The Customs, Excise & Service Tax Appellate Tribunal (CESTAT), Principal Bench, New Delhi, has upheld the imposition of penalty under Section 114A of the Customs Act, 1962 in a case involving the use of forged DEPB licences and Transfer Release Advices (TRAs) for clearing imported automobile components.
However, the bench of Dr. Rachna Gupta (Officiating President) and Hemambika R. Priya, (Technical Member) partly allowed the appeal by extending the statutory benefit of a reduced penalty of 25%, after noting that the penalty was paid within the prescribed 30-day period.
The appellant/assessee, an automobile-component manufacturer, had imported consignments of shock absorber components through the Inland Container Depot (ICD), Ballabhgarh. For payment of customs duty, it sought to utilise nine Transfer Release Advices purportedly issued against DEPB licences under Notification No. 45/2002-Cus. dated April 22, 2002.
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The Customs authorities subsequently sought verification of the TRAs from the Jawaharlal Nehru Custom House (JNCH), Nhava Sheva. The Special Intelligence and Investigation Branch (SIIB) informed the authorities that the DEPB licences and corresponding TRAs were not genuine and had not been issued by the competent authority.
After being informed about the alleged forgery, the importer deposited ₹1,29,43,927 towards customs duty under protest on August 12, 2003. Subsequent investigation found that 19 DEPB licences, including the nine licences used by the importer, were forged.
A Show Cause Notice issued in October 2006 proposed confiscation of the imported goods under Section 111(m) of the Customs Act, confirmation of the customs duty under Section 28, recovery of interest, and imposition of penalty under Section 114A.
The adjudicating authority subsequently confirmed the customs duty demand of ₹1,29,43,927, appropriated the amount already deposited, confirmed the interest liability and imposed a penalty equivalent to the duty amount under Section 114A. A redemption fine of ₹10 lakh was also imposed, along with penalties on certain employees of the importer.
The matter reached the CESTAT, which in 2008 upheld the duty and interest liabilities but set aside the redemption fine. Importantly, it remanded the matter for fresh consideration only on the issue of penalties, directing that cross-examination of a key witness be permitted and that the importer be given a reasonable opportunity of personal hearing.
The matter subsequently travelled to the Supreme Court. In its order dated September 23, 2022, the Supreme Court dismissed the appeal insofar as the duty liability was concerned while noting that the penalty proceedings arising from the CESTAT’s remand were still pending.
The Supreme Court directed that the remand proceedings be completed expeditiously, preferably within six months. Thereafter, cross-examination of Shri Vijay Singh Bishnoi was conducted on March 1, 2023. During the cross-examination, he stated that he independently dealt in the sale and purchase of import licences and acknowledged business dealings with the importer in relation to five import licences, but denied acting as an agent of the entities connected with the disputed TRAs.
Following the remand proceedings, the Commissioner concluded that the importer had failed to establish its bona fides or adequate due diligence in using the forged DEPB licences and TRAs. A penalty of ₹1,29,43,927 under Section 114A was consequently imposed.
Before the Tribunal, the importer argued that it was a bona fide purchaser and had no knowledge that the DEPB scrips and TRAs were forged.
It submitted that the documents had been purchased for consideration through proper banking channels from Shri Vijay Singh Bishnoi, who was represented as a DEPB agent. The appellant also relied upon its earlier dealings with him, stating that it had previously purchased genuine DEPB scrips without any dispute.
The importer further relied upon debit notes issued by the concerned trading entities and letters acknowledging the sale of the scrips. According to the appellant, the material on record did not establish any knowledge, connivance or participation on its part in the alleged forgery.
The appellant also contended that, during the relevant period, there was no mechanism by which it could independently verify the genuineness of DEPB scrips and TRAs with the DGFT. It argued that the Department was required to establish mala fide conduct through cogent evidence and that mere negligence or failure to undertake additional verification could not automatically justify a penalty under Section 114A.
The Department, however, maintained that the penalty issue was governed by the Supreme Court’s earlier decision in the same matter and by subsequent CESTAT decisions concerning forged DEPB scrips and TRAs.
The Department argued that the importer had failed to undertake even basic verification. According to the Revenue, the importer did not verify the authenticity of the DEPB licences from the DGFT, the identity and credentials of the intermediary, the addresses of the concerned trading entities, or the genuineness of the licences with the original DEPB holders.
The Department further argued that forged scrips were void from inception and that the defence of bona fide purchase could not by itself provide immunity from statutory penal consequences.
The CESTAT framed the surviving controversy narrowly: whether the adjudicating authority was correct in imposing the mandatory penalty under Section 114A of the Customs Act, 1962.
The Tribunal relied heavily on the Supreme Court’s earlier ruling in the appellant’s own case. The Supreme Court had held that the principle that “fraud vitiates everything” applied to forged or fake DEPB licences and that such instruments were void ab initio.
The Supreme Court had consequently upheld the Department’s invocation of the extended period of limitation in relation to the fraudulent DEPB transactions.
A significant aspect of the ruling is the Tribunal’s treatment of the relationship between the extended limitation provisions and Section 114A.
The Tribunal observed that the statutory ingredients for invoking the extended period under the proviso to Section 28—namely collusion, wilful misstatement or suppression of facts—are identical and coterminous with the statutory triggers for imposing a penalty under Section 114A.
Since the Supreme Court had already upheld the finding of fraud and the invocation of the extended period, the Tribunal held that the Section 114A penalty followed as a mandatory consequence. According to the Bench, Section 114A did not confer discretion upon the adjudicating authority to dilute, reduce or waive the penalty equal to the duty determined.
The Tribunal further held that presentation of forged TRAs for clearance of shock absorber components at a nil rate of duty constituted an explicit positive act of misstatement and deception against the exchequer.
It also noted that the cross-examination of the broker and responses from the original licence holders demonstrated that the importer had failed to carry out adequate due diligence to verify the validity of the documents with the issuing authorities.
The Bench referred to earlier decisions including Freudenberg Nonwovens India Pvt. Ltd., Nidhi Enterprises, and Mercedes Benz India Pvt. Ltd., observing that the question of penalty in cases involving forged DEPB scrips or TRAs depends significantly upon the importer’s conduct and the extent of due diligence exercised before availing the benefit of the documents.
Applying those principles to the facts before it, the Tribunal found that the appellant had not produced evidence establishing that adequate due diligence had been undertaken before purchasing the disputed scrips and TRAs.
The Tribunal also took note of the cross-examination in which Shri Vijay Singh Bishnoi denied the appellant’s contention that he had sold the disputed scrips to it.
In the absence of evidence establishing the claimed due diligence, the Tribunal declined to accept the appellant’s defence and upheld the penalty under Section 114A.
Although the Tribunal upheld the penalty liability, it accepted the appellant’s alternative claim concerning the statutory reduced-penalty mechanism.
Section 114A provides that where the determined duty or interest and applicable interest are paid within 30 days from communication of the order, the penalty can be reduced to 25% of the duty or interest determined, subject to payment of the reduced penalty within the same prescribed period.
The appellant submitted that it had complied with this requirement and had paid 25% of the penalty within 30 days of communication of the impugned order. The Department did not produce evidence contradicting this submission.
The CESTAT therefore held that the appellant was entitled to the 25% reduced penalty benefit mandated under Section 114A.
Ultimately, the Tribunal upheld the impugned Order-in-Original insofar as it imposed the Section 114A penalty but partly allowed the appeal to the extent of granting the statutory benefit of reduced penalty.
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