Imposition of Penalty under Import Export Act

Case: DKM Cassette P. Ltd Vs Union of India

Citation: 2010 (260) E.L.T. 404 (Del.)

Issue:- Whether penalty will be imposed on the assessee for not complying with conditions prescribed in the letter granting permission for setting 100% EOU?

Brief Facts:- Petitioner had applied to the Secretariat of Industrial Approvals (SIA), Department of Industrial Development, Ministry of Industry, and Government of India in July, 1985 for setting up a 100% EOU for the manufacture of video-cassette shells. By Letter dated 04.11.1985, SIA permitted petitioner to establish the 100% EOU with a capacity of 6 lakhs pieces of video cassette shells per annum. Among the conditions in the said allotment letter was that the unit should achieve a value addition of 45% with the value of imported capital goods being set at Rs 38.08 lakhs. The further conditions were that the entire production should be exported. The Letter also set out the list of the capital goods permitted to be imported. On the representation by the Petitioner the SIA reduced the value addition to 31.7% and enhanced the value of imported goods/capital.

Between October 1989 and August 1991 Petitioner manufactured and exported video cassette shells valued with a value addition of around 33%. All imported raw materials were used in the manufacture of the export products and there was neither any misuse nor mis-declaration of the imported goods.

In 1992 the Petitioner’s unit started facing labour problems which led to the closure of the factory. Consequently, the Petitioner closed down the manufacturing activities and could not meet the export obligation. The Petitioner approached the Development Commissioner (SEEPZ) requesting him to recommend to the SIA that the Petitioner’s unit should be withdrawn from the 100% EOU scheme. The Joint Development Commissioner forwarded a note to the Under Secretary, Ministry of Commerce suggesting that the Petitioner’s proposal should be placed before the Board of Approvals in the Ministry of Commerce. This note recorded that the labour strike was continuing and the Petitioner’s unit had been closed down.

In March 1994, the Development Commissioner wrote to the Additional Secretary and Chairman of BOA in the Ministry of Commerce recommending the debonding of the Petitioner’s unit. It was also recommended that no penal action should be taken against the Petitioner on its debonding. The Petitioner wrote to Ministry of Commerce on April 1994 requesting for an early date for debonding. On May 1994 the BOA in the Ministry of Commerce permitted debonding of the Petitioner’s unit. Two conditions were imposed: First was for payment of penalty of 10% of the cif value of the imported capital goods towards non-fulfillment of EO. Secondly, to undertake an export obligation of 25% of the annual production for a period of 5 years or for an amount equal to 5 times the cif value of the imports whichever is higher.

The Petitioner stated that it had complied with the first condition and requested for a waiver of the second condition. This request was accepted and the SIA informed the Petitioner on September 1994 that the condition regarding export obligation would be deleted as the Petitioner could not meet the export obligation after debonding. The Petitioner then proceeded with the formalities and on July 1995 the Assistant Collector of Central Excise, Division 1, Bombay-II granted the permission for debonding of raw material, semi-finished goods, finished goods and scrap and water. The capital goods were also permitted to be cleared at depreciated value after payment of applicable rate of duty. Although Petitioner submitted that due to the poor financial condition it could not at the time of filing the petition pay the 10% penalty, during the course of hearing Petitioner stated that the said penalty amount had since been paid.

Thereafter the impugned order was passed by ADGFT levying a penalty of Rs. 55 lakhs on the Petitioner for violation of Section 4-1 IEC Act. The said order indicated that a show cause notice had been issued to the Petitioner. In response to the order, the Petitioner replied denying receipt of the show cause notice. Further it was pointed out that since a penalty of 10% of the value of imported goods had already been imposed by the SIA no further penalty should be imposed by ADGFT. The Petitioner then filed an appeal before the ACC in the Ministry of Commerce under Section 20(2) of FTDR Act.

The ACC by the impugned order held that the permission letter did amount to a licence to import the goods in question. The levy of penalty by the SIA was independent of the penalty under the IEC Act. It was further held that upon failure to meet the export obligation, the provisions of Section 4-I(1) of the IEC Act would stand attracted as non-fulfillment of the export obligation after making the import should be construed as a mis-utilisation and the mis-declaration of the imported goods.

Aggrieved by the impugned orders passed by ADGFT and ACC, Petitioner has filed writ petition before the High Court.

Petitioner’s Contention:- Petitioner contended that the penalty could not be imposed twice for the failure to meet the conditions upon which it was permitted to import the goods in question. It was further submitted that the permission letter allowing them to import the goods in question was not a ‘licence’ and, therefore, the provisions of IEC Act did not get attracted. The guidelines and circular issued by the Government of India was referred and it was contended that it made it clear that prior to that date there was no question of two separate penalties being imposed for the non-fulfilment of the export obligation. It was lastly submitted that the impugned order passed by the ADGFT imposing a penalty or Rs 55 Lakhs on the Petitioner did no indicate which particular offence as listed out in sub-clauses of Section 4-I of the IEC Act had been violated and therefore, the penalty order was on this ground alone bad in law.

Petitioner relied upon the decisions inAmrit Foods v. Commissioner of Excise [2005 (190) E.L.T. 433 (S.C)], Commissioner of Central Excise, Jalandhar v. Max G. B. Limited [2008 (221) E.L.T. 491 (P&H)], Commissioner of Central Excise & Customs v. Nakoda Textile Industries Limited [2009 (240) E.L.T. 199 (Bombay)] and Optina Impex Pvt. Limited v. Union of India [2003 (151) E.L.T. 493 (Delhi)].

