2025 (10) TMI 1082 - AT - Customs

Duty upheld under Section 28(4) for scrip value manipulation; mandatory penalty under Section 114A sustained, appeal dismissed

CESTAT upheld the duty demand under section 28(4) of the Customs Act, finding that the appellant fraudulently manipulated scrip values to evade customs ... Fraudulently manipulating the value of the scrips showing thereby much higher value of the scrips than what was issued by the DGFT - willful statement or suppression of facts or not - invocation of extended period of limitation - Demand of customs duty u/s 28(4) of the Customs Act, 1962 with penalty of Rs. 25 lakhs imposed u/s 114AA and section 114A of the Customs Act, 1962 - HELD THAT:- The submission of the learned counsel for the appellant is that since the appellant had paid some amount to an intermediary through whom it had purchased the value of the scrip, it should not be required to pay customs duty again. This submission cannot be accepted. Merely because the appellant paid some amount to someone in the syndicate of this fraud, it does not mean that the appellant paid customs duty to the exchequer. The appellant had clearly evaded customs duty and profited from the fraud. It is a well established legal principle that fraud vitiates everything. There are no force in the submission of the appellant that it should not be required to pay customs duty or that the demand could not be made on the appellant invoking extended period of limitation under section 28 (4). The demand of duty of customs needs to be sustained. Mandatory penalty under section 114A is imposable on the same grounds as for invoking extended period of limitation. Therefore, the penalty also needs to be upheld. As far as the penalty under section 114AA is concerned, it has already been set aside by the Commissioner (Appeals) in the impugned order and there is no appeal by the Revenue against it. The issue has attained finality to the extent. The impugned order is upheld - appeal dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether demand of customs duty under section 28(4) can be sustained against an importer who cleared goods by utilising DEPB scrips whose values were fraudulently inflated in the Customs EDI system. 2. Whether the extended period of limitation under section 28(4) is invokable where non-payment/short payment of duty resulted from third-party manipulation of scrip values in the EDI system. 3. Whether mandatory penalty under section 114A is imposable where duty is recovered under the extended period (section 28(4)) on account of fraud in relation to DEPB scrip utilisation. 4. Whether penalty under section 114AA is maintainable against an importer in the absence of evidence of knowledge of forgery or direct involvement in the fraud. 5. Standard of care or verification expected from an importer who purchases and uses DEPB/DEEC scrips through intermediaries - whether mere payment to an intermediary absolves the importer of liability for unpaid customs duty. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Sustainment of demand under section 28(4) where DEPB scrip values were fraudulently inflated in Customs EDI Legal framework: Section 28(4) permits recovery of duties notwithstanding the normal period of limitation where non-payment or short payment of duty is by reason of collusion or any willful mis-statement or suppression of facts; the Customs Act provides for assessment/recovery where duty has been evaded. Precedent Treatment: The Tribunal considered earlier decisions upholding recovery in cases where scrips were fraudulently utilised by manipulating EDI entries; those decisions were treated as applicable and followed. Interpretation and reasoning: The Tribunal found undisputed facts that the scrip was issued by the trade authority for a limited amount, its value was fraudulently inflated in Customs EDI (about fifty-fold), and the importer cleared goods using the inflated value. The importer neither purchased the scrip from the recorded owner nor verified the scrip's existence or value and did not contact the owner. The Tribunal held that mere payment to intermediaries within a syndicate does not equate to payment of customs duty to the exchequer. The importer thereby profited from the fraud and effectively evaded duty. Ratio vs. Obiter: Ratio - where an importer uses fraudulently inflated DEPB scrip values to clear goods and has not taken steps to verify genuineness/ownership, duty demand under section 28(4) is sustainable. Obiter - commentary that payment to intermediaries in a fraud network is insufficient to discharge duty liability. Conclusion: The demand of duty under section 28(4) against the importer is upheld. Issue 2 - Invoking extended limitation (section 28(4)) where manipulation occurred in third-party systems Legal framework: Extended period available when non-payment/short payment is due to collusion or willful mis-statement/suppression; doctrine allows recovery where fraud vitiates transactions. Precedent Treatment: Tribunal relied on earlier authorities upholding extended period for similar EDI-manipulation schemes; those authorities were followed. Interpretation and reasoning: The Tribunal concluded that the fraudulent enhancement of scrip values