CESTAT pulled up for upholding cost recovery charges without citing legal basis under HCCAR, 2009; orders remanded

HC held that CESTAT erred in dismissing custodians' appeals against demands of cost recovery charges under HCCAR, 2009 without examining the legality and statutory basis of such recovery. Observing that Revenue failed to indicate any specific provision authorising the impugned recovery, HC ruled that CESTAT ought to have either adjudicated the issue on merits or remanded the matter to the Commissioner to identify and apply the correct legal provision, if any. The impugned CESTAT orders were quashed and set aside, and the matters remitted to the Commissioner to pass fresh orders strictly in accordance with law and this judgment.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether recovery of outstanding cost recovery charges from custodians/Customs Cargo Service Providers could be ordered under Regulations 5(2), 6(1)(o), 11(1) and 12(8) of the Handling of Cargo in Customs Areas Regulations, 2009.

1.2 Whether the appellate authority was justified in setting aside the Commissioner's order solely on the ground that HCCAR, 2009 did not contain a machinery provision for recovery, without examining the legality of the demand on merits or remanding the matter.

1.3 Consequentially, what course of action should be adopted regarding the impugned recovery notices, the Commissioner's orders, and the writ petitions challenging show cause notices and threatened recovery/revocation.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Power and mechanism to recover cost recovery charges under HCCAR, 2009

Legal framework

2.1 The Court considered Regulations 5(2), 6(1)(o), 11(1) and 12(1) & 12(8) of the HCCAR, 2009. Regulation 5(2) requires an applicant to undertake to bear and pay, on a cost recovery basis, the cost of Customs officers posted in the customs area, unless specifically exempted by an order of the Ministry of Finance. Regulation 6(1)(o) imposes a similar obligation on the approved Customs Cargo Service Provider. Regulation 11(1) authorises suspension or revocation of approval and forfeiture of security for failure to comply with provisions of the Act, rules, regulations, notifications and orders. Regulation 12 prescribes the procedure for suspension or revocation and empowers imposition of penalty up to fifty thousand rupees for contravention of the regulations.

2.2 The Court noted the reasoning adopted in an earlier decision of the Tribunal (Container Corporation of India v. Commissioner of Customs, Jodhpur), where it was held that Regulations 5(2), 6(1)(o) and 12 under HCCAR, 2009 do not contain any express machinery for realisation or recovery of defaulted cost recovery charges; they only impose an obligation to bear such cost and provide for suspension, revocation and penalty.

Interpretation and reasoning

2.3 The Court recorded the contention of the custodians that: (i) the show cause notices had primarily invoked Regulations 11(1) and 12(8) of HCCAR, 2009, but the Commissioner confirmed the demand of cost recovery charges by relying upon Regulations 5(2) and 6(1)(o); (ii) none of these provisions provide for an order of recovery or lay down a recovery mechanism; (iii) absent any specific recovery provision in HCCAR, 2009 or under the Customs Act, 1962 having been invoked, only suspension/revocation of custodianship could be resorted to, not monetary recovery.

2.4 The Court noted the revenue's counter: (i) the custodians had accepted, by public notice, guidelines and undertakings, the obligation to bear the cost recovery charges in advance, as a condition of appointment under Section 45(1) of the Customs Act, 1962; (ii) Regulations 5(2) and 6(1)(o) of HCCAR, 2009 reinforce this statutory/contractual obligation; (iii) the custodians were not exempted from such obligation by any order or circular of the Ministry of Finance; and (iv) the Tribunal ought to have examined whether the custodian was liable to pay the cost recovery charges in terms of these Regulations instead of ending the matter on the absence of an express recovery mechanism.

2.5 The Court observed that the Tribunal correctly identified that HCCAR, 2009, as such, does not in terms provide a specific machinery for the recovery of defaulted cost recovery charges, and that the Tribunal had taken the view that, in the absence of such machinery, no recovery could be effected under the Regulations, though penalty under Regulation 12(8) had been imposed.

2.6 However, the Court emphasised that the proper approach was not merely to conclude that there was no recovery provision; instead, the adjudicatory and appellate authorities were required to determine: (i) whether the demand for cost recovery charges is sustainable in law; and (ii) if so, under what statutory or regulatory provision recovery could be ordered and in what manner, including by exploring provisions that might have been omitted or not invoked in the earlier proceedings.

