Availability of benefit of DEPB licence to bona fide purchaser

PJ/CASE STUDY/2010-11/15

Case Study

Prepared By:

CA Pradeep Jain

Parag Ghate, B.Com and

Sukhvinder Kaur, LLB [FYIC]

Introduction:

The DEPB licence is transferable and can be sold by the DEPB licence holder to another person. If such a DEPB licence has been obtained by an exporter by fraud, or under false mis-declaration, then can the purchaser of the DEPB licence be denied the benefit of DEPB licence? Even though the licence is valid and has been bonafidely purchased in open market? Whether the purchaser of the DEPB licence can be penalized for the wrongful acts of exporter? These are the issues involved in the case under study herein.

Relevant Legal Provisions:

· Section 28 (1) of the Customs Act, 1962: -

28. Notice for payment of duties, interest etc.—(1) When any duty has not been levied or has been short-levied or erroneously refunded, or when any interest payable has not been paid, part paid or erroneously refunded, the proper officer may, -

(a) in the case of any import made by any individual for his personal use or by Government or by any educational, research or charitable institution or hospital, within one year;

(b) in any other case, within six months, from the relevant date, serve notice on the person chargeable with the duty or interest which has not been levied or charged or which has been so short-levied or part paid or to whom the refund has erroneously been made, requiring him to show cause why he should not pay the amount specified in the notice:

Provided that where any duty has not been levied or has been short-levied or the interest has not been charged or has been part paid or the duty or interest has been erroneously refunded by reason of collusion or any wilful mis-statement or suppression of facts by the importer or the exporter or the agent or employee of the importer or exporter, the provisions of this sub-section shall have effect as if for the words "one year" and "six months", the words "five years" were substituted.

Provided also that where the amount of duty which has not been levied or has been short-levied or erroneously refunded or the interest payable thereon has not been paid, part paid or erroneously refunded is more than one crore rupees, no notice under this sub-section shall be served except with the prior approval of the Chief Commissioner of Customs.

Explanation. - Where the service of the notice is stayed by an order of a court, the period of such stay shall be excluded in computing the aforesaid period of one year or six months or five years, as the case may be.

· Section 28 (3) of the Customs Act, 1962: -

(3) For the purposes of sub-section (1), the expression "relevant date" means-

(a) in a case where duty is not levied, or interest is not charged, the date on which the proper officer makes an order for the clearance of the goods;

(b) in a case where duty is provisionally assessed under section 18, the date of adjustment of duty after the final assessment thereof;

(c) in a case where duty or interest has been erroneously refunded, the date of refund;

(d) in any other case, the date of payment of duty or interest.]

· Section 58 of the Negotiable Instruments Act, 1881: -

When a negotiable instrument has been lost, or has been obtained from any maker, acceptor or holder thereof by means of an offence or fraud, or for an unlawful consideration, no possessor or indorsee who claims through the person who found or so obtained the instrument is entitled to receive the amount due thereon from such maker, acceptor or holder, or from any party prior to such holder, unless such possessor or indorsee is, or some person through whom he claims was, a holder thereof in due course.

M/s Sarvodaya Refinery Pvt. Ltd v/s Deputy Commissioner, Ahmedabad

[Order-in-Appeal No. 256/2010/Cus dated 28.06.2010]

Brief Facts:

- Appellant had purchased the DEPB license from the exporter and had imported RBD Palm Oil on payment of duty from the said license under DEPB Notification No. 45/2002-Cus dated 22.04.2002. Release Advise was also issued in their favour.

- Subsequently, Department conducted investigations which revealed that the exporter had obtained the DEPB fraudulently by over-invoicing the value of export goods. Accordingly, actions were initiated against the exporter by the Customs Authorities.

- The value of the export goods was re-determined and fine and penalties were imposed upon the exporter. Action was also initiated against the appellant on the ground that the RA was issued against the fraudulently obtained DEPB which was utilized by the appellant for payment of customs duty against the clearance of imported goods.

- Show Cause Notice dated 07.07.2008 was issued to the appellant demanding customs duty of along with interest and for imposing penal liability under Section 112 of the Customs Act, 1962. In the SCN, penalty under Section 114 was also proposed to be imposed on the exporter.

