2025 (11) TMI 1737 - AT - Customs

Penalties Quashed for Shipping Line, Employee as Misapplied Section 114 and Vague Findings Violate Natural Justice

M/s. Trans Asian Shipping Services (P) Ltd., Mr. V. Lakshmanan, M/s. Trans Asian Shipping Services (P) Ltd Versus Commissioner of Customs (Preventive), Trichy

CESTAT Chennai allowed the appeals filed by the liner and its employee, setting aside penalties imposed for alleged manipulation of shipping documents and ... Levy of penalties against the Liner and its Employee in relation to exports effected through ICD Salem / ICD Irugur / ICD Rakkiapalayam during various periods - manipulation/falsification of statutory shipping documents to facilitate drawback fraud - issuance of two different Bills of Lading for the very same shipments, as the port of discharge, without any satisfactory explanation as alleged in the Impugned Orders - HELD THAT:- It is found that the Appellants are not beneficiaries of the fraudulent drawback. Further the Exporters named in the IEC have not been apprehended and their statements recorded and later investigation to trace out the supporting manufacture also led the Department to nowhere and such addresses were found to be fake. Further the Appeal records reveal that the banks have confirmed that there is no realisation from overseas in the Exporter’s Account. It is also noted that the impugned Orders suffer from lack of clarity on the findings against each individual and the firm which they represent in these 3 cases. Based on the above findings the penalties imposed in all the three impugned Orders fail to sustain and deserve to be set aside. The Adjudicating authority has traversed beyond the SCN by altering the penal clause by invoking a different sub-section in the impugned order, without issuing a corrigendum or fresh notice. Such alteration amounts to changing the very foundation of the proceedings and violates the principles of natural justice. The Appellant/ noticee is entitled to know the exact clause under which penalty is proposed, so as to defend himself. Therefore, incorrect citation of penal provisions in the SCN, or imposition of penalty under a different provision in the adjudication order without amendment of the SCN, vitiates the impugned order in toto. There are no hesitation in holding that all the three impugned orders have to be vitiated for the additional reason that the Adjudicating Authority has invoked incorrect penal provisions, imposing penalty under Section 114(i) without correlating the statutory ingredients of those clauses with the acts allegedly committed by the Appellants or changing the penalty clause in the impugned Order without putting the Appellant to notice. It is well-settled Law that penalty can be imposed only under the precise statutory provision applicable to the established role, and incorrect citation of a penal section, or application of a provision that does not cover the alleged act, renders the order unsustainable. Neither the penalty imposed on the Appellant u/s 114 (iii) of Customs Act, 1962 nor the penalty imposed on the Appellant under 114(i) ibid is sustainable - Appeal allowed. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether the liner and its employee, by alleged issuance of two different Bills of Lading indicating different ports of discharge for the same consignments, manipulated/falsified statutory shipping documents so as to abet a fraudulent drawback scheme, thereby attracting penalty under Section 114(i)/(iii) of the Customs Act, 1962. 1.2 Whether, on the facts established, the requisite knowledge, intent, or active facilitation by the liner and its employee in relation to undervaluation, fictitious exporters, non-realisation of export proceeds and drawback fraud was proved so as to justify imposition of penalty. 1.3 Whether penalty could validly be imposed under Section 114(i) of the Customs Act, 1962 when the exported goods (textile garments) were neither prohibited nor restricted, and whether the adjudicating authority could impose penalty under a different sub-clause (Section 114(iii)) than that invoked in the Show Cause Notice. 1.4 Whether misquoting or changing the applicable penal provision in the adjudication order, without amending the Show Cause Notice or correlating the statutory ingredients with the alleged acts, vitiated the impugned orders. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 & 2: Alleged falsification/manipulation of Bills of Lading and liability of liner and its employee under Section 114 Legal framework (as discussed) 2.1 The impugned orders proceeded on the premise that issuance of two sets of Bills of Lading with different ports of discharge enabled fraudsters to obtain fraudulent duty drawback, constituting abetment punishable under Section 114(i)/(iii) of the Customs Act, 1962. Interpretation and reasoning 2.2 The Tribunal noted the distinction between a Master Bill of Lading (MBL) issued by the main carrier/liner and a House Bill of Lading (HBL) issued by freight forwarders. The MBL covers the consolidated shipment and is issued to the freight forwarder, while the HBL is a receipt for the individual shipper. 2.3 It was observed that a shipping line or its employee is in the 'final leg' of the shipment, does not participate in stuffing, has no direct access to or knowledge of the detailed contents or valuation in the shipping bills, and its B/L typically bears 'said to contain' and FCL/FCL CY/CY endorsements. The triplicate copy of the shipping bill, and not the MBL, is used for processing a drawback claim. 2.4 On scrutiny of records, the Tribunal found that the liner had issued only one Master Bill of Lading per consignment, with destination clearly shown as Dubai/Jebel Ali; there was no evidence of two Master Bills of Lading for the same consignment. House Bills of Lading showing U.K. as destination were issued by freight forwarders (who were not appellants). The appellants collected freight only up to Dubai and had no service beyond that point. 2.5 The Tribunal found no material to show that the liner or its employee were beneficiaries of the fraudulent drawback, or that any financial gain accrued to them from the alleged fraud. There was no direct link/interface between the appellants and the exporters; no recovery of emails, internal correspondence, instructions regarding routing to avoid customs scrutiny, or evidence of re-issuance of B/Ls at exporters' behest was brought on record. 