2025 (9) TMI 764 - AT - Customs

SEZ unit's imported polished diamonds used for authorised operations and export; no duty or Sections 111(m)/111(o) liability

M/s Sterling Ornaments Pvt. Ltd. Versus Commissioner, Customs, Noida

CESTAT ALLAHABAD - AT held that SEZ unit's imported polished diamonds were used for authorised operations and subsequent export, so customs duty liability ... Alleged mis-declaration of goods imported - Polished Diamonds (71023990) raw materials - unit is eligible for exemption from payment of Custom duties under Section 26 of the SEZ Act, 2005 or not - revenue neutrality - it is a case of the Appellants that right from the beginning, Appellants have been submitting that it was case of bona fide mistake - Confiscation - redemption fine - penalty - HELD THAT:- The units in SEZ can clear the goods in DTA upon payment of Customs duty. Otherwise the goods are to be exported only. Here in the present case, the imported goods have entered into SEZ and have been used for authorised operations and thereafter the manufactured goods have been exported. When the imported goods by SEZ unit are not liable to duty, no violation can be attributed under Section 111(m). Further, Section 111(o) is also not attracted inasmuch as the imported goods have been used in the manufacture of export goods and the same have been exported also. Therefore, it is incorrect to contend that the condition of import has not been observed by the Appellants. Penalty of Rs. 8,00,000/- has been imposed under Section 114AA of the Customs Act, 1962. In para 6.4.3 of the order-in-original, it has been held that the Appellants have knowingly and intentionally mis-declared the quantity, weight and value of the impugned goods. Appellants submit that when the entire SEZ is under Customs control, there is no question of diversion of the imported goods inasmuch as all goods to be cleared from SEZ are either exported or cleared for home consumption upon payment of customs duty. In identical provisions of Rule 26 of the Central Excise Rules, 2002, a question arose before the Larger Bench of the Tribunal whether penalty under Rule 209A/ 26 can be imposed on a body corporate. It has been held by the Larger Bench of the Tribunal in the case of Steel Tubes of India Ltd. v. Commissioner [2006 (10) TMI 146 - CESTAT, NEW DELHI [LB]] that 'The corporation/company, stands to no gain out of misdemeanors of the individuals i.e. Board of Directors. In the eyes of law, the corporate entity being a person would be held responsible for the act of the natural persons. But in order to punish the guilty individuals, the veil of corporate entity had to be lifted to understand the correct picture. Precisely for these reasons only the provisions of Rule 209A came in to statute, in order to punish the guilty acting behind the veil of corporation/company.' There are two clauses of Section 112. Clause (a) or clause (b) separated by the word ‘or’. It per force follows that both are independent of each other. Therefore, the adjudicating authority should have specified how much penalty has been imposed under Section 112(a) and how much under Section 112(b). Combined penalty is not sustainable. Further Section 112(b)(ii) has a proviso which indicates that there should be a determination of duty under Section 28(8) and interest under Section 28AA. Since there is no determination of duty, Section 112(b)(ii) is not attracted. Furthermore, Section 112(b) again mentions knowledge. The appellants being a Company cannot have knowledge as explained earlier in the case of penalty under Section 114AA. Hence Section 112(b) is also not applicable. Even furthermore, penalty under Section 112(b) is subject to Section 114A which provides for penalty for short levy or non-levy of customs duty. It per force follows that there should be a determination of short levy or non-levy of customs duty. There is no such determination in the impugned order. For that reason also, penalty under Section 112(b) is not imposable. The goods manufactured out of imported raw material were to be exported, the issue becomes revenue neutral. In the case of Palmon Exports vs. CC [2011 (6) TMI 562 - CESTAT, AHMEDABAD], Tribunal set aside the confiscation of goods where the goods under import were mis-declared by the SEZ unit holding that violation is too technical and procedural and there is no revenue implication and that Appellant is not gaining anything by making any mis-declaration. The redemption fine of Rs.2,00,000/- and penalty of Rs.10,500/- under Section 112(a) & b(ii) and penalty of Rs.8,00,000/- imposed under Section 114AA of the Customs Act, 1962 cannot sustain and is accordingly set aside - Appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the imported diamonds brought into a Special Economic Zone (SEZ) and thereafter used for manufacture and exported are liable to confiscation under Section 111(m) and/or Section 111(o) of the Customs Act for mis-declaration of quantity/weight/value. 