By TIOL News Service

MUMBAI, OCT 01, 2015: THIS is a DRI case.

Investigations revealed that some merchant exporters inflated the FOB value of their exports significantly and obtained the DEPB Scrips/DFIA Licenses against such exports. The DEPB scrips were sold to various transferees on the basis of endorsement of transferability by the DGFT. Appellants in the present appeals are such transferees of the DEPB scrips, DFIA licenses and Focus Market scrips. The transferees imported the goods against such scrips and availed the duty credit/exemption available under the scrips underNotifications 89/2005-Cus, 40/2006-Cus. The gross inflation in the FOB value of exports resulted in excess duty credit availability on the DEPB scrips. Importers/transferees who made imports under these scrips could, therefore, avail the credit obtained fraudulently resulting in loss of Revenue to the Government.

The investigation by DRI culminated in issue of show cause notices to the exporters and the transferees/importers of the DEPB/DFIA documents. The impugned orders have been passed holding the goods exported and imported liable to confiscation. The demand of duty has been confirmed against the importers i.e. transferees of the scrips; Penalties have also been imposed on the exporters and importers under Section 112/114A. When the matter was investigated and referred to the licencing authority, the Joint DGFT cancelled all the DEPB/DFIA scrips ab-initio.

Only the transferees are in appeal before the CESTAT and they are 76 in all.

The appellants inter alia submitted as below -

(a) The appellants are transferees of Licenses issued under DEPB/DFIA/Focus Market schemes under the Foreign Trade Policy. The Licenses are endorsed as transferable by the licensing authority. Further, the exports effected by the original licenses and against which exports the licenses are granted, are duly verified by the Customs by an endorsement made to that effect on the shipping bills. That apart, at the time of exports, the Shipping Bills have been duly assessed by the proper officer of customs.

(b) After the licenses were endorsed as transferable by the licensing authority, the appellants had acquired the same for valuable consideration and as such the appellants are bona fide transferees of the licenses. The licenses were valid and subsisting when the same were acquired by the appellants and at the time of import of goods by the appellants under the said licenses.

(c) The suspension and cancellation of the licenses have taken place much after the import and clearance of the goods there under.

(d) It is a settled law that even a license obtained by fraud or mis-representation of facts is only voidable and not void ab-initio. It is good in law until it is voided. Thus even a license obtained by fraud or mis-representation is valid in law until such time that it is cancelled by the licensing authority. In the present case, the licenses were valid and subsisting at the time when the appellants purchased the same as transferees and also when the goods were imported and cleared and the subsequent suspension or cancellation of the licenses cannot affect the imports made prior to such suspension and cancellation.

(e) Since a license obtained by fraud / mis-representation is only voidable and not void it follows that if before it is avoided a third party acquires such license bona fide for value and without notice of the fraud, the rights of such third party are protected.

(f) In all the present cases, the Notice is beyond the normal period of limitation. Admittedly there is no allegation, evidence and finding of any fraud or mis-statement or willful suppression of facts on the part of the appellants and hence the larger period of limitation of 5 years prescribed in the proviso to Section 28 (1) could not be invoked against the appellants. The allegation of fraud is against the original license holder and not against the appellants.

Case laws by the dozen were cited in support.

The CESTAT extracted in its entirety the Notification no. 40/2006-Cus (which relates to material imported against DFIA licenses) as well as Notification No. 89/2005-Cus (which relates to the DEPB Scheme)and observed -

++ In the first Notification 40/2006-Cus, we find no restriction on the transferee for import of goods on the basis of licenses transferred to him. The only condition applicable to the transferee is in para (2) that benefit will be allowed only if the Certificate bears endorsement of transferability by the Licensing Authority. Similarly in the second notification 89/2005-Cus relating to DEPB, the only condition relevant to the importer is condition No. (vii) which states that where benefit of exemption of duty is claimed by the person who is not Duty Entitlement Passbook Holder, such benefit shall be permissible only against specific amount of credit transferred by the DEPB holders.In terms of the notifications there is no failure on the part of transferees availing duty benefits under these schemes.

