2025 (4) TMI 120 - AT - Customs

Duty liability upheld on fraudulent DEPB scrips for mis-declared Potassium Chloride as Industrial Salt under Section 11

M/s. Bharat Futuristic Corporation, M/s. ITCO International, M/s. Chakrapani Vyapar Pvt. Ltd., M/s. Hitachi Koki India Pvt. Ltd., Molex India Pvt. Ltd. Versus The Commissioner of Customs, Bangalore

CESTAT Bangalore ruled on duty liability arising from fraudulent DEPB scrips where exporter mis-declared restricted 'Potassium Chloride' as 'Industrial ... Benefit of duty debit on DEPB scrips obtained fraudulently by the exporter - export of restricted item viz. ‘Potassium Chloride’ or ‘Muriate of Potash’ by mis-declaring the same as ‘Industrial Salt’ without possessing a valid licence - contravention of the provisions of Section 11 of the Customs Act, 1962 read with the provisions of Foreign Trade (Development & Regulation) Act, 1992 - HELD THAT:- There were large number of importers who had purchased the DEPB scrips in the market sold by the traders and these scrips were originally sold by the Exporter M/s. Bilwa Labs who had fraudulently obtained these scrips. The fraudulent nature of the Scrips is not in dispute, the only dispute is whether the purchasers of these scrips who imported goods debiting these scrips were also not eligible for the benefit. This matter stands settled in larger number of cases and the Supreme Court of India in the case of Munjal Showa Ltd. Versus Commissioner of Cus. & C. EX. [2022 (9) TMI 1076 - SUPREME COURT] observed that the duty liability due to availing benefits against forged/fake DEPB Scrips upheld. Moreover, as rightly stated by the Revenue, this Tribunal in the case of M/s. ITC Filtrona Ltd. [2024 (10) TMI 577 - CESTAT BANGALORE] held that “We do not find any reason to interfere with the impugned order as far as the demand of duty is concerned. However, since the appellants were not aware of the fact that the goods imported by them were based on the fraudulently obtained DEPB scrips, the question of imposing penalty on them does not arise. Accordingly, we set aside the penalty”. Conclusion - i) The duty demands and interest for the extended period upheld, emphasizing that fraud vitiates everything, rendering the DEPB scrips void ab initio. ii) Penalties imposed on the appellants are set aside, as they are not aware of the fraud at the time of purchase. Appeal allowed in part. ISSUES PRESENTED and CONSIDEREDThe core legal issues considered in this judgment are:Whether the appellants are eligible for the benefit of duty debit on DEPB scrips obtained fraudulently by the exporter, M/s. Bilwa Labs.Whether the appellants, who purchased the DEPB scrips in good faith from the open market, can be held liable for duty demands due to the fraudulent nature of the scrips.Whether the extended period of limitation for duty demands is applicable in this case.Whether penalties imposed under Section 114A of the Customs Act, 1962, are justified against the appellants.ISSUE-WISE DETAILED ANALYSIS1. Eligibility for Duty Debit on Fraudulently Obtained DEPB ScripsThe appellants argued that they purchased the DEPB scrips from the market under a bona fide belief of their genuineness, verified through the Directorate-General of Foreign Trade's (DGFT) website. They contended that the scrips were registered and validated by customs authorities, and there was no allegation of fraud against them. They relied on precedents such as Leader Valves Ltd and Pee Jay International, where courts ruled in favor of purchasers acting in good faith.The court, however, emphasized that fraud vitiates everything, rendering the DEPB scrips void ab initio. The Tribunal referenced the Supreme Court's decision in Munjal Showa Ltd., affirming that benefits availed through fraudulent scrips cannot be retained, regardless of the purchaser's knowledge of the fraud.2. Liability of Purchasers for Duty DemandsThe appellants maintained they were not party to the fraud and had exercised due diligence in verifying the scrips' validity. They cited cases where courts did not hold purchasers liable when they acted in good faith. However, the Tribunal held that the fraudulent nature of the scrips invalidated any benefits derived from them, as established in Friends Trading Co. and Eastern Silk Industries Limited. The court concluded that the appellants, as beneficiaries of the fraudulent scrips, were liable for duty demands.3. Applicability of Extended Period of LimitationThe appellants argued that the demand was time-barred, as they had acted without collusion or suppression of facts, citing Vallabh Design Products and Indian Acrylics Ltd. However, the Tribunal, aligning with the Supreme Court's ruling in Munjal Showa Ltd., held that fraud justifies invoking the extended period of limitation under Section 28 of the Customs Act, 1962.4. Imposition of PenaltiesThe Tribunal acknowledged the appellants' lack of knowledge regarding the fraud and set aside the penalties under Section 114A, consistent with the Tribunal's decision in ITC Filtrona Ltd. The court distinguished between duty liability and penalty imposition, noting that the latter depends on the purchaser's knowledge of the fraud.SIGNIFICANT HOLDINGSThe Tribunal upheld the duty demands and interest for the extended period, emphasizing that fraud vitiates everything, rendering the DEPB scrips void ab initio.Penalties imposed on the appellants were set aside, as they were not aware of the fraud at the time of purchase.The Tribunal relied on the Supreme Court's decision in Munjal Showa Ltd. to affirm that benefits obtained through fraudulent means cannot be retained, regardless of the purchaser's knowledge.The extended period of limitation was deemed applicable due to the fraudulent nature of the scrips, as supported by precedents like Friends Trading Co. and Eastern Silk Industries Limited.The appeals were partially allowed, confirming the duty demand with interest while setting aside the penalties.