bank within the prescribed period and RBI remitted funds), imposition of penalties under Section 114 on both appellants is unjustified; the penalties are set aside.