2026 (3) TMI 49 - HC - Customs

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) ... Validity of imposing penalty on the petitioner for alleged violation of Warehouse (Custody and Handling of Goods) Regulations, 2016 (“Warehouse Regulations”) - Almost after 05 years from the date of cancellation of the registration - respondent issued a show-cause notice - violation of Regulation 11 of the Warehouse Regulations - Applicability of Special Warehouse Regulations to a license granted u/s 58A - invocation of incorrect regulations vitiates penalty proceedings - failed to manage records in digital form, warehouse keeper has not obtained digital signature and failed to renew solvency certificate and risk insurance policy annually. Business of import, processing of precious metals and has been undertaking imports and has been granted license on 10.06.2016 under Special Warehouse (Bonded Warehouse) under section 58A of the Customs Act, 1962 (“the Act”) - On 29.01.2018, the petitioner surrendered its license and the same was accepted by the Principal Commissioner of Customs, Ahmedabad vide his intimation letter dated 08.03.2019. Thus, from 08.03.2019, the license granted to the petitioner under section 58A of the Act stood cancelled. Applicability of Special Warehouse Regulations to a license granted under section 58A - HELD THAT:- The licence granted to the petitioner was under section 58A of the Act and the Special Warehouse Regulations were issued under the enabling provisions tied to section 58A. The Court held that activities and regulatory compliance of a Special Warehouse licencee are governed by the Special Warehouse Regulations and, therefore, proceedings premised on the generic Warehouse Regulations were wrongly invoked against the petitioner. The existence of analogous or pari materia provisions in the two sets of regulations does not validate proceedings founded on the incorrect regulatory framework where distinct statutory categories of warehouses are prescribed. [Paras 4, 10, 11, 13] Proceedings and penalty based on the Warehouse Regulations do not apply to the petitioner licensed under section 58A; the Special Warehouse Regulations apply. Invocation of incorrect regulations vitiates penalty proceedings - failure to supply foundational audit report and inordinate delay vitiates initiation of penalty proceedings - HELD THAT:- The show-cause notice was issued relying on an audit report which the petitioner had expressly requested but which was not supplied. The audit report post-dated the acceptance of surrender of the licence by several years, and the penalty proceedings were commenced nearly five years after the licence stood cancelled. The Court found that initiating and continuing penalty proceedings on the basis of an undisclosed audit report, and doing so after an inordinate delay, rendered the proceedings unsustainable. The combination of reliance upon incorrect regulatory provisions and non-supply of the foundational document, together with long delay, led to the conclusion that the impugned order was illegal. [Paras 5, 12, 14, 16] The penalty order is invalid because it was based on the wrong regulations and on an undisclosed audit report after an inordinate delay. Remand refused where initiation after long delay and proceedings defective - HELD THAT:- Although the respondent sought remand if the Court set aside the order, the Court observed that the petitioner was being roped into proceedings nearly five years after surrender and acceptance of the licence, and that the proceedings suffered from the twin defects of being founded on incorrect regulations and proceeding without disclosure of the audit report. In those circumstances the Court concluded that remand was not appropriate and that quashing the impugned order was the proper remedy. [Paras 7, 16] Remand was declined and the impugned penalty order was quashed. Final Conclusion: The writ petition succeeded: the penalty order was quashed because the Special Warehouse Regulations governed the petitioner, the proceedings were founded on incorrect regulations and an undisclosed audit report after an inordinate delay, and remand was refused. 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.