Extended limitation under Section 28(4) not invocable for DFIA licence user absent collusion or suppression findings

The CESTAT Chennai allowed the appeal of the importer using transferred DFIA licences and set aside the impugned demand of customs duty. It held that the extended limitation under Section 28(4) of the Customs Act, 1962 can be invoked only in cases of collusion, wilful misstatement or suppression of facts by the importer/noticee. As the SCN contained no such specific allegation or supporting evidence against the appellant, the preconditions for invoking the extended period were not met. Relying on precedent distinguishing void and voidable licences, the Tribunal held that Revenue could not demand duty foregone on utilisation of the transferred DFIA scrips.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether customs duty foregone on imports made under transferred DFIA licences can be demanded from the transferee-importer by invoking the extended period of limitation under Section 28(4) of the Customs Act, 1962, when the allegation of misrepresentation/suppression relates only to the original exporter-licensee and not to the transferee.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Demand of duty from transferee-importer under extended period of limitation on the ground that DFIA licences were initially obtained by misrepresentation by the exporter

Legal framework

2.1 The Court examined Section 28(4) of the Customs Act, 1962 (as applicable during the relevant period), which permits invocation of a five-year extended limitation only where non-levy/short-levy of duty or erroneous refund arises "by reason of" (a) collusion, (b) any wilful misstatement, or (c) suppression of facts "by the importer or the exporter or the agent or employee of the importer or exporter".

2.2 Explanation 1 to Section 28 defining "relevant date" was also noticed, particularly clause (a) regarding cases where duty is not levied and clause (d) for "any other case".

Interpretation and reasoning

2.3 The Court noted that the sole basis in the show cause notice for invoking the extended period was the alleged wilful suppression and misrepresentation by the "Exporters" in obtaining DFIA licences, through nondisclosure of technical characteristics, quality and specifications of essential oils in shipping bills and DGFT applications, thereby securing transferable DFIA licences used for "undue and unlawful importation".

2.4 It was specifically observed that the show cause notice did not allege any fraud, forgery, wilful misstatement or suppression of facts by the appellant-importer, nor did it attribute any collusion or intent to evade duty to the appellant.

2.5 The Court emphasised that there was no material placed to demonstrate that the DGFT proceedings against the exporters had culminated in final findings of fraud or in cancellation of the DFIA licences ab initio; the allegations remained at the stage of show cause notices without proof of final cancellation.

2.6 On a plain reading of Section 28(4), the Court held that the extended period can be invoked only when the requisite ingredients (collusion, wilful misstatement, suppression of facts) are present in relation to the "person chargeable with duty" - here, the transferee-importer - and that such ingredients must be both alleged and established.

2.7 Since the show cause notice contained no allegation of any positive act of misrepresentation, collusion, or suppression by the appellant, the statutory preconditions for resorting to Section 28(4) were held not to be satisfied; mere allegation of fraud by the exporter could not, by itself, extend limitation against the transferee-importer.

2.8 The Court relied on the decision of the High Court of Punjab & Haryana in Commissioner of Customs, Amritsar v. Vallabh Design Products, which held that where the transferee of a DEPB scrip is not a party to the fraud, has purchased the scrip bona fide, and no misrepresentation, collusion or suppression is alleged against such transferee, the extended period under Section 28 cannot be invoked once the normal limitation has expired; this view having been affirmed by the Supreme Court.

2.9 The Court further relied on the Tribunal's decision in Commissioner of Customs, Amritsar v. Gopi Chand Krishna Kumar Bhatia, which distinguished between void and voidable licences and held that where (i) the scrip/licence was actually issued by DGFT (though obtained by misrepresentation or forged documents by the exporter), (ii) there is no allegation or evidence that the transferee was aware of the exporter's fraud, and (iii) the scrip was valid at the time of use and cancelled only later, the licence is voidable, not void, and remains valid till cancelled; in such circumstances, the principle "fraud vitiates everything" does not apply against the bona fide transferee.

2.10 In Gopi Chand Krishna Kumar Bhatia, it was noted that such cases are to be governed by the principles under the Contract Act and Sale of Goods Act, under which a bona fide transferee of a licence/scrip issued by the competent authority obtains a good title where there is no knowledge of the transferor's fraud; this approach was held consistent with the Supreme Court rulings in East India Commercial Co. and Sneha Sales Corporation.

2.11 The Court observed that the present case falls within the category recognised in Gopi Chand Krishna Kumar Bhatia - DFIA scrips actually issued by DGFT and valid at the time of import, alleged to have been obtained by the exporter by suppression/misrepresentation, but utilised by a transferee against whom there is no allegation of fraud and whose imports took place prior to any demonstrated cancellation.

2.12 The Court distinguished the authorities relied upon by the department, noting that those decisions pertained either to forged/fake scrips not issued at all by the licensing authority, or to situations where different factual or legal elements were present; in such cases the principle that fraud nullifies all acts could apply, whereas in the present case the licences were at best voidable and valid till cancelled, and the transferee acted bona fide.

2.13 The Court also noted that the impugned appellate order had merely relied upon the Tribunal's decision in Eastern Silk Industries without independently analysing the statutory requirements for invoking the extended limitation under Section 28(4) with reference to the specific allegations (or their absence) against the appellant.

Conclusions

2.14 Since imports were made during November 2012, December 2012 and May 2013 and the show cause notice dated 03/05.12.2014 was admittedly issued beyond the normal limitation period, and in the absence of any allegation or proof of collusion, wilful misstatement or suppression of facts by the appellant-importer, the pre-conditions for invoking the extended period under Section 28(4) of the Customs Act, 1962 were held not to be satisfied.

2.15 The demand of duty and interest raised against the transferee-importer on the basis of alleged misrepresentation by the original exporter in obtaining DFIA licences was held to be unsustainable in law.

2.16 The impugned order-in-appeal confirming the duty demand with interest was set aside, and the appeal of the transferee-importer was allowed with consequential reliefs as admissible in law.

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