By TIOL News Service

NEW DELHI, APR 10, 2015: CUSTOMS - Import - Failure to fulfill conditions of exemption - Confiscation - redemption fine - Is duty payable under Section 125 if goods are not redeemed? No.

Facts : Appellant, a hospital imported medical equipment without payment of Customs duty under Notification No. 64/88- cus dated 01.03.1988. The Notification imposed conditions that the Hospital should provide free treatment to at least 40% of their outdoor patients and free treatment to families having less than five hundred rupees income. These are post import conditions. Department found that the appellant had failed to fulfill these conditions. Notice was issued under Section 124 of the Customs Act proposing to confiscate the equipment and impose penalty. There was no demand for duty. The Commissioner confiscated the goods, but allowed the importer to redeem the goods on payment of a redemption fine of Rs . One lakh. He also demanded a duty of 1.65 crores (there was no mention of duty in the notice). The appellant did not redeem the goods and appealed to CESTAT pleading that duty was payable only when goods are redeemed. CESTAT allowed the appeal, but Revenue appealed to the High Court which held that under Section 125(2), the duty payable on the confiscated goods has to be paid on imposition of fine in lieu of confiscation and it is immaterial whether such option is exercised or not. This is in appeal before the Supreme Court.

As per Section 125,

1. When goods are confiscated, the owner is given an option to pay a fine in lieu of confiscation.

2. When redemption fine is imposed, the owner shall in addition be liable to pay duty.

Supreme Court Observations :

It is not in dispute that Show Cause Notice in the instant case was issued under Section 124 of the Act. Once such a Show Cause Notice was issued and as can be seen from the proposed action which was contemplated in this provision, it was also confined to confiscation of the imported machinery and imposition of penalty. Nothing was stated about the payment of duty. However, in spite of the fact that Show Cause Notice was limited to confiscation of the goods and imposition of penalty, the final order which was passed included the direction to pay the customs duty as well. It is clear that when such an action was not contemplated, which even otherwise could not be done while exercising the powers under Section 124 of the Act, in the final order there could not have been direction to pay the duty.

Notwithstanding the aforesaid position, the Department is taking shelter under the provisions of sub-section (2) of Section 125 of the Act. However, on a plain reading of the said provision, such a provision would not apply in case where option to pay fine in lieu of confiscation is not exercised by the importer. Trigger point is the exercise of a positive option to pay the fine and redeem the confiscated goods. Only when this contingency is met, the duty becomes payable. In the present case, admittedly, such an option was not exercised and the confiscated machinery was not redeemed by the Institute . As a matter of fact, thus, no fine has been paid.

Section 124 deals with confiscation of goods and penalty and does not deal with payment of import duty. No doubt, such a payment of import duty becomes payable by virtue of sub-section (2) of Section 125 but only when condition stipulated in the said provision is fulfilled, namely, fine is paid in lieu of confiscation of goods. When the Department chose to take action under Section 124 of the Act, it should have been alive of the situation that the Noticee may not exercise the option and in such case, duty would not be payable automatically.

Department is not without any remedy : if the Department wanted the Institute to pay the duty, which may have become payable, it could have taken independent action; de hors Section 124 of the Act, for payment of duty, simultaneously with the notice under Section 124 of the Act or by issuing composite notice for such an action. No doubt, it could have waited for option to be exercised by the Institute under Section 125(1) of the Act as well and in that eventuality, duty would have automatically become payable under Section 125(2) of the Act. But when such an option was not exercised, it could have taken separate and independent action by issuing Show Cause Notice to the effect that the Institute had violated the terms of exemption notification and therefore, was liable to pay duty.

What is emphasised is that when in the Show Cause Notice issued under Section 124, nothing was stated about the payment of import duty, there could not have been direction to that effect in the final order Further, insofar as Section 125(2) is concerned, the contingency contained therein did not occur in the present procedure for want of exercise of option to pay fine.

So, the Supreme Court agreed with the CESTAT and held that the High Court was not correct in observing that it is immaterial whether option under Section 125(2) is exercised or not.

Supreme Court allowed the appeal of the importer but made it clear that it would still be open to the Department to take appropriate independent action against the appellant for payment of import duty, in case it is still within period of limitation.

(See 2015-TIOL-57-SC-CUS)