2025 (10) TMI 744 - HC - Customs

Tribunal cannot cancel bank guarantee or reduce statutory penalties; Section 117 Customs Act and 2010 Regulations restored

Karnataka HC held that, on facts identical to an earlier judgment, the CESTAT's order was set aside to the extent that penalties under the 2010 ... Liability for penalty under Section 117 of the Customs Act 1962 and also under Regulation 14 of the Courier Imports and Exports (Electronic Declaration & Processing) Regulation, 2010 - Tribunal could interfere and set aside a validity executed contract like Bank Guarantee which are guided by the provisions of the Indian Contract Act or not - power of Tribunal to exercise discretion on the ground of equity and reduce the penalty which is not provided in law - HELD THAT:- In identical facts, reliance placed in judgment in M/S. PIGEON INTERNATIONAL [2025 (10) TMI 686 - KARNATAKA HIGH COURT], where some of the parties involved in the alleged transactions are also the same. Learned counsel for the respondent has reiterated the contentions raised by learned counsel in CSTA No.7/2024. In CSTA No.7/2024, after detailed consideration of the contentions urged, the order of the CESTAT is modified only to the extent of restoring the penalty imposed under the 2010 Regulations and the penalty under Section 117 of the Act. As the facts and the legal issues are identical to the above-referred case, it is deemed appropriate to dispose of this appeal in terms of the judgment in CSTA No.7/2024. Substantial questions of law are answered in favour of the appellant and against the respondent - order of CESTAT set aside - appeal allowed in part. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether respondent is liable to penalty under Section 117 of the Customs Act, 1962 and under Regulation 14 of the Courier Imports and Exports (Electronic Declaration & Processing) Regulations, 2010 for alleged facilitation of mis-declared imports. 2. Whether the Tribunal could interfere with or set aside the validity or enforcement of an independent bank guarantee/bond executed by a financial institution which stipulates payment without demur (issue not finally decided by the Court). 3. Whether the Tribunal could exercise equitable discretion to reduce an otherwise statutorily provided penalty. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Liability to penalty under Section 117 (Customs Act) and Regulation 14 (2010 Regulations) Legal framework: Section 117 of the Customs Act empowers imposition of penalties for contraventions specified by the Act. Regulation 14 of the 2010 Regulations prescribes penalties for violations committed by authorized courier agents under the courier regulatory regime. Regulation 12 and Regulation 13 (revocation and related enforcement of bonds/guarantees) also bear on license-holder obligations and consequences. Precedent Treatment: The CESTAT concluded that the respondent acted only as a facilitator without mens rea and therefore set aside penalties and revocation. The Court examined and applied reasoning from a contemporaneous appellate decision involving identical facts and parties to modify the CESTAT order by restoring the penalties under Regulation 14 and Section 117. Interpretation and reasoning: The Court accepted that the respondent performed functions as an authorized courier agent and that facilitation alone does not automatically negate statutory liability where contraventions under the Act and Regulations are established. Although facts included initial denial and later acknowledgment of import by the ultimate consignor/importer (who paid duty, interest and penalty), the Court held that acceptance of duty etc. by the importer does not preclude imposition of penalties on the license-holder if the statutory contraventions under the Act and Regulations are otherwise made out. The Tribunal's reliance on absence of mens rea and equities to wholly set aside penalty was treated as insufficient to displace statutory penal consequences. Applying the reasoning in the similar disposed appeal, the Court restored penalties of Rs.50,000 under Regulation 14 and Rs.50,000 under Section 117. Ratio vs. Obiter: Ratio - Where an authorized courier agent facilitates customs transactions and the statutory ingredients of violation under the 2010 Regulations and the Customs Act are established, the Tribunal cannot wholly negate statutory penalties merely on the basis that the agent acted as a facilitator or that the importer later paid duty and penalties; statutory liability can subsist. Obiter - Observations about the factual credibility of the importer's initial denial versus subsequent ownership admission are subsidiary factual findings supporting the ratio but not independently determinative of legal principles beyond the statutory interpretation above. Conclusions: The Court answered the substantial question on liability (Issue 1) in favour of the revenue and against the respondent by restoring the penalties under Regulation 14 and Section 117; the CESTAT's complete exoneration on penalty was set aside to this extent. Issue 2 - Power of Tribunal to interfere with an independent bank guarantee/bond executed by a financial institution which stipulates payment without demur Legal framework: Bank guarantees and bonds executed by financial institutions are independent contracts guided by contract law principles, often stipulating unconditional payment obligations. Precedent Treatment: The question was framed as a substantial question of law but the Court determined that this issue did not arise from the impugned CESTAT order and therefore was not decided on merits. Interpretation and reasoning: The Court expressly declined to adjudicate on the competence of the Tribunal to interfere with the validity or enforcement of an independent bank guarantee because the CESTAT order under challenge did not require determination of that specific legal point. The Court therefore left open any broader doctrine as to whether and when a tribunal may set aside or refuse enforcement of an independent guarantee. Ratio vs. Obiter: Obiter - No ratio laid down since the issue was not adjudicated; the non-answer constitutes a procedural ruling that the point did not arise on the facts or issues before the Court. Conclusions: Substantial Question No.2 was held not to arise from the CESTAT order and was not answered. Issue 3 - Whether the Tribunal could exercise equitable discretion to reduce statutory penalty Legal framework: Penalties under the Customs Act and the 2010 Regulations are statutory; tribunals exercise appellate jurisdiction but must apply statutory scheme. Discretionary relief based on equity is constrained where law prescribes penalties and conditions for mitigation or reduction. Precedent Treatment: The CESTAT exercised discretion to wholly set aside penalties on equitable grounds and on findings about absence of mens rea. The High Court, following its approach in a contemporaneous decision with identical facts, treated such equitable reduction as impermissible to the extent of wholly negating penalties where statutory contraventions are made out. Interpretation and reasoning: The Court reasoned that the Tribunal cannot, solely on equitable notions or absence of subjective mens rea, eliminate statutory penalties unless the statutory provisions themselves permit such mitigation or unless the facts do not establish the statutory ingredients. Equity cannot be invoked to contravene or nullify penalties expressly provided by statute where conditions for imposition are satisfied. The Court therefore restored statutory penalties even while recognizing the respondent's role as facilitator. Ratio vs. Obiter: Ratio - A tribunal may not resort to broad equitable discretion to reduce or negate penalties that are provided for by statute where the statutory requirements for imposition of penalties are satisfied; equitable considerations do not supplant statutory mandate. Obiter - Specific factual observations about the respondent's lack of mens rea are explanatory but do not establish a principle permitting elimination of statutory penalties on that basis alone. Conclusions: Substantial Question No.3 was answered in favour of the appellant (revenue) and against the respondent; the Tribunal's exercise of equitable discretion to set aside penalties was rejected to the extent it negated statutorily prescribed penalties, and the penalties under Regulation 14 and Section 117 were restored. Cross-reference The Court disposed of the appeal by applying reasoning announced in a contemporaneous appellate judgment involving identical facts and parties, modifying the Tribunal's order only to the extent of restoring the statutory penalties while otherwise affirming the CESTAT's factual findings where not inconsistent with the recovery of penalties. No costs were awarded.