By TIOL News Service

MUMBAI, JAN 02, 2013: THIS petition challenges the order of the Settlement Commission, Customs and Central Excise (Settlement Commission) to the extent it imposes a penalty of Rs.15 lacs on the petitioner.

Consequent to a search, show cause notice dated 30/11/2005 demanding in the aggregate a duty of Rs.3.30 crores was issued to the petitioner. The notice alleged that during the period April, 2001 to September, 2002 the petitioner had cleared partially oriented yarn (POY) of higher grade by downgrading the variety of POY in its invoices and thus discharging duty on a lower value. Therefore evasion of duty is alleged.

On receipt of the show cause notice dated 30/11/2005 the petitioner opted to settle the dispute before the Settlement Commission. In its application the petitioner accepted the duty liability of Rs.1.89 crores as against the total demand of Rs.3.30 crores while praying for immunity from penalty, interest and prosecution. In its application for settlement, the petitioner has admitted and accepted the allegations contained in the show cause notice.

The Settlement Commission by order dated 8/2/2011 settled the dispute directing the revenue to rework the amounts after granting the petitioner the benefit of cum duty price in respect of the differential price. The impugned order dated 8/2/2011 while granting immunity from prosecution, imposed a penalty of Rs.15 lacs on the petitioner besides waiving interest in excess of 10% simple interest.

The petitioner submitted that the Settlement Commission is a statutory body and obliged to pass reasoned orders. It is their submission that the breach of law on the part of the Petitioner was not deliberate and thus the impugned order is bad. It is submitted that the petitioner had sought settlement only with a view to avoid prolonged litigation. It was next submitted that merely because duty liability has been admitted by a party it does not follow that the penalty is imposable. The decision making process has been vitiated and therefore this court should exercise its jurisdiction and set aside the impugned order to the extent it has imposed a penalty of Rs.15 lacs without any discussions.

The High Court observed,

It is an undisputed position that the petitioner had opted to go before the Settlement Commission to settle the dispute when show cause notices dated 30/11/2005 issued to it were pending adjudication before the Commissioner of Central Excise, Nagpur. The Settlement Commission has been constituted as an extra ordinary measure to enable a defaulting person to make a full and complete disclosure/confession to have the matter settled. It is not a place where one can challenge the show cause notice on merits. In this case the petitioner has made a conscious decision of not going ahead with pending adjudication proceeding but availing the remedy of settlement provided under the Act. Full and complete disclosure is a sine qua non to invoke the jurisdiction of the Settlement Commission. In an application made under Section 32E of the Act, an applicant has to make a full and true disclosure of his duty liability including admission of short levy on account of misclassification, under valuation etc.

Further, in the application for settlement and seeking immunity from penalty, interest and prosecution the petitioner has submitted in Paragraph 38 of its application as under:

"The applicant submit that the present application is being filed before this Hon'ble Settlement Commission admitting and accepting the allegations contained in the show cause notice".

It is very pertinent to note that the show cause notice dated 30/11/2005 has alleged deliberate mis-declaration i.e. valuation fraud and the manner in which it was done. Thus, the acceptance of undervaluation and the allegation of a deliberate and fraudulent undervaluation is an accepted position.

In the light of the above, once the allegations in the show cause notices are admitted by the petitioner, it is not open to the petitioner to contend that the Settlement Commission ought to have passed a detailed reasoned order before imposing a penalty of Rs.15 lacs. It is also important to note that the Settlement Commission in the impugned order while settling the matter proceeded on the basis of the admission of the petitioner and applied the same test while imposing penalty. It is most relevant to note that in the spirit of settlement, the Settlement Commission has imposed a penalty of only Rs.15 lacs and not equivalent penalty as proposed in the show cause notice issue for adjudication.

In this case, there is an admission on the part of the petitioner with regard to conduct which alleges deliberate mis-declaration and under valuation. Thus in the present facts, mens rea was an admitted position and therefore not an issue before the Settlement Commission.”

Further, the High Court found that that the impugned order does indicate/disclose the reasons for imposing a penalty. In para 15 of the impugned Order, the Settlement Commission decided not to consider/examine the pleas of the petitioner on merits of duty demand as the same was admitted by the petitioner and for that very reason also does not disregard the valuation fraud for the purposes of imposing penalty. In the circumstances, there has been no breach of law in the decision making process and the order imposing penalty does disclose the mind of the Settlement Commission in imposing penalty. In any case, in view of the admission of the petitioner, no prejudice is caused to it in case a penalty of Rs.15 lacs is imposed. Therefore, the Court found that there is no fault with the decision making process and was not inclined to interfere.

Settlement Commission – a package deal; can a part of the order be challenged? The High Court made it clear that in the peculiar facts of this case, the Court has not examined the issue whether it is open to challenge a part and accept the other part of the order of the Settlement Commission even when admittedly an order of the Settlement Commission is in the nature of a package deal.

The petition is dismissed.

(See 2013-TIOL-08-HC-MUM-CX)