2. Whether penalty under Section 114AA of the Customs Act (penalty for use of false and incorrect material by a person 'knowingly or intentionally') is imposable on a company (an artificial/juristic person) where knowledge or intention is attributed to the corporate entity. 3. Validity of penalties imposed under Section 112(a) and Section 112(b)(ii) of the Customs Act where (a) the adjudicating authority did not specify the apportionment between clauses (a) and (b), (b) no determination of duty/short levy was made under Section 28/114A, and (c) company knowledge is implicated. 4. Whether the facts (bona fide/clerical error, export of manufactured goods, SEZ exemption from customs duties) render the exercise of confiscation/penalty powers inappropriate because the case is revenue-neutral or involves merely technical/procedural violation. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Confiscation under Section 111(m) and 111(o) Legal framework: Section 111(m) condemns goods that 'do not correspond in respect of value or in any other particular with the entry made under this Act' to confiscation; Section 111(o) condemns goods exempted subject to a condition where the condition is not observed unless sanctioned by the proper officer. SEZ Act Section 26(1) grants exemption from customs duty on goods imported into an SEZ for authorised operations; SEZ Rules (Rule 29(2)(a)) permit transfer of goods into SEZ where BOE is not assessed, with subsequent mandatory appraisement for diamonds. Precedent treatment: Tribunal authorities have recognised that where imported goods are used for authorised operations within SEZ and goods are exported, revenue implication may be absent and strictly technical irregularities do not necessarily justify confiscation. Interpretation and reasoning: The Court examined the chronology: Bill of Entry was registered but assessment/appraisement was pending; diamonds were transferred into SEZ under the endorsed BOE consistent with SEZ/Customs practice for diamonds which require 100% appraisement at SEZ. The alleged mis-declaration arose from discovery of a revised supplier invoice indicating larger quantity; appellant explained bona fide clerical error caused by amendment of overseas purchase order and submitted evidence of export of manufactured goods. Given SEZ statutory exemption (no customs duty payable when imported goods are used for export manufacture and export occurs) there was no actual revenue loss. Where goods are not liable to duty by reason of SEZ entitlement and have been used for authorised operations and exported, the condition in Section 111(o) is not breached in substance; Section 111(m) purpose - to protect revenue - is not served where there is no duty implication. Ratio vs. Obiter: Ratio - Confiscation under Section 111(m)/(o) cannot be sustained where imported goods into an SEZ have been used for authorised operations and the manufactured goods have been exported, rendering the transaction revenue-neutral; technical or procedural mis-declaration, absent revenue prejudice or diversion, does not automatically attract confiscation. Obiter - factual relevance of pending appraisement and SEZ procedural practice for diamonds as explanatory context. Conclusion: Confiscation under Sections 111(m) and 111(o) is not sustainable on the facts; confiscation set aside. Issue 2 - Applicability of Section 114AA to a Company (Knowledge/Intention) Legal framework: Section 114AA penalises any 'person knowingly or intentionally' making or using false/incorrect material, with penalty up to five times the value of goods. Question arises whether an artificial person (company) can be said to 'know' or 'intend'. Precedent treatment: Tribunal and appellate decisions interpreting similar provisions (Rule 209A/Rule 26 of Central Excise Rules and related authorities) have held penalties framed in terms of knowledge or intention attach to natural persons; a company, being an artificial juristic person, does not possess a mind of its own distinct from natural persons operating it, and such penalties are therefore not properly levied on the corporate entity unless corporate veil is pierced to attribute conduct to individuals. Interpretation and reasoning: Section 114AA's phrase 'knowingly or intentionally' denotes a mental element that is inherently personal. The Court applied the rationale of prior decisions that identical or pari materia expressions cannot reasonably be read to create a mental state in an