- The Adjudicating Authority denied the benefit of DEPB scheme and confirmed the duty demand along with the interest and imposed a penalty of Rs 2,00,000/- on the appellant. The penal action against the exporter was dropped since the exporter was penalized by the jurisdictional Custom authorities.

- Aggrieved by the impugned order, appellant filed appeal before the Commissioner (Appeal).

Appellant’s Contention:

¨ Appellant contended that appellant were bona fide purchasers of DEPB Licence from the open market on payment of full price in bonafide belief of its being genuine and they were not a party to the fraud by the exporter. It was contended that the whole process of purchasing the DEPB licence and issuance Release Advice (RA) was done with the involvement of the Customs and Excise Authorities. The valuation and assessment is done by the Central Excise department. Thereafter, goods are sent to the port for export where the custom officer satisfies himself about the value of the goods. On the basis of Shipping Bill issued by the Custom department and after realisation of sale proceeds, the DEPB licence is applied to DGFT. The DGFT issues the DEPB licence and it is submitted to Custom department once again for verification. The verification is done by Custom department with the help of Shipping Bill. Thereafter, a request is made to the custom department to issue in favour of importer. After the RA is issued then in case of manual port, the RA is crossed check by the port of importer. The custom authority at the port of import send fax to the DEPB issuing port to verify that the RA has been issued by the custom of port of export. The custom department at the port of export confirms by Fax that the RA has been issued by that port only. Thereafter, the importer is allowed to utilise the DEPB. Thus, it is seen that the complete process is undertaken by the Custom department and the DEPB is checked at various places by various authorities. There is no chance of any fraud. It is submitted that the appellant had relied on the process and custom department has also confirmed that the RA has been issued by the department only. As such the appellant couldn’t be said to know about the over invoicing of export goods.

¨ Appellant contended that they had had taken all reasonable care and caution on their part while buying the tradable DEPB license. It was contended that they had checked the DEPB for the required endorsement f transferability by the Licencing Authority. All payments were made through Account Payee cheques. Thus, there was bonafide transaction at the part of importer and hence the duty should not be confirmed against him. The fraud or over invoicing, if any, had been done by the exporter and the action should be taken against him.

¨ Appellant contended that the Adjudicating Authority has erred in relying upon the decision in the case of Indian Aluminum Company Ltd. V/s Thane Municipal Corporation [1991 (55) ELT 454 (SC)] which relates to procedural flaws whereas in the present case all the conditions mentioned in the Notification were complied. It was submitted that in the afore-cited case, the order says that if the conditions prescribed are not fulfilled even though procedural, would disentitle the benefit because there was no way to verify whether the appellant was entitled to such concession.

The said order further said that if the procedural incompliance leads to facilitation of fraud or introduces administrative inconveniences. It was submitted that the appellant themselves were not knowing that the DEPB had been taken after committing some fraud by the exporter otherwise he would not have purchased them. They were acting in the bonafide belief that the DEPB was obtained through proper ways.

¨ It was contended that they were bonafide ‘holders in dues course’ of the DEPB licence without notice of any defect in the title of the transferor, whether on account of fraud or otherwise. It was submitted that even if it is found that the exporter had obtained the DEPB license on the basis of fraudulent mis-declaration about the value of export, appellant could not be deprived of the benefit of the licence purchased bona-fidely. Appellant referred to the provisions of Negotiable Instruments Act, 1881 in this regard. It was submitted that the appellant were totally unaware of any defect in the title of the DEPB license. In this regard, reliance was placed on the judgments given in the case of Taparia Overseas (P) Ltd. v/s Union of India [2003 (161) ELT 47 (Bom)], Sanjay Sanwarmal Agarwal v/s Union of India [2004 (169) ELT 261 (Bom)], Commissioner of Customs V/s Leader Valves [2007 (218) ELT 349 (P&H)] and Commissioner of Customs, Amritsar v/s Ajay Kumar & Co. [2009 (238) E.L.T. 387 (S.C.)]

