The Calcutta High Court has ruled that a bona fide purchaser of a duty-free import licence cannot be compelled to pay customs duty, interest or redemption fine due to fraud allegedly committed by the original licence holder when the licence remained valid and had not been cancelled by the competent authority.
The Bench of Justice Rajarshi Bharadwaj and Justice Sudip Deb held that a genuinely issued licence obtained or made transferable on the basis of fraud is voidable rather than automatically void. Until the licence is cancelled in accordance with law, it continues to remain a valid and effective instrument.
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The Court consequently quashed the customs duty demand of ₹22.87 lakh, the consequential interest and a redemption fine of ₹15 lakh imposed on Comet Overseas Pvt. Ltd.
Comet Overseas is engaged in the export-import business involving bulk commodities. It purchased Duty Free Import Authorisation Licence No. 0210100847, dated May 16, 2007, from Gemini Overseas Ltd.
Gemini Overseas had obtained 23 DFIA licences from the Directorate General of Foreign Trade during 2007-08 and 2008-09 under Customs Notification No. 40/2006-Cus., dated May 1, 2006. The licences permitted the duty-free import of Mulberry Raw Silk of any grade, Dupion Silk Yarn and Reeled Tassar Yarn.
Three of these licences were subsequently endorsed as transferable by the Regional Authority after Gemini Overseas certified that it had fulfilled the prescribed export obligation. The licence acquired by Comet Overseas was one of those transferable licences.
Comet Overseas purchased the licence for ₹14,51,795 through proper banking channels with the assistance of its customs house agent.
Using the licence, the company imported Mulberry Raw Silk Yarn through Kolkata Port under a bill of entry dated October 22, 2008. The imported goods had an assessable value of approximately ₹74.03 lakh, while the customs duty foregone amounted to ₹22,87,654.95.
The dispute arose after the Directorate of Revenue Intelligence received information that Gemini Overseas had not properly fulfilled its export obligation.
According to the Department, Gemini Overseas exported fabric manufactured from Noil Yarn but described it in the export documents as natural silk fabric predominantly made from Mulberry Raw Silk.
Certain export consignments were intercepted at N.S. Dock, Kolkata, on November 12 and 13, 2008. Another interception was carried out at the factory of Eastern Silk Industries Ltd. in the Falta Special Economic Zone on November 15, 2008.
Tests conducted by the Central Silk Board reportedly found that the fabric was made from Noil Yarn mixed with cotton. Gemini Overseas subsequently admitted in a letter dated January 2, 2009 that the description of the goods in its export documents was incorrect and that it stood to receive benefits to which it was not entitled. It also expressed willingness to pay the duty foregone through the use of the three transferable licences.
A show-cause notice dated May 11, 2012 was issued to Comet Overseas, Gemini Overseas, a director of Gemini Overseas and the chairman and managing director of Eastern Silk Industries.
The notice proposed the recovery of customs duty of ₹22,87,654.95 with interest. It also proposed confiscation of the imported goods under Section 111(o) of the Customs Act, 1962, and the imposition of penalties under Section 112.
The High Court noted that the show-cause notice did not specifically accuse Comet Overseas of collusion, wilful misstatement or suppression of facts.
Through an Order-in-Original dated February 28, 2014, the adjudicating authority confirmed the customs duty demand and imposed a redemption fine of ₹15 lakh. A penalty of ₹10 lakh was also imposed under Section 112 of the Customs Act.
Comet Overseas challenged the adjudication order before the Customs, Excise and Service Tax Appellate Tribunal.
By its order dated December 22, 2015, CESTAT partly allowed the company’s appeal. The Tribunal set aside the ₹10 lakh penalty after finding that Comet Overseas had no knowledge about the nature of the goods used and exported by Gemini Overseas or Eastern Silk Industries.
However, CESTAT sustained the demand for customs duty, interest and the ₹15 lakh redemption fine. Comet Overseas thereafter approached the Calcutta High Court.
The substantial question before the High Court was whether a bona fide purchaser of a duty-free import licence could be required to pay duty, interest and redemption fine when it had no notice of any irregularity committed by the exporter and the licence had not been cancelled.
The Revenue contended that fraud committed by Gemini Overseas went to the foundation of the licence and, therefore, the licence could not confer any customs exemption upon its subsequent holder.
The High Court, however, distinguished between a forged licence that had never been issued by the competent authority and a licence genuinely issued by the DGFT but subsequently affected by fraud committed at the stage of certification of export obligation.
The Court observed that decisions involving forged DEPB scrips or forged Transfer Release Advices could not be directly applied to the present case. Here, the DFIA licence had admittedly been issued by the DGFT and endorsed as transferable by the Regional Authority.
The alleged fraud was committed by the original licence holder at the export-obligation certification stage. The licence itself had not been forged and had never been cancelled by the DGFT or the Regional Authority.
Relying on the Supreme Court’s decisions in East India Commercial Co. Ltd. v. Collector of Customs and Collector of Customs v. Sneha Sales Corporation, the High Court held that a licence affected by fraud or misrepresentation does not automatically become non-existent.
Such a licence remains legally effective unless it is avoided or cancelled in the manner prescribed by law.
The Court said that the absence of cancellation was a material and unrebutted fact. Since the licence remained uncancelled, it had to be treated as a valid and subsisting instrument when Comet Overseas made the import.
The Bench clarified that the general principle that “fraud vitiates everything” could not, without more, be used to defeat the rights of an innocent purchaser for value who had no notice of the fraud.
The Court placed considerable importance on Comet Overseas’ status as a bona fide transferee.
It was undisputed that the company purchased the DFIA licence for ₹14.51 lakh through proper banking channels. CESTAT had also conclusively found that the importer had no knowledge about the goods actually used or exported by the original licence holder.
That finding was not challenged by the Customs Department before the High Court.
Applying the principle recognised in Taparia Overseas (P) Ltd. v. Union of India, the Bench held that a bona fide purchaser for value without notice of the original fraud stood on a materially different footing from the person who committed or participated in the fraud.
The default of an upstream party could not automatically be imposed upon an innocent transferee, the Court observed.
Comet Overseas also sought to challenge the invocation of the extended limitation period on the ground that the show-cause notice did not allege collusion, wilful misstatement or suppression against it.
The High Court declined to decide limitation as an independent ground because no substantial question of law concerning limitation had been framed when the appeal was admitted. The company had also not sought the framing of an additional question before the final hearing.
Nevertheless, the Court took note of the fact that the show-cause notice contained no allegation of collusion, wilful misstatement or suppression against Comet Overseas while assessing the overall circumstances of the case.
Answering the substantial question of law in favour of Comet Overseas, the High Court held that a bona fide purchaser for value, having no notice of an irregularity committed by the exporter or original licence holder, cannot be required to pay duty, interest or redemption fine when the licence has not been cancelled by the issuing authority.
The Court accordingly set aside the CESTAT order to the extent that it sustained the customs duty demand of ₹22,87,654.95, the applicable interest and the redemption fine of ₹15 lakh.
CESTAT’s decision setting aside the ₹10 lakh penalty under Section 112 was left undisturbed, as the Customs Department had not challenged that part of the order.
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