CESTAT sets aside penalties for export scheme conversion after customs approval found no violation

CESTAT Kolkata set aside penalties imposed under Sections 112(a)(ii) and 114AA of Customs Act, 1962 on appellant for conversion of export Bill of Export from DFIA scheme to DEPB scheme. The tribunal held that Commissioner of Customs (Preventive) had already examined and approved the conversion as proper, finding no violation or mala fide intention. The issuance of Show Cause Notice contesting the approved conversion violated res judicata principle. No false documents were identified for Section 114AA penalty, and no suppression of facts warranted Section 112(a)(ii) penalty. Appeal allowed.

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The core legal questions considered in this appeal revolve around the validity and legality of the conversion of an export Bill of Export from the DFIA (Duty Free Import Authorization) scheme to the DEPB (Duty Entitlement Pass Book) scheme, and the consequent imposition of penalties under the Customs Act, 1962. Specifically, the Tribunal examined whether the appellant obtained the conversion fraudulently or by suppression of facts, whether penalties under Sections 112(a)(ii) and 114AA of the Customs Act were justified, the applicability of Circulars and past departmental communications, and the issue of limitation in issuing the Show Cause Notice (SCN).

First, the Tribunal addressed the legality of the conversion of the Bill of Export from the DFIA scheme to the DEPB scheme. The appellant initially exported goods under the DFIA scheme but later sought to convert the shipping bill to avail benefits under the DEPB scheme. The initial application for conversion was rejected by the Commissioner of Customs (Preventive) via a letter issued by the Assistant Commissioner of Customs (Tech). However, the appellant subsequently filed a fresh application before the Assistant Commissioner of Customs, Krishnanagar Division, which was allowed, resulting in the issuance of a DEPB license.

The Directorate of Revenue Intelligence (DRI) initiated an investigation alleging fraudulent conversion. The Special Investigation Unit (SIU) of the Customs (Preventive) Commissionerate examined the matter in depth and concluded that there was no financial advantage gained by the appellant through the conversion, as the benefit under the DFIA scheme was higher than that under the DEPB scheme. The Commissioner of Customs (Preventive) formally communicated this conclusion to the DRI, effectively closing the matter from the departmental perspective.

The Tribunal observed that the Assistant Commissioner's order allowing the conversion was accepted by the Commissioner of Customs (Preventive) and no appeal was filed against this acceptance. Consequently, the principle of res judicata was invoked, holding that the DRI could not issue a SCN contesting the conversion order once it had been examined and approved by the competent authority. This established that the conversion was legally valid and binding on the department.

Regarding the imposition of penalties, the appellant was penalized under Section 112(a)(ii) for alleged suppression of facts and under Section 114AA for making false statements or fabricating documents. The Tribunal analyzed the applicability of these provisions meticulously. Section 114AA pertains to false statements in documents or fabricated documents, but the Tribunal found no evidence of any such documents filed by the appellant in relation to the conversion or importation. Since the appellant was not involved in the importation process and no false documents were identified, the penalty under Section 114AA was held to be unsustainable and was set aside.

Similarly, the penalty under Section 112(a)(ii) was challenged on the ground that there was no suppression or misstatement by the appellant. The Tribunal noted that the exportation was undisputed and the DEPB license was validly issued and utilized within its validity period. The Hon'ble Apex Court's ruling in Sampat Raj Dugar vs Union of India was cited, which supports the position that no penalty can be imposed when importation occurs during the validity of a license issued under the law. The SIU's recommendation to close the investigation further corroborated the absence of any wrongdoing by the appellant. Therefore, the penalty under Section 112(a)(ii) was also quashed.

The Tribunal also considered the appellant's submissions regarding the applicability of departmental circulars, particularly Circular No. 04/2004, which was later rescinded via Circular No. 36/2010 acknowledging its inconsistency with Tribunal judgments. The reliance on Circular No. 04/2004 to reject the conversion application was found to be misplaced. The Tribunal held that the Board's Circular No. 51/96, which governs conversion applications under Section 147 of the Customs Act, was the relevant legal framework, and the application was returned without proper order-in-original, rendering the rejection invalid.

Another issue raised was the limitation period for issuance of the SCN. The appellant contended that the SCN dated 08.10.2012 was time-barred since the export was made on 14.07.2007, and the statutory five-year limitation period had expired. While the Tribunal did not explicitly rule on limitation, the acceptance of the conversion and the closure of investigation by the Commissioner of Customs (Preventive) implicitly supported the appellant's position that the SCN was not sustainable.

The Tribunal also addressed the question of whether the appellant, as a proprietor of a firm, could be separately penalized. It was noted that the proprietorship firm and the proprietor are not distinct legal entities, and therefore, imposition of separate penalties was improper. Furthermore, the appellant was not an importer, which further negated the applicability of penalties under the relevant sections of the Customs Act.

In conclusion, the Tribunal held that the conversion of the Bill of Export from DFIA to DEPB was legally valid and binding on the department, having been accepted by the Commissioner of Customs (Preventive). The issuance of the SCN and the imposition of penalties under Sections 112(a)(ii) and 114AA were found to be without basis, as there was no suppression, misstatement, or fabrication of documents by the appellant. The principle of res judicata barred re-litigation of the conversion order. The departmental investigation corroborated the absence of any financial benefit or wrongdoing. Consequently, the penalties imposed were set aside.

Significant holdings include the Tribunal's statement: "Once the Ld. Commissioner of Customs (Preventive) has examined and concluded that the conversion from DFIA scheme to DEPB scheme is proper and no appeal has been filed against the same, then, no mala fide intention can be attributed to the appellant for such conversion." Further, the Tribunal affirmed that "the order of conversion passed by the Assistant Commissioner of Customs has been accepted by the Commissioner of Customs (Preventive) as legal and proper and thus, it is binding on the DRI also."

The Tribunal also held that "no penalty is imposable on the appellant under Section 114AA of the Customs Act, 1962" and "the penalty imposed on the appellant under Section 112(a)(ii) is not sustainable." These determinations reinforce the principle that penalties under the Customs Act require clear evidence of wrongdoing, suppression, or false documentation, none of which was established here.

Thus, the appeal was allowed to the extent of setting aside the penalties, and the impugned order was modified accordingly.

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