in the Customs EDI system and the importer's failure to verify or contact the recorded scrip owner amounted to conduct that justified invoking section 28(4). The importer's lack of enquiry and the resultant benefit from the fraud meant the extended period applied. Ratio vs. Obiter: Ratio - extended limitation under section 28(4) applies where an importer benefits from fraud in EDI scrip manipulation and has not exercised due verification; Obiter - factual emphasis that passive acquisition of scrips via intermediaries does not negate applicability of section 28(4). Conclusion: Invocation of the extended period under section 28(4) is justified and the demand is not time-barred. Issue 3 - Imposability of mandatory penalty under section 114A when extended period is invoked Legal framework: Section 114A prescribes mandatory penalty where extended period of limitation is invoked for recovery of duty; penalty grounds correspond to those supporting extended limitation. Precedent Treatment: Tribunal followed prior decisions treating mandatory penalty under section 114A as imposable on the same grounds that justify invoking extended limitation. Interpretation and reasoning: Given the Tribunal's conclusion that the extended period applied because of fraudulent enhancement of scrip values and the importer's failure to verify/ascertain genuineness, the mandatory penalty under section 114A is properly attracted. The importer's conduct showed no minimal effort to confirm validity; therefore the statutory penalty follows. Ratio vs. Obiter: Ratio - mandatory penalty under section 114A is imposable where the facts justify invoking section 28(4); Obiter - analysis of sufficiency of verification steps expected from importers. Conclusion: Penalty under section 114A is upheld. Issue 4 - Maintainability of penalty under section 114AA absent evidence of knowledge or direct involvement Legal framework: Section 114AA contemplates penal consequences for specific culpable conduct (fraud/forgery/knowledge); mens rea or knowledge may be relevant to sustain that particular penalty. Precedent Treatment: The Commissioner (Appeals) had set aside penalty under section 114AA due to absence of evidence of the importer's knowledge of forgery; Revenue did not appeal that relief and the point was treated as final. Interpretation and reasoning: The Tribunal noted the Commissioner (Appeals)'s factual finding that there was no evidence of the importer's knowledge of forgery of the scrip license and that, accordingly, the penalty under section 114AA stood set aside. As Revenue did not challenge that finding, the issue attained finality. Ratio vs. Obiter: Ratio - where there is no evidence of knowledge or direct participation in forgery, penalty under section 114AA may be unsustainable; Obiter - no broader pronouncement on evidentiary thresholds beyond the present facts. Conclusion: Penalty under section 114AA is not sustained in this matter and the appellate decision setting it aside is final (no appeal by Revenue). Issue 5 - Standard of care/verification required from importer using DEPB scrips purchased through intermediaries Legal framework: Importers are expected to exercise reasonable care to ensure validity of instruments relied upon to claim duty exemptions; general principle that fraud vitiates transactions applies. Precedent Treatment: Tribunal relied on prior authorities which treated lack of due enquiry/verification by importers as culpable conduct supporting recovery and penalties. Interpretation and reasoning: The Tribunal emphasised that the importer neither verified the scrip ownership nor its face value, nor contacted the recorded owner, and therefore took no reasonable steps to ensure the instrument's validity. Payment to intermediaries within a fraudulent syndicate was insufficient to treat the importer as having discharged duty obligations. The maxim 'fraud vitiates everything' was applied to deny the importer protection from recovery. Ratio vs. Obiter: Ratio - importers must exercise basic verification of DEPB scrip validity and ownership before utilising them; failure to do so that results in benefit from fraud supports duty recovery and penalties (as in Issues 1-3). Obiter - practical suggestions on minimal verification steps were noted but not exhaustively laid down. Conclusion: Importer's failure to verify the scrip or contact its recorded owner constituted lack of due care, justifying duty recovery and penalties under the Act. Interrelation and final determination Cross-reference: Issues 1-3 are interlinked - the fraudulent inflation of scrip values in the Customs EDI system (Issue 1), and the importer's failure to verify (Issue 5), together justify invocation of extended limitation (Issue 2) and imposition of mandatory penalty under section 114A (Issue 3). Issue 4 is distinct and was resolved in favour of the importer on facts (no evidence of knowledge), and that relief was not appealed. Final conclusion: The Tribunal upheld the demand of customs duty under section 28(4) and the mandatory penalty under section 114A, while noting that the penalty under section 114AA had been set aside by the lower appellate authority and was not appealed by the Revenue; the appeal by the importer was dismissed.