The Customs, Excise & Service Tax Appellate Tribunal (CESTAT), Bengaluru Bench, has held that customs duty and interest remain payable when confiscated goods are redeemed under Section 125 of the Customs Act, 1962, even where the purchaser claims to have acquired the goods in good faith on the basis of apparently genuine documents.

The bench of R. Bhagya Devi (Technical Member) dealt with the confiscation of a Yamaha R-1 motorbike that had been imported into India without payment of customs duty on the strength of a fabricated Bill of Entry. While the Tribunal upheld the liability to customs duty and interest, it reduced the redemption fine from ₹50,000 to ₹10,000, taking into account the purchaser’s bona fide belief and the fact that the penalty had already been set aside. 

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The appellant had purchased a Yamaha R-1 motorbike bearing registration No. MH 06 AR 8899 from an individual in Bengaluru on April 10, 2013, for ₹5 lakh. According to the appellant, the purchase was made in good faith because he was provided with documents including a Bill of Entry, insurance policy, challan and a sale letter purportedly issued by the importer.

The vehicle had originally been imported through Indira Gandhi International Airport under Bill of Entry No. 110190 dated May 29, 2008. The records indicated M/s Galaxy Trading as the importer. The appellant contended that he had relied upon the documents made available to him and therefore should not be made liable for customs duty or redemption fine arising from the alleged irregularities in the original import.

The Customs authorities, however, discovered during investigation that the address of the person shown in the registration records was fictitious and that the Bill of Entry relating to the motorcycle was fake. It was consequently found that the motorcycle had been imported without payment of the applicable customs duty.

The original adjudicating authority ordered confiscation of the motorcycle and imposed a redemption fine of ₹50,000 along with a penalty of ₹20,000 under Section 112 of the Customs Act. On appeal, the Commissioner (Appeals) upheld the redemption fine but dropped the penalty under Section 112. The purchaser thereafter approached the CESTAT.

Before the Tribunal, the appellant argued that he had no knowledge of the fraudulent import. He maintained that the documents supplied to him appeared genuine and that he had purchased the motorcycle under a bona fide belief that it had been lawfully imported.

The appellant also challenged the proceedings on limitation, contending that the customs authorities could not raise the demand after the normal limitation period had expired. Reliance was placed on judicial precedents including Commissioner of Customs (Import), Bombay v. VXL India Ltd., Shanoob M.S. v. Commissioner of Customs, Cochin and HCL HP Ltd. v. Commissioner of Customs.

The Department opposed the argument, submitting that the import was fraudulent and that limitation could not be invoked in a case involving forged documents. The Revenue relied upon the Supreme Court’s decision in Commissioner of Customs (Preventive) v. Aafloat Textiles (I) Pvt. Ltd. and the Tribunal’s decision in Mercedes Benz India Pvt. Ltd. v. Commissioner of Customs, Delhi.

The Tribunal found that the motorcycle had been illegally imported without payment of customs duty and that the Bill of Entry was fake or fabricated. It held that the goods were consequently liable to confiscation under the Customs Act.

Importantly, the Tribunal noted that the Revenue came to know of the fraudulent import only on April 17, 2013. The show-cause notice for confiscation was issued on August 19, 2013. Therefore, the notice could not be treated as time-barred.

The Tribunal relied extensively upon the Supreme Court’s observations in Aafloat Textiles, particularly on the legal consequences of fraud and forged documents. The Supreme Court principle relied upon by the Tribunal was that fraudulent or forged documents cannot be treated as having legal existence and that the discovery of fraud can affect the limitation position.

The Tribunal accordingly rejected the appellant’s limitation challenge.

The Tribunal referred to the Supreme Court’s discussion that a purchaser is expected to exercise appropriate care and make necessary enquiries regarding the genuineness of documents and title before purchasing property or goods. The principle does not mean that a buyer must blindly accept every risk; rather, the purchaser must take reasonable care and undertake appropriate verification.

The Tribunal further noted that the purchaser must establish that he had made the necessary enquiries and taken appropriate precautions regarding the genuineness of the documents. Where forged documents are involved, the purchaser cannot automatically escape the consequences merely by asserting that he was unaware of the fraud.

Thus, although the appellant was not subjected to penalty because of the circumstances surrounding his purchase, his plea of bona fide purchase did not eliminate the statutory consequences attached to the unlawfully imported vehicle.

The Tribunal then examined the important question of whether customs duty could be demanded when confiscated goods are redeemed on payment of redemption fine under Section 125 of the Customs Act.

The Tribunal relied upon the Supreme Court’s decision in Navayuga Engineering Co. Ltd. v. Union of India, which explains the relationship between confiscation, redemption fine and customs duty.

The Supreme Court has recognised that confiscation and duty operate in distinct spheres. Customs duty represents the fiscal liability arising from importation, whereas confiscation and redemption fine arise from violations of customs law.

Section 125 provides an option to redeem confiscated goods by paying a fine in lieu of confiscation. Where the option is exercised, Section 125(2) additionally makes the owner liable for the duty and other charges payable in respect of the goods.

The Tribunal therefore held that redemption of the motorcycle could not extinguish the underlying customs duty liability.

The Tribunal emphasised the distinction between customs duty and redemption fine.

Referring to the Supreme Court’s interpretation of the statutory scheme, the Tribunal noted that customs duty is a tax obligation and is distinct from confiscation, penalty and redemption fine, which arise from contravention of customs law.

The Tribunal further observed that once the option to redeem confiscated goods is exercised, payment of duty becomes an integral condition associated with such redemption. Section 125(2), introduced by Parliament in 1985, expressly recognises the owner’s liability to pay duty and other charges in addition to the redemption fine.

Accordingly, the appellant could not avoid payment of customs duty merely because he had to pay a redemption fine for retaining the motorcycle.

The Tribunal also examined the Supreme Court’s decision in Jagdish Cancer & Research Institute and clarified the correct legal position concerning the interaction between Sections 125 and 28 of the Customs Act.

According to the Tribunal, the fact that the liability to pay duty arises under Section 125(2) does not mean that Section 28 becomes irrelevant for purposes of assessment or determination of that duty.

The Tribunal explained that where confiscated goods are redeemed after the owner exercises the option under Section 125, the duty liability arises because of Section 125(2). However, Section 28 may operate as the machinery provision for determining and assessing the amount of duty payable.

This distinction was central to the Tribunal’s conclusion on interest.

The Tribunal held that the liability does not stop at customs duty. Interest on delayed payment is also attracted.

It noted that Section 125(2) makes the owner liable to “duty and charges” payable in respect of the goods. Once Section 28 is applied for determining the duty obligation arising in connection with redemption under Section 125(2), the statutory provision relating to interest on delayed payment also becomes applicable.

The Tribunal therefore concluded that the appellant was liable to pay both customs duty and interest in respect of the Yamaha motorcycle.

Despite upholding the duty and interest liability, the Tribunal took into consideration the appellant’s circumstances.

The Commissioner (Appeals) had already recognised that the appellant purchased the motorcycle under a bona fide belief and had therefore set aside the penalty imposed under Section 112. The CESTAT considered this circumstance relevant while determining the appropriate redemption fine.

Consequently, the Tribunal reduced the redemption fine from ₹50,000 to ₹10,000 while maintaining the liability to pay customs duty and applicable interest.

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