¨ The appellant further contended that the Adjudicating Authority had wrongly relied upon the judgment of ICI India Limited v/s Commissioner of Customs (Port), Calcutta [2005 (184) ELT 339 (Cal)]. The decision given in ICI India Ltd’s case was not applicable to the appellant’s case as the facts of both the cases are different. In the ICI India Ltd the issue was regarding availability of fraud on the forged DEPB licenses, whereas in appellant’s case the issue is regarding alleged overpricing of FOB/PMV value of exported goods for getting higher DEPB. The DEPB licences issued in appellant’s case are not forged ones but are genuinely issued by the DGFT authority. In this regard reliance is placed on the cases of Paramount Steel Ltd. v/s Commissioner of Customs, Amritsar [2008 (223) ELT 593] and Flexo Polymers Pvt. Ltd. v/s Commissioner of Customs, Amritsar [ 2008 (223) ELT 553].

¨ It was also submitted that the special leave petition filed against the judgment of ICI India Ltd case was dismissed by the Apex Court does not that the decision was not dismissed on merits of the case. In such case, the decision given by the High Court will not be final decision and therefore, the same cannot be followed as a precedent. This has been held in the case of M/s U P State Sugar Corporation Ltd v/s CCE, Meerut-I [2009-TIOL-452-CESTAT-DEL]. Appellant also relied upon the judgment given in The Asstt Engineer (Civil) & Ors v/s CCE, Raipur [2008-TIOL-1777-CESTAT-DEL-LB], Supreme Court Employees’ Welfare Association v. Union of India and Another [1989 (4) SCC 187] and Yogendra Narayan Chowdhury and Others v. Union of India and Others [1996 (7) SCC 1], Jindal Stainless Limited v/s Union of India [2006 (206) ELT 0155 (Del)], V. M. Salgaocar & Brothers v/s Commissioner of Income Tax [2000 (038) RLT 0619].

¨ With regard to the presumption in the order-in-original that any case that will be relied by the importer will not prevail against the decision given in M/s ICI India Ltd as it will be having an overriding effect on the other cases, the appellant had contended that there are decisions of the Supreme Court prevailing for the situation mentioned above so they will obviously have an overriding effect on the decision of the Kolkata High Court. Reliance was placed on East India Commercial Co. Ltd. V/s Collector of Customs [1983 (13) ELT 1342 (SC)] and Collector of Customs V/s Sneha Sales Corp. [2000 (121) ELT 577 (SC)]

Relaince was also placed on the decisions given in Commissioner of Customs (E.P.) v/s Jupiter Exports [2007 (213) E.L.T. 641 (Bom.)], Commissioner of Customs, Amritsat v/s Vallabh Design Products [2007 (219) E.L.T. 73 (P & H)] and Paramount Steel Ltd. v/s Commissioner of Customs, Amritsar [2008 (223) E.L.T. 593 (Tri. - Del.)]

The appellant further submitted that the fraud was committed on the part of another person i.e. the exporter. Therefore the appellant should not be made responsible for that by raising the whole of duty as a demand against him. No contravention has been made on their part. All the procedures related to the import were complied by him legally. Relaince has been placed on the judgment given in Commissioner of Customs (Imports), Bombay v/s Hico Enterprises [2008 (228) E.L.T. 161 (S.C.)]

¨ The appellant further submits that in order in original, reliance has been placed on the decision given in the case of DSM Anti Infective India Ltd. v/s CC, Amritsar wherein it was held that the extended period should be invoked against us as this the case of fraud, collusion or willful misrepresentation. A copy of this decision is annexed herewith as Annexure-11. In this regard, the appellant submit that when the appellant has acted bonafidely and had not participated in the fraud how can the extended period be invoked against him.

¨ The appellant submitted that the Bill of entries were issued on 30.06.03 and 02.07.03 but the show cause notice was issued to the appellant on 10.06.2008 i.e. after expiry of the period of 6 months. As per Section 28 of the Customs Act, 1962 the notice was required to be issued within 6 months from the relevant date. Thus, the impugned notice was not sustainable. In this regard, reliance was placed on the judgment given in the case of Commissioner of Customs v/s M/s Leader Valves Ltd [2007-TIOL-701-HC-P&H-CUS] and in CC, Amritsar v/s M/s Deebee Marketing Pvt Ltd [2009-TIOL-225-HC-P&H-CUS].

