2025 (7) TMI 1015 - AT - Customs

Chief Commissioner violated natural justice by rejecting customs compounding applications without hearing under Rule 4

CESTAT Mumbai disposed of appeals against dismissal of compounding applications under Customs (Compounding of Offences) Rules, 2005. The Chief ... Dismissal of common compounding application filed by the appellants herein u/r 4 (3) of the Customs (Compounding of offences) Rules, 2005 without giving any opportunity of hearing to the appellants - violation of principles of natural justice - HELD THAT:- The issue of maintainability of appeal under Section 35B of Central Excise Act, 1944 (which, as noted, is pari material with section 129A of Customs Act, 1962) against the order of compounding authority in a compounding application under the Central Excise (Compounding of Offences)Rules, 2005 r/w. Section 9A of the Central Excise Act, 1944 was deliberated by the Hon’ble High Court in Girish B. Mishra [2013 (6) TMI 179 - GUJARAT HIGH COURT] and issue was raised by revenue before the Hon’ble High Court whether an order passed by the Chief Commissioner on an application for compounding of offence could be construed as an order passed by the ‘’Adjudicating Authority’ as defined u/s. 2(a) of the Central Excise Act, 1944. In the instant appeals, the request for compounding, sought by the Appellants by invoking the statutory provisions of Section 137(3) of the Customs Act, 1962 prior to the institution of prosecution, was summarily denied without even the rudimentary step of calling for a report from the Reporting Authority as mandated by Rule 4(1) ibid. The learned Chief Commissioner has rejected the application under 2nd proviso to Rule 4(3) ibid categorizing it as premature/inadmissible, crucially without even granting any opportunity of hearing to the appellants which is in direct contravention of the clear mandate of first proviso to Rule 4(3) ibid. If the intention was to reject the application, an opportunity of hearing is an indispensable prerequisite - it is not able to fathom how the learned Chief Commissioner could bypass the mandatory requirement of Rule 4(1) and directly proceed to Rule 4 (3), and further, how he could jump directly to 2nd proviso to Rule 4(3) without even considering the 1st proviso, thereby passing the impugned order without granting any hearing whatsoever to the Appellants. An identical issue namely the rejection of compounding application by relying on the 2nd proviso to Rule 4(3) ibid being premature and inadmissible due to the non-determination of duty/ fine/penalty, had been raised before the Hon'ble Bombay High Court in lmran Latif Shirgawkar v. DRI, Mumbai [2019 (10) TMI 26 - BOMBAY HIGH COURT]. In that case, the Hon’ble High Court while allowing the Petition filed by the Petitioner therein held that ‘No bar on filing an application for compounding before issuance of show cause notice or adjudication thereof is contemplated in the Act. The application for compounding is restored to the file of the Chief Commissioner of Customs, to be taken up for decision afresh, after determination of demand, interest and penalty by the adjudicating authority concerned - appeal disposed off. The primary legal issue considered by the Tribunal was whether the Chief Commissioner, acting as the Compounding Authority under Section 137(3) of the Customs Act, 1962, was justified in rejecting the compounding application without granting the appellants an opportunity of hearing, as mandated by the first proviso to Rule 4(3) of the Customs (Compounding of Offences) Rules, 2005.Another significant issue was the maintainability of the appeals before the Tribunal, given that Section 129A(1) of the Customs Act permits appeals only against orders of the Principal Commissioner or Commissioner of Customs, and the Chief Commissioner's role as compounding authority was questioned in terms of whether it qualifies as an 'adjudicating authority' under the Act. Additionally, the jurisdiction of a Single Member Bench to hear these appeals under Section 129C(4) was contested by the Revenue.On the merits, the question arose whether the rejection of the compounding application on grounds of prematurity and non-payment of duty, fine, penalty, and interest was legally sustainable, especially in light of the statutory scheme permitting compounding applications at any stage, including prior to prosecution or adjudication.Regarding the maintainability of the appeals, the Tribunal analyzed the definition of 'adjudicating authority' under Section 2(1) of the Customs Act, which includes any authority competent to pass any order or decision under the Act, excluding only the Board, Commissioner (Appeals), or Appellate Tribunal. The Chief Commissioner, when acting as Compounding Authority, falls within this definition as it passes orders under the Act. The Tribunal held that the absence of an explicit appeal provision in the Compounding Rules does not negate the statutory right of appeal under Section 129A(1). The Tribunal relied on precedents, notably a decision of the Gujarat High Court, which affirmed that orders passed by the Chief Commissioner on compounding applications are appealable before the Tribunal. This view was supported by subsequent rulings of various High Courts and the Supreme Court's refusal to interfere with such decisions, thereby establishing the maintainability of the appeals.On the jurisdiction of the Single Member Bench, the Tribunal examined Section 129C(4), which restricts single-member disposal of appeals where issues relating directly to the rate or value of duty are involved. Since the present appeals concerned only the rejection of the compounding application as premature and did not involve determination of duty or valuation, the Tribunal concluded that the Single Member Bench had jurisdiction to hear the appeals. This interpretation was consistent with the Supreme Court's ruling in Naveen Chemicals and a coordinate Bench decision of the Tribunal in a similar compounding case, which had not been challenged by the Revenue.Turning to the merits, the Tribunal scrutinized Rule 4 of the Customs (Compounding of Offences) Rules, 2005, which prescribes a detailed procedure for handling compounding