Whether penalty imposable for negligence committed by bank in remitting receipts in case of overvaluation made by exporter?

PJ/Case Law/2013-14/2024

Case:-HDFC BANK LTD. VERSUS COMMISSIONER OF CUSTOMS

Citation:-2014-TIOL-107-CESTAT-MUM

Brief Facts:-The appeal and stay petition are directed against Order-in-Original CAO No: 45/ 2013/CAC/CC (E)/YG/GR.VII dated 26/03/2013 passed by the Commissioner of Customs, (Export), New Custom House, Mumbai. vide the impugned order, a penalty of Rs. 1 crore has been imposed on M/s. HDFC Bank Ltd., under the provisions of Section 114 of the Customs Act, 1962 towards liability of M/s. Centurion Bank of Punjab, New Delhi which was taken over by them.

The relevant facts are as follows:

A case of overvaluation of readymade garments by M/s. Sri Balaji Overseas, Mumbai and fraudulent availment of drawback on such garments alleged to have been exported to Russia was investigated by the Directorate General of Revenue Intelligence. The investigation resulted in issue of show cause notice to the exporter and the present appellant also.

Vide the impugned order the adjudicating authority came to the conclusion that drawback amounting to Rs. 46,28,867/- on exports ostensibly made to Russia under Rupee-Rouble Trade and Rs. 10,16,381/- in respect of exports made to Dubai availed fraudulently by M/s. Sri Balaji Overseas was inadmissible under the provisions of Rule 16 and 16A of the Customs and Central Excise Duties (Drawback) Rules, 1995 read with Section 75 of the Customs Act, 1962 and the said goods exported were liable to confiscation under the provisions of Section 113 of the Customs Act, 1962. The allegation against the appellant is that they, as bankers were supposed to be custodian of money on behalf of persons banking with them and they were expected to scrutinize the documents submitted by the exporter minutely and systematically. In the present case, the exporter, M/s. Sri Balaji Overseas filed documents with the said Bank showing different dates of shipment for the same voyage and the same vessel and Port of discharge and place of delivery were shown as Moscow and Russia respectively and these declarations were accepted and based on the claim of the exporter, the documents were processed and money credited to their accounts. Consequently, the appellant bank failed to protect government money amounting to Rs.3,02,09,760/- inasmuch as they did not properly scrutinize the documents presented to them by M/s. Sri Balaji Overseas, Mumbai for availment of remittance from RBI under Rupee-Rouble Trade and they also failed to notice that the exporter had no letter of credit in their favour on the date of export which was a condition for export to Russia under the Rupee-Rouble Trade Agreement.

In view of the above omissions on the part of the Bank, a penalty of Rs.1 crore was imposed under Section 114 of the Customs Act. Aggrieved of the same, the appellant is before the tribunal.

Appellant Contentions:-The learned counsel for the appellant submits that the allegation of non-scrutiny of the documents presented by the exporter to the appellant is contrary to facts and the appellant-bank had acted diligently and was based on the bona fide belief that the contents of the Bills of Lading were true and correct. The actions taken by the appellant-bank were in fact in the ordinary course of business and in good faith and after following the internal policies of the bank. So long as the documents were not fraudulent on the face of it, a bank is not obligated to undertake any independent investigation to verify the authenticity of each and every statement made in the documents submitted. It is also contended that the allegation that the exporter did not have the letter of credit in their favour on the date of export is incorrect. As per the documents submitted, the date on the Bills of Lading presented to the bank, were subsequent to the Letter of Credit issue dates. They also denied the allegation that they failed to protect government money amounting to Rs.3,02,07,960/- as it is the RBI who had permitted the remittance. Even if it is assumed that there was lapsed on the part of the bank, the lapse, at best can be held as an act of negligence and such lapse cannot be treated as deliberate or intentional. Accordingly, it is contended that the penalty imposed on the bank under Section 114 for an omission on the part of the appellant-bank is not justified. Accordingly, it is prayed that stay be granted against the penalty imposed on the bank.