¨ The appellant further submits that in the impugned order the extended time period has wrongly been invoked against the appellant. It was submitted that extended period of limitation can be invoked only in case of willful and deliberate suppression of facts by the assessee, whereas in the appellant’s case all the facts were within the knowledge of the Customs Department, Central Excise Department and DGFT. When there was no willful suppression, then the extended period of limitation cannot be invoked against the appellant. Reliance was placed upon the judgment given in the case of Commissioner of Customs, Amritsar v/s Dev Steel Forgings Industry [2009 (235) ELT 0862 (Tri-Del)]

¨ It was also submitted that as there was no involvement of any fraud, collusion or willful mis-statement by the appellant the extended period of 5 years was not applicable to the appellant and so the demand could be raised just within 6 months from the date of Bill of Entry. In this regard, the appellant relies upon the judgments given in Commissioner of Customs, Amritsar v/s Vallabh Design Products [2007 (219) E.L.T. 73 (P & H)], DCW Ltd. v/s Commr. of Cus., Tuticorin [2009 (241) E.L.T. 421 (Tri. - Chennai)], Commissioner of Customs v/s Leader Valves Ltd.[2007 (218) E.L.T. 349 (P & H)], Scientific Pharmacy v/s Commissioner of Cus., ACC, Mumbau [2001 (135) E.L.T. 1085 (Tri. - Mumbai)], Purulax Electric (P) Ltd. v/s Commissioner of Customs, Mumbai [2001 (138) E.L.T. 786 (Tri. - Mumbai)], M.C. Daver Aromatics P. Ltd. v/s Commissioner of Customs, Mumbai [1999 (113) E.L.T. 91 (Tribunal)], H. Kumar Gadecha v/s Commissioner of Customs, Ahmedabad [2009 (243) E.L.T. 248 (Tri. - Ahmd.)] and Commissioner of Customs v/s Binani Cement Ltd. [2009 (238) E.L.T. 33 (Guj.)], Pushpam Pharmaceuticals Company v/s Collector of C. Ex., Bombay [1995 (78) E.L.T. 401 (S.C.)]

Issue Involved:

The issued involved in this matter was

“Whether the appellant who was a bona fide purchaser of valid DEPB licence could be denied the benefit of the same because the DEPB licence was obtained by the exporter under mis-declared facts deliberately?”

Order of the Commissioner (Appeal):

The Commissioner (Appeal) held as under:

Ø The Commissioner (Appeal) held that the period of import was July 2003 whereas the show cause notice was issued to the appellant in July 2008. There were no findings in the impugned order that any mala fide intention was their on the part of the appellant or there was suppression by the appellant with intent to evade payment of duty. The notice under Section 28 of the Act was not maintainable because the normal period of six months stipulated by Section 28 of the Act stood already expired on the date of issuance of the SCN.

Ø The Commissioner (Appeal) held that the Proviso to sub-section (1) of Section 28 of the Act provided that where any duty has not been levied or has been short-levied or the interest has not been charged or has been part paid or the duty or interest has been erroneously refunded by reason of collusion or any willful mis-statement or suppression of facts by the importer or the exporter or the agent or employee of the importer or exporter, the provisions of this sub-section shall have effect as if for the words “one year” and “six months”, the words “five years” were substituted.

Ø Accordingly, it was held that there was no allegation that the appellant has not paid the duty by reason of collusion or any willful mis-statement or suppression of facts. Therefore, the demand of duty invoking proviso to sub-section (1) of Section 28 was not sustainable. There were no grounds to invoke extended period of limitation because the appellant could not be accused of mis-representation, collusion or suppression of facts within the meaning of proviso postulated by Section 28.

Ø It was held that appellant was a transferee of the DEPB therefore, the ratio of the judgment of the Hon’ble Supreme Court in the case of Ajay Kumar & Co and other judgments relied upon by the appellant on limitation are applicable to the facts of the present case. Accordingly, it was held that the demand in question was barred by limitation under Section 28.

Ø On merits, the Commissioner (Appeal) held that the DEPB licence was not forged document and was legitimately issued by the licensing authority i.e. DGFT. The DEPB is tradable and the purchaser can avail the same benefits which could have been availed by the original exporter. DEPB licence enables the importer to import goods without paying duty in cash. The appellant had purchased the DEPB licence from the open market in the bona fide belief of it being genuine. It is not the case of the Department that the appellant had even remote knowledge or information of the fraudulent tactics practiced by the exporter in obtaining the DEPB licence in question, much less they being a party to the manipulations. It is also a fact on record that the RA produced by the appellant for payment of duty in respect of the imported goods was issued in their name by the proper officer of Customs. Therefore, the authenticity of the DEPB–RA is not at all in dispute in this case.