Respondent’s Contention:- Revenue relied upon the decisions in Supercom India Limited v. Directorate General Foreign Trade Ministry of Commerce [2003 (160) E.L.T 69 (Del.)].

With regard to imposition of penalty imposable under Section 4-I IEC Act, Revenue contended that it was Section 4-I(1)(a) of the Act stood attracted in the case of petitioner.

Reasoning of Judgment:- The High Court first considered the question that whether the provisions of the IEC Act applied considering what was issued to the Petitioner was a letter permitting import of capital goods and raw materials.

The High Court noted that it was only on account of Letter dated 04.11.1985 that the petitioner was permitted to import under 100% EOU scheme for the manufacture of video cassette shells. Thereafter, a formal agreement was entered into between the Petitioner and the Government of India whereby the Petitioner had agreed to comply with the conditions prescribed therein.

The High Court perused the clauses of the agreement and found that it showed that the Letter dated 04.11.1985 by which the petitioner was permitted to make import was in fact accepted and acted upon by both parties as a licence to import. That apart Ministry of Commerce issued an order No. 23/88-91 being Open General Licence No. 23/88 under Section 3 of the IEC Act. This gave a general permission to all actual users approved by the Government as 100% EOU for the import of raw materials, components etc.

In the OGL provided that the importer shall be liable to penal action under the provisions of the Imports and Exports (Control) Act, 1947 and the rule made thereunder, without prejudice to any other action such as conciliation or revocation of permission letter or letter of intent or industrial licence.

Thus, the High Court held that above clause (clause 5A) of the OGL order pointed that the failure to meet export obligation in terms of the permission letter dated 04.11.1985 would not only attract penalty as a result of such violation but under the provisions of the IEC as well.

Consequently, the High Court held that there was no error by ACC in holding that permission letter issued by them should be construed as an import licence and for any failure to comply with the conditions attached thereunder action could be independently taken by the SIA as well as the office of the ADGFT under the IEC Act.

The next question considered by the High Court was that whether the impugned order of the ADGFT levying penalty of Rs. 55 lakhs on the Petitioner which was affirmed by ACC was sustainable in law.

The High Court perused the order passed by ADGFT was found that the said order was an ex-parte order. Service to the petitioner was presumed. There was no discussion of any of the provisions of the IEC at all.

It was held that merely because the assessee did not avail of the opportunity of personal hearing, the ADGFT straightway proceeded to hold the Petitioner guilty of contravention of Section 4-I of the IEC Act read with Section 4-K of the IEC Act and imposed penalty of Rs. 55 lakhs. There was no mention that under which particular clause of Section 4-1 IEC Act was attracted in the facts of the Petitioner’s case. The High Court perused the order of the ACC was also of no help.

The High Court perused the provisions of Section 4-I IEC Act and held that it showed that the failure to fulfill an export obligation is not listed out expressly as an instance attracting the liability to pay penalty thereunder.

In the circumstances, if the ADGFT in the instant case intended to levy a penalty on the Petitioner under Section 4-I IEC Act, it was incumbent on him to indicate which of the sub-clauses of Section 4-I(1) IEC Act stood attracted. On this aspect, there can be no doubt that there was non–application of mind by the ADGFT. Nothing is discernible from his order as to which of the sub-clauses of Section 4-I IEC Act, if any, was attracted. The order simply states that the offence is under Section 4-I. This is wholly insufficient for the purposes of imposing a penalty on the strength of Section 4-I read with Section 4K of the IEC Act.

It was held that the for a penalty order having to specifically indicate the precise provision under which the penalty is being imposed was emphasized by the Supreme Court in Amrit Food v. Commissioner of Central Excise, U.P.. On the facts of that case, it was held that in the absence of any indication as to which particular clause of Rule 173Q has been contravened, the penalty could not have been imposed. Reliance was also placed on Commissioner of Central Excise, Jalandhar v. Max G. B. Limited andCommissioner of Central Excise & Customs v. Nakoda Textile Industries Limited.

It was further held that judgment relied upon by the Revenue was not applicable since the Court had proceeded on the footing that sub-clause (1) (a) of Section 4-I applied. But in the instant case, there was no argument or consideration as to whether in fact that sub-clause applied.

With regard to applicability of the provision of Section 4-I, the High Court held that the Revenue’s contention that Section 4-I (1) (a) was attracted, it was noticed that this was not the basis on which the ADGFT. A fresh reason cannot be supplied for the conclusion reached in the said order. A reading of Section 4-I shows that it is attracted when the goods have been imported under any licence and such goods have been used or utilized “otherwise than in accordance with the conditions of such licence or letter of authority”.

It was held that there was no finding by ADGFT that Petitioner had either mis-utilised or mis-declared the imported goods. This was also not found by the ACC either.

The High Court held that failure to meet the export obligation could be for various reasons not relatable to any of the sub-clauses under Section 4-I (1). It was incumbent upon ADGFT while imposing penalty with the aid of the said provision to precisely indicate which sub-clause was attracted in petitioner’s case.

It was held that Petitioner had submitted that they had utilised the imported goods in the manufacturing of video cassette shells and it could not be exported on account of labour unrest. Therefore, it cannot be held that there was either mis-utilisation or mis-declaration by the Petitioner to attract Section 4-I (1) (a) of the IEC Act.

In the end, impugned orders passed by the ADGFT and ACC where held to be unsustainable in law and were set aside.

Decision:- Writ Petition allowed in the terms of the judgment.

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PJ/Case Laws/2010-11/1037

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