Regulatory misapplication and procedural unfairness invalidated penalty proceedings, resulting in quashing of the penalty order.

Application of the Warehouse (Custody and Handling of Goods) Regulations, 2016 rather than the Special Warehouse (Custody and Handling of Goods) Regulations governing a special warehouse licence was treated as an error in law, rendering the proceedings and penalty premised on the wrong regulatory framework unsustainable and set aside. Independently, initiation of proceedings after an almost five year delay following licence surrender, non supply of the audit report relied upon in the show cause notice, and absence of justification for the penalty quantum constituted procedural unfairness, vitiating the penalty order and justifying quashing rather than remand.

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Issues: (i) Whether the penalty order dated 30.12.2025 could be validly based on the Warehouse (Custody and Handling of Goods) Regulations, 2016 instead of the Special Warehouse (Custody and Handling of Goods) Regulations, 2016 applicable to a license under section 58A of the Customs Act, 1962; (ii) Whether the penalty order is sustainable in view of delay in initiation of proceedings, non-supply of the audit report which formed the basis of the show-cause notice, and lack of justification for fixation of the quantum of penalty.

Issue (i): Whether the respondent could invoke Warehouse Regulations, 2016 instead of Special Warehouse Regulations, 2016 in proceedings against a licensee under section 58A of the Customs Act, 1962.

Analysis: The petitioner held a Special Warehouse licence under section 58A of the Customs Act, 1962. The Special Warehouse Regulations were issued by Notification No. 69/2016-Customs (N.T.) dated 14.05.2016 under the statutory powers relevant to section 58A. The impugned show-cause notice and order expressly proceed under specific regulation numbers of the Warehouse Regulations, 2016 that do not correspond to the Special Warehouse Regulations applicable to the petitioner. Even if there are similar or pari materia provisions in both regulation sets, initiation and adjudication under regulations that do not apply to the statutory category of licence held by the petitioner entails an error in law.

Conclusion: The proceedings and penalty premised on the Warehouse Regulations, 2016 instead of the Special Warehouse Regulations, 2016 are not legally sustainable and must be set aside.

Issue (ii): Whether the penalty order is sustainable given the five-year delay after surrender of licence, the non-supply of the audit report relied upon for issuance of the show-cause notice, and absence of clarification for the quantum of penalty.

Analysis: The audit report dated 16.12.2022, which prompted the show-cause notice dated 01.02.2024, was not supplied to the petitioner despite being requested, depriving the petitioner of the material necessary to make effective representation. The impugned proceedings were initiated almost five years after acceptance of licence surrender, and no satisfactory explanation or contemporaneous verification was shown to justify the delay. Further, the respondent did not clarify how the specific penalty amounts were fixed. Under these circumstances, continuation and completion of penalty proceedings, and imposition of the specified penalty amount, involved procedural infirmities.

Conclusion: The penalty order is vitiated by procedural unfairness arising from non-supply of the foundational audit report, inordinate delay, and lack of justification for the penalty quantum; the order must be quashed.

Final Conclusion: The writ petition succeeds and the impugned order dated 30.12.2025 imposing penalty is quashed and set aside; the remedy of remand is declined due to the inordinate delay and procedural defects.

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