applications. The Rule mandates that upon receipt of an application, the Compounding Authority shall call for a report from the reporting authority within one month. Only after receipt of such report can the Compounding Authority allow or reject the application. Crucially, the first proviso to Rule 4(3) requires that no application shall be rejected without giving the applicant an opportunity of being heard, and the grounds of rejection must be stated in the order.In the instant case, the Chief Commissioner rejected the compounding application ex parte, without calling for any report from the reporting authority and without granting any hearing to the appellants. The rejection was based on the second proviso to Rule 4(3), which requires payment of duty, penalty, and interest before allowing the application. However, the Tribunal emphasized that this proviso applies only when allowing the application and does not justify summary rejection without hearing. The first proviso's mandatory requirement of hearing prior to rejection was flagrantly disregarded.The Tribunal noted that the appellants had filed the compounding application prior to the institution of prosecution and before any show cause notice or adjudication had taken place. The appellants had made detailed disclosures regarding the alleged offences and expressed willingness to pay the compounding amount as determined. The Tribunal observed that the compounding authority's assertion that the appellants failed to make full and true disclosure was unsupported by any specific findings or contrary evidence. Moreover, no report from the reporting authority had been obtained to verify such an assertion, rendering the rejection arbitrary and unsustainable.Precedents were cited, including a decision of the Bombay High Court in Imran Latif Shirgawkar v. DRI, which held that there is no bar on filing compounding applications before issuance of show cause notice or adjudication. The Court emphasized that the compounding authority must consider such applications and cannot show disinclination to entertain them. The Tribunal found that the compounding authority in the present case failed to follow this legal position and the procedural safeguards prescribed under Rule 4.The Tribunal also rejected the Revenue's contention that the impugned order was merely an interim order highlighting deficiencies and not a final rejection. The fact that the DRI had relied on the order to oppose the appellants' anticipatory bail applications indicated that the order was treated as a final rejection. The Tribunal further noted that the rejection appeared to be precipitated by the impending hearing of the anticipatory bail applications, indicating undue haste and procedural unfairness.The Tribunal underscored the principle of natural justice as inherent to quasi-judicial proceedings and held that any decision without affording an opportunity of hearing is legally unsustainable. It also referred to the doctrine of judicial discipline, emphasizing that subordinate authorities must follow binding judicial precedents unless stayed or set aside by a competent court. The Revenue had failed to produce any stay or contrary ruling to justify deviation from established precedents.Consequently, the Tribunal set aside the impugned order and restored the compounding application to the file of the Chief Commissioner. It directed that the application be decided afresh after the determination of demand, interest, and penalty by the adjudicating authority, and after affording the appellants an opportunity of hearing. The Chief Commissioner was free to decide the application independently, uninfluenced by the Tribunal's observations on the merits.Significant holdings include the following verbatim excerpt from the Tribunal's reasoning on the mandatory nature of hearing before rejection:'The language of the 1st proviso is plain and unambiguous, that 'application shall not be rejected unless an opportunity has been given to the applicant of being heard...' [emphasis supplied]. Evidently without granting an opportunity of hearing, the application cannot be rejected as per the said proviso.'Further, the Tribunal affirmed the status of the Chief Commissioner as an adjudicating authority for purposes of appeal under Section 129A(1):'The definition of adjudicating authority is manifestly, encompassing 'any authority' which passes 'any order or decision under this Act'. This definition unequivocally includes any order that decides the lis of a party. Consequently the Chief Commissioner in deciding the compounding application filed u/s. 137 (3) of the Customs Act, 1962, undoubtedly falls within the aforesaid definition of 'adjudicating authority'.'Core principles established include:The Compounding Authority must follow the procedural safeguards under Rule 4 of the Compounding Rules, including calling for a report from the reporting authority and granting an opportunity of hearing before rejecting any compounding application.Compounding applications can be filed at any stage, including prior to prosecution or issuance of show cause notice, and cannot be summarily rejected as premature.The Chief Commissioner acting as Compounding Authority qualifies as an adjudicating authority under the Customs Act, and orders passed by such authority are appealable before the Tribunal under Section 129A(1).The Single Member Bench of the Tribunal has jurisdiction to hear appeals where issues relating directly to the rate or value of duty are not involved.Principles of natural justice and judicial discipline require adherence to binding precedents and procedural fairness in quasi-judicial proceedings.Final determinations on each issue were:The appeals against the ex parte rejection of the compounding application were maintainable before the Tribunal.The Single Member Bench had jurisdiction to hear the appeals.The Chief Commissioner's rejection of the compounding application without hearing was contrary to the mandatory provisions of Rule 4(3) and principles of natural justice, and thus unsustainable.The impugned order was set aside, and the matter remanded for fresh adjudication in accordance with law and after affording the appellants an opportunity of hearing.