2025 (11) TMI 1738 - AT - Customs

Penalties Under s.112(b) Customs Act Quashed for Lack of Mens Rea in LCC Paper Roll Imports

M/s. Ragavan Paper Process, M/s. Sri Jagadeesh Paper Cutting Works, M/s. Muthukrishnan Agencies Versus Commissioner of Customs, Chennai

CESTAT Chennai set aside penalties imposed under s.112(b) of the Customs Act on the high sea sellers/job workers connected with imports of LCC paper ... Levy of penalty u/s 112(b) of the Customs Act, 1962 on High Sea Sellers - Appellants had colluded with the importer in evading customs duty by facilitating the Importer to obtain the benefit of exemption under Customs Notification No.12/2002 and Central Excise Notification No.12/2012 on the LCC Paper rolls imported by the Importer on High Sea Sale Seller - reasons to believe - HELD THAT:- The penalty u/s 112(b) is imposable only when positive knowledge or men’s rea is clearly established to show that any person dealing with the goods “knows or has reason to believe' that the goods in dispute are liable to confiscation under Section 111. However, it is seen that the department had not produced any evidence on record to show that the Appellants either as High Sea Sale Sellers or as Job worker was aware of the fraud committed by importer or at any point colluded with the importer to evade duty or to claim undue benefit under the Customs and Central Excise Notification. Further, it is seen the High Sea Sale Sellers (Appellants), had also been engaged as Job Workers for which the imported goods had been sent to the premises of the Appellants from the Customs area and been sent back to importer on completion of the process of cutting. In support of the same, the Appellants had produced sample copies of delivery challan and other documents which were presented before the Adjudicating Authority also. However, the Adjudicating Authority had not arrived at any decision that the documents produced were faulty/deficient but had given only finding to the effect saying that it is an afterthought. It appears that the facts indicate that the appellants are involved in selling paper of varieties to purchases and not only to the owner of ‘Censor’ Magazine. Evidence has been produced by the appellants that the importer has moved the importer paper to the appellants for conversion and the charges were collected for the job work. It is seen that the Appellants cannot be expected to know in advance as to Importer's fraudulent intention when effecting the High Sea Sale. As such, the imposition of penalties under Section 112 (b) cannot be justified in the absence of any evidence to show that the Appellants had aided and abetted the fraud committed by the importer. The penalty levied u/s 112 (b) of the Customs Act, 1962 is not imposable and accordingly, the impugned Order-in-Original to the extent of levying the penalties against the Appellants are set aside. Appeal allowed. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether the imposition of penalty under Section 112(b) of the Customs Act, 1962 on the High Sea Sale sellers was legally sustainable in the absence of proof that they knew or had reason to believe that the goods were liable to confiscation under Section 111. 1.2 Whether the mere facts that (a) the appellants sold the goods on High Sea Sale basis to the importer, and (b) received the goods post-clearance for storage and job work, were sufficient to infer collusion or abetment in the importer's misuse of exemption and duty evasion. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Requirements of Section 112(b) and necessity of knowledge / mens rea (a) Legal framework (as discussed) 2.1 The Court extracted Section 112 of the Customs Act, 1962 and noted that penalty under clause (b) applies to any person who acquires possession of, or is concerned in carrying, keeping, concealing, selling or otherwise dealing with goods 'which he knows or has reason to believe are liable to confiscation under section 111'. 2.2 The Court emphasized that, on a careful reading, penalty under Section 112(b) is imposable only when positive knowledge or mens rea is clearly established that the person knew or had reason to believe that the goods were liable to confiscation. (b) Interpretation and reasoning 2.3 The proceedings before the Tribunal were confined exclusively to the appellants, as only penalty under Section 112(b) was proposed and confirmed against them; the findings against the importer had attained finality as the importer did not appeal. 2.4 The Court found that the department had not produced any evidence to show that the appellants, either in their capacity as High Sea Sale sellers or as job workers, were aware of the fraud committed by the importer, or that they had colluded with the importer to evade duty or to claim undue exemption. 2.5 The appellants had effected genuine High Sea Sales to the importer prior to clearance, after which ownership and control passed to the importer; the High Sea Sale transactions themselves were not alleged to be fake or sham. 2.6 Post-clearance, the importer moved the goods to the appellants' premises for cutting and conversion on job work basis; documents such as delivery challans, job work invoices, and ledger accounts were produced to evidence return of goods to the importer after processing. 2.7 The Adjudicating Authority did not record any specific finding that these documents were false or fabricated, merely terming them an afterthought, and did not establish any concrete link evidencing knowledge or participation of the appellants in the fraudulent use or diversion of the goods. 2.8 The Court held that the appellants, as High Sea Sale sellers and subsequent job workers, could not be expected to know, at the time of sale or while doing job work, the importer's fraudulent intention to misuse exemption or to divert the goods. 2.9 Reliance was placed on precedent holding that: (i) persons such as transporters, purchasers or job workers cannot be penalized under Section 112(b) in the absence of proof that they were aware of the fraud or knew that goods were liable to confiscation; and (ii) positive knowledge or mens rea is a sine qua non for imposition of penalty under Section 112(b). (c) Conclusions 2.10 The Court concluded that the essential ingredient of Section 112(b) - that the appellants knew or had reason to believe that the goods were liable to confiscation - was not established. 2.11 Mere High Sea Sale to the importer and subsequent temporary possession for job work did not, in the absence of evidence of knowledge or collusion, justify penal liability under Section 112(b). 2.12 Accordingly, the penalty of Rs. 10,00,000/- imposed on each appellant under Section 112(b) was held to be unsustainable in law and on facts. 2.13 The impugned order was set aside to the extent it levied penalties on the appellants, and the appeals were allowed with consequential relief in accordance with law.