The Customs, Excise & Service Tax Appellate Tribunal (CESTAT), New Delhi Principal Bench, has dismissed an appeal against a customs duty demand arising from the utilisation of fraudulently obtained Duty-Free Import Authorisation (DFIA) licences. 

The bench of  Dr. Rachna Gupta (Officiating President) and Hemambika R. Priya (Technical Member) has observed that an importer who relies upon transferable export incentive licences cannot escape customs duty, interest and penalty merely by claiming to be a bona fide purchaser when it has failed to undertake the necessary verification and due diligence.

The dispute arose from an Order-in-Original passed by the Commissioner of Customs, Delhi. The adjudicating authority had confirmed a customs duty demand of ₹11,68,099 and imposed an equivalent penalty under Section 114A of the Customs Act, 1962.

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The case originated from a large-scale investigation conducted by the Directorate of Revenue Intelligence (DRI), Kolkata Zonal Unit, concerning alleged fake exports shown through the Ghojadanga Land Customs Station in West Bengal.

According to the investigation, a syndicate allegedly fabricated export documents in the names of several exporters to obtain export incentive licences under schemes including DEPB, DFIA and VKGUY. The investigation found that the purported exports had not actually taken place through Ghojadanga Land Customs Station. Customs verification further revealed that the shipping bills relied upon for securing the licences had never been filed before the Customs authorities.

The investigation further established that the allegedly fraudulently obtained transferable licences were subsequently sold through brokers to importers in different parts of the country for utilisation towards payment of customs duty on imported goods.

The appellant had utilised two DFIA licences issued in the name of M/s Royal International, bearing Licence Nos. 0310586905 dated August 11, 2010 and 0310587744 dated August 16, 2010.

These licences were used for clearance of imported polyester fabrics through Tuticorin Port, resulting in what the Department treated as wrongful exemption of customs duty amounting to ₹11,68,099.

The investigation also included searches at the premises of other importers and recovery of documents connecting the fraudulent licences with beneficiary importers. Statements recorded under Section 108 of the Customs Act were relied upon to establish the chain through which the licences had been procured and utilised.

Following the investigation, a show cause notice was issued proposing recovery of duty and interest and imposition of penalties. The adjudicating authority concluded that the DFIA licences used by the appellant were void ab initio, since they had originated from licences obtained on the basis of fake exports.

Before CESTAT, the appellant argued that it had merely purchased the transferable DFIA licences from the exporter, Royal International, and had not participated in the alleged fraud.

The appellant contended that there was no evidence connecting it with the alleged fraudulent exporters, brokers or persons who had engineered the fake-export scheme. It maintained that the licences had been validly issued by the Directorate General of Foreign Trade (DGFT) and were transferable under the applicable Foreign Trade Policy.

The appellant further submitted that the licences had been purchased through normal commercial channels for valuable consideration and that payments had been made through banking channels. According to the defence, an importer purchasing a transferable licence could not reasonably be expected to investigate the entire underlying export transaction undertaken by another person.

It was also argued that once the competent licensing authority had issued a transferable licence after its own scrutiny, the purchaser should be entitled to rely upon its validity. The appellant contended that any failure in governmental verification could not automatically be shifted onto an innocent transferee.

The Department opposed the appeal by relying heavily upon an earlier CESTAT decision concerning Freudenberg Nonwovens India Pvt. Ltd.

According to the Departmental Representative, the Freudenberg case arose from the same DRI investigation and involved the same fraudulent export incentive licence mechanism. The Department pointed out that the Tribunal had already dismissed the appeals in that matter through Final Order Nos. 51065-51067/2025 dated July 16, 2025.

The department argued that the same defence—that the importer was a bona fide purchaser because the licence had been obtained through brokers—had already been rejected. It submitted that the importer had undertaken no verification with DGFT or Customs, had not investigated the genuineness of the underlying exports and had not conducted any enquiry concerning the original exporter.

CESTAT identified the central issue as whether the importer could be held liable for customs duty and penalty when the DFIA licences utilised for duty-free imports were subsequently found to have been fraudulently obtained.

The Bench found that the appellant’s case was materially identical to the earlier Freudenberg matter. It relied upon the reasoning in the earlier decision, which itself had followed the Tribunal’s decision in Mercedes Benz concerning fraudulent export incentive licences and forged Telegraphic Release Advices (TRAs).

The Tribunal noted that in the earlier case, importers had argued that they had purchased transferable licences through brokers, paid consideration through banking channels and were unaware that the licences or related TRAs had been manipulated. That defence was nevertheless rejected because the importers had failed to independently verify the authenticity of the relevant documents.

CESTAT referred to the earlier Mercedes Benz ruling, under which importers could not simply rely on the fact that licences appeared on the DGFT system or had been obtained through brokers. The Tribunal emphasised the need for verification of the relevant TRA and the underlying documentation from the concerned port of registration.

The earlier decision had found that importers who failed to obtain the TRA directly from the port of registration, or failed to ascertain its authenticity from that port, had not exercised the degree of diligence expected from them.

CESTAT specifically recorded that the Icon Fibers matter and the Freudenberg matter arose from the same DRI investigation.

The Tribunal’s comparative assessment identified common features including the same fake-export syndicate, forged export documents, fraudulent DFIA/export incentive licences, the same series of adjudication orders, the same Commissioner and substantially the same legal issue.

The Bench therefore considered the earlier Freudenberg decision to have particularly strong relevance to the case before it.

The Tribunal observed that the investigation had established that Royal International had obtained the DFIA licences on the basis of fabricated exports and that those licences were subsequently used for duty-free imports by the appellant. It consequently found that the underlying foundation of fraud was identical to that considered in the earlier case.

The Tribunal rejected the argument that purchasing the licences through an intermediary was sufficient to establish bona fide conduct.

According to the Bench, the appellant had not made any verification from DGFT or Customs. It had also not conducted any enquiry into the genuineness of the exports or the credentials of Royal International, from whom the licences had originated.

CESTAT held that merely relying upon the broker for procurement and utilisation of the licences could not amount to the exercise of due diligence. The importer could not simply accept documents supplied by an intermediary without independently verifying their authenticity.

The Bench further found that the licences themselves originated from Royal International and were ultimately products of fake exports. In such circumstances, the appellant’s failure to verify the genuineness of the licences became decisive.

The ruling makes an important distinction between the transferability of a licence and the validity of the underlying entitlement.

The fact that a DFIA licence is transferable does not, by itself, mean that an importer acquiring it can disregard the circumstances in which the licence was generated. Where the underlying export transaction is fictitious and the licence is consequently fraudulent or void ab initio, utilisation of such a licence cannot automatically confer a valid exemption from customs duty.

CESTAT specifically observed that the appellant had relied merely upon the transfer of the licences without verifying the authenticity of the exports, validity of the DFIA, correctness of the underlying documents or genuineness of the issuing exporter. It therefore held that the ratio of the Mercedes Benz decision squarely applied.

Since the Tribunal found the customs duty demand to be sustainable, it also upheld the consequential penalty.

The Bench observed that the Freudenberg decision was particularly significant because it arose from the same DRI investigation, involved the same fraudulent export syndicate and the same category of fraudulent export incentive licences, while addressing the same legal questions.

Thus, the Tribunal found no basis for taking a different view in the present appeal.

CESTAT held that the appellant was a beneficiary importer under the same fraudulent scheme and had utilised DFIA licences obtained by Royal International on the basis of fake exports.

The Tribunal accordingly held that the ratio of the Freudenberg Nonwovens decision applied squarely to the case. It found no reason to interfere with the Order-in-Original, upheld the customs duty demand and penalty, and dismissed the appeal.

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