artificial entity. While a company may be held vicariously liable in some contexts, penal provisions predicated on subjective knowledge/intention require identification of culpable natural persons. The Board/employees' minds cannot be equated to corporate knowledge for the purposes of Section 114AA without explicit statutory imputation or lifting of the corporate veil. Ratio vs. Obiter: Ratio - Section 114AA is not imposable on a company qua company because a juristic/artificial person cannot possess the subjective mental element ('knowingly or intentionally') required by the provision; penalty under Section 114AA must be confined to natural persons whose knowledge/intention can be demonstrated. Obiter - illustrations from Central Excise jurisprudence were applied by analogy. Conclusion: Penalty under Section 114AA set aside as unsustainable against the company; identical reasoning mitigates imposition on corporate entity absent proven individual culpability. Issue 3 - Validity and form of penalties under Section 112(a) and 112(b)(ii) Legal framework: Section 112(a) penalises acts/omissions rendering goods liable to confiscation; Section 112(b) penalises persons who deal with goods they 'know or have reason to believe' are liable to confiscation; sub-clause (ii) prescribes penalties for dutiable goods subject to provisions like Section 114A (short levy) and requires determination of duty (Section 28/28AA) for assessment. Precedent treatment: Established principle that penalties must be specifically and properly quantified and founded on legal preconditions (e.g., determination of duty where required) and that subjective knowledge under Section 112(b) implicates the same difficulties for a company as under Section 114AA. Interpretation and reasoning: The Court noted that clauses (a) and (b) are independent; the adjudicating order failed to specify the quantum attributable to each clause, rendering a combined penalty unsustainable. Further, Section 112(b)(ii) presupposes a finding of duty short-levy and interest (Section 28/114A) which was not undertaken; without a determination of duty the sub-clause cannot be invoked. Additionally, the knowledge element in Section 112(b) suffers the same infirmity when levied against a company without identification of culpable natural persons. Consequently Section 112(b) is not attracted on the record and the penalty as imposed is procedurally and substantively defective. Ratio vs. Obiter: Ratio - Penalty must be imposed in accordance with the correct statutory limb, with explicit apportionment between independent clauses; Section 112(b)(ii) requires antecedent duty determination and a finding of knowledge which cannot be imputed to a company absent proof of natural persons' mens rea. Obiter - procedural requirement to specify basis and calculation of penalty emphasised. Conclusion: Penalty imposed under Section 112(a) & (b)(ii) is unsustainable in the form recorded and therefore set aside; the order lacked necessary specification and statutory preconditions for Section 112(b)(ii). Issue 4 - Effect of bona fide/clerical error and revenue neutrality Legal framework: Principles permit leniency where violations are technical/procedural, bona fide, and without revenue prejudice; SEZ statutory scheme provides duty exemption when goods are imported for authorised operations and exported. Precedent treatment: Tribunals have set aside confiscation/penalties in SEZ mis-declaration cases where violation was technical and there was no revenue implication. Interpretation and reasoning: The appellant produced contemporaneous correspondence showing revised overseas purchase order and invoice leading to apparent mis-declaration, claimed bona fide human error, and demonstrated that goods manufactured from the imported diamonds were exported before adjudication, creating no revenue shortfall. Given SEZ regulatory architecture and the department's control over goods in SEZ, diversion was not established. Where the violation is technical and the record shows export and no revenue loss, invoking confiscation/harsh penalties is disproportionate. Ratio vs. Obiter: Ratio - Bona fide clerical errors and absence of revenue prejudice disentitle the revenue to seek confiscation and heavy penalties; consideration of proportionality and actual prejudice is material. Obiter - factual weight accorded to contemporaneous emails and export documentation. Conclusion: The application of confiscation and monetary penalties in the circumstances was disproportionate; the tribunal allowed the appeal and set aside the confiscation/penalties specified in the order insofar as they failed statutory, evidentiary, or proportionality tests, granting consequential relief as per law.