Ø The Commissioner (Appeal) held that the question could be differently addressed if the document itself, on the strength whereof credit is claimed, was forged. It was held that the New Delhi Tribunal in Paramount Steel Ltd. [2008 (223) ELT 593 (Tri-Del)] relying on the judgment of the Hon’ble High Court of Punjab & Haryana in Leader Valves Ltd. [2007 (218) ELT 349 (P&H) has held that when the importer was not a party to fraud having purchased freely transferable DEPB in bona fide manner they are not to be deprived of benefits legitimately available to them. The decision in the case of Leader Valves Ltd, was maintained by the Apex Court [2008 (227) ELT A29 (SC)].

Ø It was also held that the order in the case of DSM Anti Infective India Ltd 2006 (199) ELT 250 (T) is stay order and the Adjudicating Authority has failed to notice that the final order in that case was in their favour as reported in 2009 (91) RLT 83 (CESTAT-Del.). The other decision relied upon by the Adjudicating Authority has also been categorically distinguished by the New Delhi Tribunal in its decision in Paramount Steel Ltd. [2008 (223) ELT 593 (Tri-Del)]. Similar is the view taken by the Hon’ble High Court of Gujarat in the case of Binani Cements Ltd. [2009 (238) ELT 33 (Guj.)] and by CESTAT in its judgment in Flexo Polymers Pvt. Ltd. Vs. CC, Amritsar [2008 (223) ELT 553 (Tri-Del)].

Ø The Commissioner (Appeal) applied the ratio laid down by the Appellate authorities in the aforementioned decisions and held that the imports made under the DEPB licence, which was valid at the time of import, the subsequent modification/cancellation of the same on the ground that the exporter procured them by fraud/manipulation will not have any bearing upon the imports made by the appellant.

Ø As there are no mala fide established on the part of the appellant, the Commissioner (A) held that the imports made by the appellant in terms of the RA lawfully and validly issued in their name cannot be held invalid. The Commissioner (Appeal) found force in the submission of the appellant that the findings by the Adjudicating Authority that the DEPB obtained by alleged over-invoicing of exports by the exporter would make the licence non est, attracting confiscation do not hold good and in the result demand of duty on goods imported by the appellant, can not survive the scrutiny of law.

Ø With regard to confiscation under Section 111, the Commissioner (Appeal) held that there is nothing in the impugned order which would indicate that the import in question by the appellant was effected in contravention of any of the provisions of the Act so as to attract confiscation under the provisions of Section 111 of the Act and therefore, there cannot be any valid ground for clamping confiscation of the imported under Section 111 of the Act.

Ø For a penalty under Section 112 of the Act, it was held that it has to be shown that the person who is sought to be penalized has, in relation to any goods, done or omitted to do any act which act or omission renders such goods liable to confiscation under Section 111 or has abetted such commission or omission. In the present case, the Adjudicating Authority has not found the DEPB having been fraudulently obtained by the appellant, nor is it his finding that the appellant in any way abetted the manipulation by the exporter. Therefore, when the department has not established that the appellant, by any commission or omission, rendered the imported goods liable to confiscation or a case of abetment of the offence or fraud by the exporter, the conclusion arrived by the Adjudicating Authority for denying the benefit of DEPB scheme for the imported goods and imposition of penalty on the appellant under Section 111 and 112 respectively of the Act appears to be baseless.

Ø In the end, the Commissioner (Appeal) held that there exists no evidence against the appellant to sustain the findings of the Adjudicating Authority in the impugned order.

Decision of the Commissioner (Appeal):

The Impugned order was set aside. Appeal allowed.

Conclusion:

The Commissioner (Appeal) rightly held that when the DEPB licence was valid and when the importer had purchased the same under bona fide belief and had not colluded with the original licence holder, then the importer could not be denied the benefit accruing due to the said licence. The importer cannot be penalized for the wrongful act of another person i.e. the exporter herein.

When a person has paid rightful consideration and had genuinely purchased a negotiable instrument, then being holder-in-due course, he can accrue the benefits of such an instrument, irrespective of the fact that the said instrument was obtained by fraud, mis-declaration etc.

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PJ/CASE STUDY/2010-11/15
07 August 2010

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PJ/CASE STUDY/2010-11/15
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