Conclusions

2.7 The Court did not finally adjudicate the legality or enforceability of the cost recovery charge demands, nor did it definitively rule on whether HCCAR, 2009 alone provides an adequate recovery mechanism.

2.8 Instead, the Court held that the question whether the recovery in question is legally sustainable, and under which precise statutory or regulatory provisions it can be made, requires fresh consideration by the Commissioner of Customs, taking into account the legal position discussed by the Tribunal and in this judgment. The Court noted that the revenue had not, at this stage, been able to point to any specific provision clearly authorising recovery, which warranted remand for a comprehensive determination.

Issue 2 - Propriety of the Tribunal's approach and the need for remand

Interpretation and reasoning

2.9 The Court found that the Tribunal, while agreeing in substance that there was an outstanding demand of cost recovery charges, disposed of the appeals by holding that there was "no provision to satisfy such demand in the form of recovery of cost recovery charges" under HCCAR, 2009, and did not proceed to examine the impugned notices and orders on merits or consider a remand.

2.10 In the Court's view, once the Tribunal had identified an arguable basis for demand and simultaneously noticed a possible deficiency in the specific provisions invoked for recovery, it ought either: (i) to have examined, in detail, the legality of the demand and the validity of the recovery with reference to the correct statutory framework; or (ii) to have remanded the matter to the Commissioner to pass fresh orders under the relevant provisions, after considering all applicable law, including any provisions that had been inadvertently omitted in the earlier order.

2.11 The Court held that the Tribunal was not justified in finally setting aside the Commissioner's order merely on the ground that the specific regulations invoked did not contain a machinery for recovery, particularly when the question "under which provisions the recovery can be made, if at all" had not been thoroughly examined and the record showed that no clear basis had been pointed out by the revenue at that stage.

Conclusions

2.12 The Court concluded that the impugned orders of the Tribunal suffered from a legal infirmity in their approach, and therefore required interference. The Tribunal's orders dated 26.07.2019 were quashed and set aside.

2.13 The orders of the Commissioner of Customs which had been challenged before the Tribunal were also quashed and set aside, not on merits of the demand, but in order to enable a fresh and comprehensive adjudication.

2.14 The matters were remanded to the Commissioner of Customs to pass fresh, reasoned orders on the legality and sustainability of the recovery of cost recovery charges, after granting adequate opportunity of hearing to all concerned parties, and while keeping in view: (i) the legal analysis by the Tribunal; and (ii) the law as discussed by the High Court, without being influenced by the earlier orders.

Issue 3 - Consequential directions in appeals and writ petitions

Interpretation and reasoning

2.15 The Court noted that the writ petitions challenged show cause notices and consequential steps for revocation of custodianship and recovery of cost recovery charges, raising, inter alia, contentions based on CBIC Circular No. 02/2021 (Customs) dated 19.01.2021 regarding: (i) exemption of custodians notified before 26.06.2002 from bearing cost of customs staff, except in specified exceptional categories; and (ii) subsuming of certain cost recovery posts into the regular cadre strength, allegedly affecting the basis for recovery post 18.12.2013.

2.16 The Court recorded these submissions but did not adjudicate on the merits of the claimed waiver, exemption or the effect of the circulars, holding instead that such issues fall within the scope of the fresh adjudication to be undertaken by the Commissioner, and thereafter, if necessary, by the appellate forum.

Conclusions

2.17 The appeals by the revenue were allowed, and the Tribunal's orders dated 26.07.2019 were quashed and set aside. The Commissioner's earlier orders were also set aside to facilitate de novo consideration.

2.18 The Commissioner of Customs was directed to pass fresh orders strictly in accordance with law, after providing adequate opportunity of hearing, and considering all relevant aspects including: (i) legality and validity of the recovery; (ii) applicable statutory and regulatory provisions; and (iii) contentions on exemption/waiver, demand and recovery.

2.19 It was further directed that, if upon such reconsideration the Commissioner concludes that the recovery of cost recovery charges is sustainable, the aggrieved parties would be at liberty to approach the Tribunal and raise all contentions, including on exemption, waiver, demand and the legal basis for recovery. The Tribunal, in that event, shall first determine the legality and validity of the recovery in question and, only if lawfully established, permit such recovery.

2.20 In light of the above directions and remand, the connected writ petitions challenging the show cause notices and consequential actions were disposed of, with the direction that the Commissioner's fresh orders shall govern the rights and liabilities of the parties.

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