2025 (6) TMI 1441 - AT - Customs

Foreign entities escape customs penalty due to lack of territorial jurisdiction over overseas companies

Shri Ashok Kharey, CEO, M/s. Maxx Access Ltd. Versus The Commissioner of Customs, Bangalore And Shri Chetan Kharey, Director, M/s. Maxx Access Ltd. Versus The Commissioner of Customs, Bangalore And Smt. Seema Kharey, Director, M/s. Maxx Access Ltd. Versus The Commissioner of Customs, Bangalore

CESTAT Bangalore allowed appeal against penalty imposed under Section 112(a) of Customs Act, 1962 on appellants settled abroad for undervaluation of ... Levy of penalty u/s 112(a) of the Customs Act, 1962 - Personal penalty - territorial jurisdiction - Appellants were settled abroad - undervaluation while importing goods - wilful commission of fraud by deliberately suppressing the value of the imported goods with an intention to evade Customs Duty - admissible evidences or not - HELD THAT:- As per the documents available on record, the Appellant were named in the show cause notice and proceedings were culminated into the impugned order where Adjudication authority imposed penalty. As per the impugned order, it is evident that based on the intelligence report, proceedings were initiated by conducting search in the premises of M/s. Vinayaka Hotel on 08.07.2009. However as per the impugned order, statement of various persons were considered by the Adjudication authority as admissible evidence to impose penalty against the Appellant herein. Further there are strong force in the submission made by Ld Counsel that the provision of Customs Act was not available for the act of omission of a person beyond the Indian territory and only after extending the territorial jurisdiction with effect from 29.03.2018, the Customs Act empowered Respondent to proceed against offences beyond the jurisdiction of the India territory. Further this Tribunal in the matter of M/s. Guru Electronics Singapore Pvt. Ltd., [2008 (9) TMI 808 - CESTAT, BANGALORE] held that the proceedings against the Company which is incorporated abroad cannot be sustained in view of the lack of jurisdiction. Conclusion - In the absence of any admissible evidence, the penalties imposed on the Appellants are unsustainable. Appeal allowed. The core legal questions considered in this appeal revolve around the imposition of penalty under Section 112(a) of the Customs Act, 1962 on individuals who are directors/officers of a foreign company allegedly involved in undervaluation of imported goods. The key issues include: (i) Whether the Appellants, being foreign nationals and directors of a foreign company, fall within the territorial jurisdiction of the Customs Act, 1962 for acts committed outside India; (ii) Whether the penalty under Section 112(a) can be imposed on the Appellants in absence of direct evidence implicating them; (iii) The validity of initiation and continuation of proceedings against the Appellants without proper service of show cause notice or personal hearing; and (iv) The evidentiary value of statements recorded from third parties and their retraction in relation to the Appellants' culpability.The first issue concerns the territorial jurisdiction of the Customs Act, 1962 as it stood during the relevant period. The Appellants argued that the Customs Act's territorial jurisdiction, prior to the 2018 amendment, was limited to Indian territory including territorial waters, and did not extend to acts committed outside India by foreign persons or entities. The Court examined Section 1(2) and Section 2(27) of the Customs Act, 1962, and relied on authoritative precedents including a Supreme Court decision which clarified that Indian statutes generally have territorial operation limited to the country and its territorial waters unless expressly extended beyond. The Court quoted the Supreme Court's reasoning that Indian Parliament lacks authority to legislate for foreign vessels or foreigners beyond Indian territorial limits, and that statutes are ineffective against foreign property and persons outside jurisdiction unless specifically provided otherwise. The Court also referred to Tribunal decisions which held that proceedings against foreign companies incorporated abroad cannot be sustained for lack of jurisdiction. Applying these principles, the Court concluded that the Customs Act did not empower authorities to proceed against the Appellants, foreign directors, for alleged offences committed outside India during the relevant period.The second issue relates to the imposition of penalty under Section 112(a) of the Customs Act on the Appellants. The adjudication authority imposed penalty based on statements recorded during investigation, including statements from the Appellants during short visits to India unrelated to the import transactions under scrutiny, and statements from third parties such as partners and accountants of the importer. The Appellants contended that these statements were not connected to the alleged undervaluation, were retracted, and there was no positive or corroborative evidence against them. The Court noted that the adjudication authority relied primarily on these statements as admissible evidence to hold the Appellants guilty of willful fraud to evade customs duty. However, the Court found the reliance on such evidence insufficient, especially given the absence of direct evidence and the retraction of statements by key witnesses. The Court also highlighted that the exporter company itself was not issued a show cause notice, only the directors were targeted, which was impermissible in the absence of explicit statutory provision extending liability to officers managing the company.The third issue concerns procedural fairness, specifically the service of show cause notices and opportunity for personal hearing. The Appellants submitted that no show cause notice was served on them, and no intimation regarding personal hearing was provided, resulting in ex parte orders. The Court observed that the proceedings were initiated based on intelligence and investigation but the Appellants, residing abroad, were not afforded the opportunity to respond or be heard. This procedural lapse undermined the validity of the penalty proceedings.In addressing competing arguments, the Revenue defended the penalty imposition by asserting that the adjudication authority had duly considered the evidence and found the Appellants guilty of deliberate suppression of value with intent to evade duty. However, the Court found the Revenue's reliance on statements from unrelated visits and retracted testimonies unconvincing. The Court also rejected the extension of liability to the Appellants as officers of the foreign company without explicit statutory mandate. The Court emphasized the legal principle that jurisdiction and liability must be clearly established and cannot be presumed or extended by implication, especially in cross-border contexts.Based on the above analysis, the Court concluded that the penalties imposed on the Appellants were unsustainable due to lack of territorial jurisdiction, absence of admissible and corroborative evidence, and procedural infirmities. The appeals were allowed accordingly.Significant holdings established in this judgment include the following:'The Indian Parliament therefore has no authority to legislate for foreign vessels or foreigners in them on the high seas. Thus a foreign ship on the high seas, or her foreign owners or their agents in a foreign country, are not deprived of rights by our statutory enactment expressed in general terms unless it provides that the foreign ship entering an Indian port or territorial waters and thus coming within the territorial jurisdiction is to be covered.''Without anything more Indian statutes are ineffective against foreign property and foreigners outside the jurisdiction.'These principles confirm the territorial limitation of the Customs Act prior to its 2018 amendment and underscore that proceedings cannot be sustained against foreign persons for acts committed outside Indian territory absent explicit statutory provisions.The Court also reaffirmed that liability under Section 112(a) cannot be extended to officers or directors of foreign companies in the absence of explicit statutory language, and that reliance on retracted or unrelated statements is insufficient to impose penalties.In sum, the Court's final determinations were that (i) the Customs Act, as applicable at the relevant time, did not confer jurisdiction over foreign directors/officers for acts committed outside India; (ii) the penalty imposed under Section 112(a) on the Appellants was not sustainable for lack of evidence and procedural lapses; and (iii) the appeals were allowed with consequential relief.