2.6 Statements of intermediaries (who admitted receiving commission out of drawback) did not name or implicate the appellants. The exporters mentioned in IECs or supporting manufacturers were not traced; their addresses were found fake and no export proceeds were realised. However, none of these circumstances were linked evidentially to the appellants' conduct beyond routine issuance of MBLs. 2.7 The Tribunal also recorded that shipping bills were assessed and LEO granted by customs officers; no examination endorsements were present despite CBIC Circular No. 6/2002-Cus. mandating minimum examination percentages, especially for sensitive destinations like Dubai. The Tribunal found 'serious breach' and 'total systemic failure' on the part of customs examination staff, contributing to non-detection of undervaluation and other irregularities at the threshold. Customs officers, though their statements were recorded, were not made parties to the proceedings. 2.8 The Tribunal further observed that proof of export was not in dispute; goods had reached Dubai and were auctioned there. Diplomatic enquiries only disclosed undervaluation abroad, which should have been detected at the time of examination by customs, not by the liner/carrier. 2.9 The Tribunal found that the department's core allegation against the appellants rested solely on the theory of 'two sets of B/Ls' facilitating fraudulent drawback. Since only one MBL per consignment, with Dubai as destination, was established, and HBLs were issued by freight forwarders and used for drawback processing, the allegation of falsification by the liner stood unsubstantiated. 2.10 Relying also on the ratio in Lohia Travels & Cargo, the Tribunal emphasized that, in the absence of evidence establishing wrongful intent or conscious involvement, penalty cannot be sustained merely on suspicion or on the existence of fraud by others in the chain. Conclusions 2.11 The Tribunal held that there was no evidence of manipulation/falsification of Master Bills of Lading by the liner or its employee, no evidence that they issued two sets of MBLs, and no evidence of their participation, knowledge, or intent in relation to the fraudulent drawback scheme. 2.12 The requisite mens rea and active facilitation necessary to invoke penalty under Section 114 against the liner and its employee were not established. On merits, the penalties imposed in all six appeals were held unsustainable and liable to be set aside. Issue 3 & 4: Correctness of invoking Section 114(i)/(iii), effect of misquoting/altering penal provisions, and adjudication beyond the Show Cause Notice Legal framework (as discussed) 2.13 Section 114(i) of the Customs Act, 1962 (quoted in the judgment) provides for penalty 'in the case of goods in respect of which any prohibition is in force under this Act or any other law for the time being in force'. Section 114(iii) relates to other cases of export contraventions (not reproduced, but referred to in the impugned orders). 2.14 The Tribunal noted that in two impugned orders penalties on the liner and its employee were imposed under Section 114(i) (prohibited goods), and in the third impugned order the Show Cause Notice invoked Section 114(i) but the adjudicating authority imposed penalty under Section 114(iii), justifying this as mere misquoting of the Section, by relying on earlier case law. Interpretation and reasoning 2.15 The Tribunal found that in all three impugned orders the goods exported were textile garments, which are freely exportable as per the Foreign Trade Policy and are neither prohibited nor restricted. Therefore, the foundational ingredient of Section 114(i) (existence of a prohibition on export) was absent; invocation of this sub-clause was incorrect. 2.16 As regards the third impugned order, the Tribunal observed that the Show Cause Notice specifically invoked Section 114(i), while the adjudicating authority imposed penalty under Section 114(iii), thereby traversing beyond the scope of the Show Cause Notice without issuing a corrigendum or fresh notice. 2.17 The Tribunal examined the reliance placed by the adjudicating authority on the decision in Mohan B. Samtani, which held that mere misquoting of the enabling Act did not vitiate proceedings where the underlying prohibition was common under both statutes and no prejudice was caused. The Tribunal distinguished that ratio, emphasizing that in the present case the penal sub-clause itself was changed, and the statutory ingredients of the substituted provision were different from those cited in the notice. 2.18 The Tribunal referred to the Supreme Court decision in Commissioner of C. Ex., Nagpur v. Ballarpur Industries Ltd., highlighting that a Show Cause Notice is the foundation for levy and recovery of duty, penalty and interest, and that a rule or provision not invoked in the notice cannot be subsequently invoked by the adjudicating authority. 2.19 Applying these principles, the Tribunal held that altering the penal clause from Section 114(i) to Section 114(iii) in the adjudication order, without prior notice or amendment of the Show Cause Notice, amounted to changing the very foundation of the proceedings and violated principles of natural justice. The noticee is entitled to know the exact clause under which penalty is proposed in order to frame an effective defence. 2.20 The Tribunal further held that penalty can be imposed only under the precise statutory provision whose ingredients are satisfied by the established facts. Invoking a penal provision inapplicable to the nature of goods (e.g., Section 114(i) when goods are freely exportable) or substituting a different sub-clause at the adjudication stage, without correlating its ingredients to the acts alleged, renders the order unsustainable. Conclusions 2.21 The Tribunal concluded that all three impugned orders were vitiated by incorrect invocation and misapplication of penal provisions under Section 114. In particular: (a) Section 114(i) was wrongly invoked where the goods were not prohibited or restricted. (b) In one case, imposition of penalty under Section 114(iii) despite the Show Cause Notice invoking only Section 114(i) was held to be adjudication beyond the notice, in breach of natural justice. 2.22 On this independent legal ground, apart from failure on merits, the penalties imposed under Section 114(i) and 114(iii) in all six appeals were held to be unsustainable in law, and the impugned orders were set aside.