Customs duty liability on REP licence transferee quashed; exemption upheld, section 108 statements invalid without section 138B compliance

CESTAT set aside the Commissioner's order fastening customs duty liability on the appellant, a transferee of REP licences originally issued to third parties. Relying on Apar Industries, the Tribunal held that where the licensing authority has actually issued the REP/DEPB licences, exemption cannot be denied to the transferee during the validity of such licences even if they were procured by the original holder on the basis of fraudulent documents, so long as the licences themselves are not forged. CESTAT further held, following Surya Wires, that statements recorded under section 108 of the Customs Act could not be relied upon to allege complicity in fraud, as the procedure under section 138B, including examination and opportunity for cross-examination, was not followed. The appeal was allowed.

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ISSUES PRESENTED AND CONSIDERED

1. Whether an importer/transferee who purchases and uses Replenishment (REP) licences that were validly issued by the licensing authority, but which were obtained by the original licensee on the basis of forged/fabricated documents, can be fastened with customs duty liability when the licences themselves are not forged.

2. Whether statements recorded under section 108 of the Customs Act can be relied upon in adjudication to prove that the purchaser/transferee was party to fraud where the procedural safeguards of section 138B of the Customs Act were not followed.

ISSUE-WISE DETAILED ANALYSIS - ISSUE 1: LIABILITY OF PURCHASER OF VALIDLY ISSUED BUT FRAUDULENTLY OBTAINED REP LICENCES

Legal framework: The relevant rule derives from the Export-Import policy provision permitting freely transferable REP licences and the general principle that licences issued by the competent authority and valid at the time of import govern entitlement to exemption. Statutory and common-law principles treat licences obtained by misrepresentation as voidable, not automatically void, unless and until avoided by the competent authority.

Precedent Treatment: The Court relied on earlier Tribunal and superior court decisions which distinguish between (a) licences/scrips that are genuinely issued by the competent authority (even if the issuing process involved fraud by the original applicant) and (b) licences/scrips that are themselves forged (i.e., never issued by the authority). Authorities examined include decisions holding that genuine licences valid on the date of import confer entitlement to exemption even if later cancelled, and that a licence obtained by fraud is voidable and effective until lawfully avoided. Decisions treating forged licences (not issued by authority) as giving no entitlement were distinguished.

Interpretation and reasoning: The Court accepted the distinction that if the licensing authority in fact issued the REP licences (i.e., they are genuine documents) then imports effected under such licences during their validity cannot be treated as imports without licence; subsequent cancellation does not retrospectively render the prior imports illegal. In contrast, forged licences (never issued by authority) afford no protection. The decisive criterion is the existence and validity of the licence at the time of import and presentation to customs, not whether the original exporter used forged documents to obtain the licence. The Court also noted precedents holding that in absence of evidence that the transferee was aware of or participated in the fraud, duty cannot be recovered from a bona fide transferee.

Ratio vs. Obiter: Ratio - Where REP licences were validly issued by the competent authority and were presented at import, exemption cannot be denied to a bona fide transferee merely because the original licensee had obtained the licence by fraudulent/substantively false documents; the licence is voidable and operates until lawfully avoided. Distinguished ratio - forged licences (never issued) provide no entitlement. Observations relying on comparative case-law (e.g., considerations of factual difference with cases involving forged documents or forged licences) are explanatory obiter supporting application of the ratio.

Conclusion: The Court concluded that duty could not be imposed on the purchaser/transferee where the REP licences were not forged and were valid at the time of import; hence the demand based on licence invalidity could not be sustained as to such purchaser/transferee.

ISSUE-WISE DETAILED ANALYSIS - ISSUE 2: ADMISSIBILITY AND RELIANCE ON STATEMENTS RECORDED UNDER SECTION 108 WITHOUT COMPLIANCE WITH SECTION 138B

Legal framework: Section 108 allows officers to summon and record statements during inquiries. Section 138B prescribes that statements recorded under section 108 shall be relevant for proving facts only if the person who made the statement is first examined as a witness before the adjudicating authority, the adjudicating authority forms an opinion that the statement should be admitted in the interests of justice, and the person is made available for cross-examination (subject to limited exceptions such as death or inability to find).

Precedent Treatment: The Court followed Tribunal and High Court decisions that have held the procedures in section 138B to be mandatory: statements taken during investigation cannot be used as evidence in adjudication unless the formal admissibility process in section 138B(1)(b) is complied with. The Court relied on a recent Tribunal analysis which examined analogous provisions in the Central Excise Act and reiterated the necessity of in-adjudication examination and a recorded admissibility opinion before such statements can be relied upon.

Interpretation and reasoning: The Court emphasized the protective purpose of section 138B - to neutralize risks that investigative statements may have been recorded under coercion or compulsion and to ensure opportunity for cross-examination. A plain reading of sub-section (1) and (2) requires that the maker of the statement be examined as a witness before the adjudicating authority and that the authority form a view on admissibility; only then can reliance be placed on the content for proving truth. Failure to follow that procedure renders such statements inadmissible and incapable of supporting a finding that the transferee was party to fraud.

Ratio vs. Obiter: Ratio - Statements recorded under section 108, without subsequent examination of the declarant before the adjudicating authority and formation of an admissibility opinion under section 138B, cannot be relied upon to prove the truth of their contents in adjudication; non-compliance is fatal to reliance on such statements. Observations explaining rationale (risk of coercion, need for cross-examination) are supporting reasoning but integral to the ratio.

Conclusion: The Court held that the statements recorded under section 108 could not be relied upon because the mandatory procedural safeguards of section 138B were not observed; therefore, those statements could not support a finding that the purchaser/transferee was party to the alleged fraud.

OVERALL CONCLUSION

Because (a) the REP licences used by the importer/transferee were not forged and were valid at the time of import, and (b) the investigative statements relied upon were inadmissible for want of compliance with section 138B, the demand of customs duty and imposition of penalties on the purchaser/transferee could not be sustained; the adjudicatory order confirming the demand was set aside.

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