The Delhi High Court has ruled that importers cannot escape customs duty liability by claiming to be bona fide purchasers where transferable duty-credit scrips used for payment of customs duty were found to have been fraudulently manipulated. 

The bench of Justice Anil Khetarpal and Justice Shail Jain observed that an importer cannot disown the acts of an authorised customs representative through whom the disputed scrips were procured and utilised.

The case concerned transferable scrips issued under various export promotion schemes under the Foreign Trade Policy, including the Duty Free Import Authorisation (DFIA), Focus Product Scheme (FPS), Focus Market Scheme (FMS), Vishesh Krishi and Gram Udyog Yojana (VKGUY) and Duty Entitlement Pass Book (DEPB) Scheme.

Buy Now: S. 68 Can’t Be Used to Tax Rs. 10 Crore Advance in Wrong AY: Delhi High Court

The Court noted that such scrips, once issued by the Directorate General of Foreign Trade (DGFT), were transferable and could be registered with Customs for utilisation towards payment of customs duty. The investigation, however, revealed alleged manipulation of the Electronic Data Interchange (EDI) system at ICD Tughlakabad.

According to the findings recorded in the judgment, individuals associated with a Customs Broker were involved in procuring scrips originally issued to exporters and routing them through various entities. The investigation further revealed that digital records were manipulated to artificially increase the value of scrips, reuse exhausted entitlements or utilise scrips which did not exist in DGFT records. In one illustration referred to by the Court, a scrip of ₹100 was allegedly enhanced in the system to ₹10,000.

The importers had relied upon the disputed scrips while filing Bills of Entry and sought to discharge their customs duty liabilities through those instruments. The Customs authorities subsequently issued show-cause notices proposing recovery of customs duty under Section 28(4) of the Customs Act, 1962, along with interest under Section 28AA, confiscation of imported goods under Sections 111(d) and 111(o), and penalties under Sections 112(b)(ii), 114A and 114AA.

The importers argued that they had themselves not manipulated the EDI records and had relied upon documents and scrips that had been processed and accepted by Customs authorities. They also contended that the original scrips, Bills of Entry and other primary documents were not made available and that their requests for cross-examination of Customs officers had been denied.

The defence further relied on the security architecture of the Customs EDI system, arguing that access was restricted to Customs officials and that outsiders could not ordinarily manipulate the system. The importers therefore contended that any manipulation must have occurred within the Customs-controlled system.

The High Court identified three principal issues for determination.

First, it considered whether users or beneficiaries of forged, fabricated or manipulated transferable scrips could avoid liability by claiming protection as bona fide purchasers.

Second, the Court examined whether non-availability of original scrips and related documents, coupled with denial of cross-examination of Customs officers, rendered the proceedings invalid for violation of natural justice.

Third, it considered whether penalties under Sections 112 and 114A of the Customs Act could be sustained where the importers claimed that they had no direct knowledge of the manipulation.

The Court found that he and one of his entities had been engaged by the appellant to handle customs-clearance operations. He had been entrusted with import documents, preparation and processing of Bills of Entry, communication of duty liabilities, coordination of customs formalities and arrangement for utilisation of scrips.

The Court relied upon Section 147 of the Customs Act, under which an importer may transact customs business through an authorised agent and acts done by such an agent are, unless proved otherwise, deemed to have been done with the knowledge and consent of the importer.

Consequently, the Court held that the importer could not accept the benefit generated through an agency relationship and subsequently distance itself from the manner in which the benefit was obtained. The fact that the manipulation was ultimately discovered in the EDI system did not, by itself, sever the agency relationship.

The Court also rejected the attempt to invoke the principle of bona fide purchase.

It explained that the underlying principle of Section 41 of the Transfer of Property Act, 1882, incorporates the requirement of good faith and reasonable diligence. Even though Section 41 does not directly govern the transfer or utilisation of customs scrips, the principle of due diligence was considered relevant in assessing whether an importer could claim protection as a bona fide purchaser.

Importantly, the Court distinguished between the genuine entitlement originally represented by a scrip and the inflated entitlement subsequently reflected in the Customs EDI system.

The scrips may have been genuinely issued by the DGFT to exporters, but the enhanced values entered into the EDI system exceeded the entitlement actually granted by the competent authority. Since the transferor never lawfully possessed the inflated entitlement, the Court held that such enhanced entitlement could not be transferred to the importer merely through manipulated electronic entries.

The High Court rejected the argument that the entire case rested merely upon disputed EDI entries.

The investigation, according to the Court, produced independent documentary, electronic and oral evidence which, when considered cumulatively, established the fraudulent modus operandi and misuse of the scrips. Therefore, the absence of original scrips or related documents did not automatically create an adverse inference in favour of the importers.

The Court also considered the evidence concerning the intermediary’s explanations and dealings. The investigation revealed inconsistencies in his statements, failure to produce purchase records and failure to verify the authenticity of licences from the DGFT. The Court further noted evidence indicating that certain scrips had been fraudulently enhanced after their original issuance.

On the question of penalty, the Court drew an important distinction between Sections 112 and 114A of the Customs Act.

It held that Section 114A applies where duty has not been levied or has been short-levied because of fraud, collusion, wilful misstatement or suppression of facts with an intention to evade duty. The Court observed that the provision does not require the importer to have personally executed the fraudulent act.

In the present case, the Court found that the appellant had filed Bills of Entry containing declarations concerning utilisation of scrips despite having failed to verify their existence, validity or availability. The Court therefore held that the conduct could not be characterised as merely innocent reliance upon an external fraud, particularly when the importer had obtained the direct benefit of the manipulated scrips.

Accordingly, the penalty under Section 114A was sustained.

At the same time, the Court held that a separate penalty under Section 112(b) could not be imposed where the statutory scheme attracted Section 114A. The Section 112(b) penalty was therefore set aside.

The Court noted that the 41 connected writ petitions arose from the same investigation and involved substantially similar questions of law and fact.

Rather than relegating the writ petitioners to alternative statutory remedies, the Court considered that doing so would serve little purpose because the issues had already been conclusively addressed in the connected Customs Appeals. It therefore disposed of the writ petitions in terms of the findings recorded in the appeals.

The Delhi High Court held that the appellant was not a bona fide purchaser and could not claim protection under the principle of caveat emptor. The Court further found that the proceedings were supported by overwhelming independent documentary, electronic and oral evidence and that the appellant had failed to establish prejudice warranting judicial interference.

The Court upheld the penalties imposed under Section 114A of the Customs Act, 1962, but set aside the separate penalty under Section 112. The same findings and directions were made applicable, mutatis mutandis, to the connected writ proceedings. All pending applications were also closed.

Membership Required to Access Case Details & Order Copy

To view the complete Case Details and Download Order Copy, you must have an active membership. Please subscribe to continue.

Read More: S. 68 Can’t Be Used to Tax Rs. 10 Crore Advance in Wrong AY: Delhi High Court