Respondent Contentions:-The learned Additional Commissioner (AR) appearing for the Revenue, on the other hand, contends that as per the RBI guidelines vide Circular No. 30 dated 28/09/21993 and Circular No. 4 dated 05/09/1999, it was stipulated that:

"Funds from repayments of State Credits to be utilised for export of goods to Russian Federation only. No third country exports are to be permitted to be financed out of funds from such repayment of state credits."

It is his contention that the bank failed to notice that all the Bill of Lading contained the same container number, Serial No., Vessel and voyage No. which in the normal course of export was not possible. They also failed to notice that the exporter had no Letter of Credit in his favour on the date of export, which is a condition for export to Russia under the Rupee-Rouble trade Agreement. These omissions on the part of the exporter resulted in grant of remittance to the tune of Rs. 3 crore which was otherwise not due to the exporter and, therefore, the appellant is liable to penalty under Section 114 of the Customs Act, 1962.

Reasoning of Judgment:-We have carefully considered the submissions made by both the sides.

A similar issue had come up before this Tribunal in the case of Bank of Madura Ltd. & Others vs. Collector of Customs, Madras 1978 (28) ELT 396. In that case, it was an import transaction. The bank had issued Letter of Credit without margin in respect of a person who was non-existent and who was not even an income tax assessee and whose credit worthiness, the bank was blissfully ignorant of. A penalty was sought to be imposed on the bank under Section 111(a) of the Customs Act as the goods were held to be liable to confiscation under Section 111(d). The bank challenged the imposition of penalty and this Tribunal held that:

"omissions on the part of the bank are acts culpable of ignorance and reprehensible imprudence on the part of a banking institution but would fall short of an act/omission rendering the goods liable to confiscation under the provisions of Section 111 as only a person who in relation to any goods does or omits to do any act which act or omission would render such goods liable to confiscation under Section 111 shall be liable to penalty."

In the said case, it was further observed by this Tribunal that the frittering away its funds in either disregard of the banking procedures and rules and regulations would not ipso facto make the bank liable for a penalty under Section 112(a) of the Customs Act, 1962.

In a similar case pertaining to drawback fraud in the case of IDBI Bank Ltd. vs. Commissioner of Customs (Export), New Delhi 2011 (274) ELT 439 (Tri.-Del) (2012-TIOL-20-CESTAT-DEL) , it was held by this Tribunal that negligence on the part of the employee of the bank in deviating from the proper procedure in not sending the CDFs submitted by the exporter for verification to the proper authorities is not adequate to constitute an offence under Section 114 of the Customs Act in the absence of any evidence indicating the handling of goods liable to confiscation or handling of any document in relation to such goods. Therefore, it was held that banking transactions relating to the export goods carried out in the normal course of business without any mens rea cannot attract the provisions of Section 114.

Again in the case of A.S. Kotwal vs. Commissioner of Customs, New Delhi 2009 (235) ELT 495 this Tribunal held that penalty cannot be imposed on the Bank Manager for not taking due caution before opening current account in the name of proprietor and company will not attract penalty under Section 114.

In the present case, the goods have been held liable to confiscation under the provisions of Section 113(i) of the Customs Act for overvaluation of the goods under export. The overvaluation has been done by the exporter and the appellant-bank has no role to play in such overvaluation. No doubt there has been some negligence on the part of the bank in not properly verifying the export documents and recommending to the RBI for allowing remittance to the exporter under the Rupee-Rouble Trade Agreement. However, such omissions on the part of the bank do not fall within the scope of Section 113(i) and consequently no penalty is imposable on the appellant-bank under Section 114.

In view of the above, we find that the appellant-bank has made out a strong case in their favour for grant of stay. Accordingly, we grant unconditional waiver from pre-deposit of penalty adjudged against the appellant and stay recovery thereof during the pendency of the appeal.

Decision:-Stay granted.

Comment:- The nexus of this case is that negligence on the part of the bank in not properly verifying the export documents and recommending to the RBI cannot be equated with acts done to render goods liable for confiscation. As far as the fact of overvaluation done by the exporter is concerned, bank cannot be accused to have been party to such overvaluation. As such, the omissions on the part of the bank do not fall within the scope of Section 113(i) and consequently no penalty is imposable on the appellant-bank under Section 114.

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