++ The transferability of License/material imported against such scrips is prescribed in para 127 of the Hand Book of Procedures. It is clear that transferability is allowed after endorsement to that effect by the licensing authority i.e. DGFT.

++ We also observe that para 4.49 of the Hand Book of Procedures (2004-2009) provides that the Customs shall verify the details of export as per records before allowing import against DEPB. Thus it is seen that Customs are supposed to have verified the value of exports on the application for transfer of license as well as when they allowed import against the DEPB.

++ We find that the goods in question are goods which are traded frequently; if the Customs had taken the trouble of delving into the records and made some inquiries, the obvious multiple fold over valuation could have been detected at the time of exports on basis of which DEPBs/DFIA Licences were granted as well as at the time of imports under the DEPBs/DFIA Licenses.

++ Goods which are later detected by the DRI to have been overvalued, were allowed to be exported by the customs officers without pointing any discrepancies in the value and thereafter DGFT allowed transfer of the license on the basis of such documents. The plea of the appellants is that they cannot be held responsible when the procedure for transfer involves only the transferor, Customs and DGFT. We agree with this contention.

To the submission of the Special Counsel for Revenue that in respect of licenses obtained by fraud, misrepresentation etc., benefit canot be taken by any one, whether the transferor or transferee otherwise it would lead to a dangerous proposition and enable fraudsters to obtain DEPB scrips by fraudulent means, the Bench commented -

"To this we can only comment that authorities themselves are also responsible to the extent of not having checked the fraud at the time of exports. We should not be affected in our findings only by the fact that grant of benefit to transferees will encourage fraudsters. We are only guided by the law itself."

The CESTAT further observed -

++ A valid License is valid for all Purposes. The only condition in the notifications which grant duty benefits as far as transferee is concerned is that the licenses must be valid at the time of import. There is no other condition in the notifications. In our considered view, once the licenses are held valid there can be no denial of benefit of notification on their plain reading.

The Bench also took cognizance of the Larger Bench decision in Hico Enterprises - 2005-TIOL-1100-CESTAT-MUM-LB (upheld by the Supreme Court) and where it was held that the legal maxim lex non cogit ad impossibilia can be invoked and benefit of the same be given to the transferee of the licence for claiming exemption under the Notification.

And the Bench held - In the present case the appellants being bonafide purchasers of Licenses for value without any notice of fraud, it has to be held that the concept of fraud vitiating everything is not applicable.

It was further observed -

++ It is clear that the DEPB scrips are held to be goods. This being the legal position, the Sale of Goods Act will apply. Section 29 of this Act deals with Sale by a person in possession under a voidable contract. It states "When the seller of the goods has obtained possession thereof under a contract voidable under Section 19 or Section 19A of the Indian Contract Act, 1872, but the contract has not rescinded at the time of the sale, the buyer acquires a good title to the goods, provided he buys them in good faith and without notice of the seller's defect of title".

++ Therefore transfer of DEPB scrips in the present cases will governed by the provisions of the statute, that is the Sale of Goods Act. In such a situation the Mumbai High Court decision in the case of Taparia Overseas will prevail. Resultantly, applying the ratio of Taparia, we are convinced that effect of misrepresentation in the present cases has not rendered the transaction between the original license holders and the transferees void ab-initio but rendered it voidable at the instance of the party (in this case importer) defrauded and transaction continues to be valid until the party defrauded has decided to avoid it. In the present case the licences/scrips were transferred to the appellant importers who had no knowledge of the misrepresentation by the exporters in obtaining them. The Bills of Entry were filed by the appellant importers well before the cancellation of licenses, thus imports were made under valid licenses. Therefore goods could not be subjected to levy of Customs duty for imports under Licences nor could availment of credit in DEPB scrips be denied.

++ The view that duty cannot be demanded from the transferees was perhaps recognised by Government when it introduced Section 28 AAA in the Customs Act with effect from 28/5/2012. Section 28AAA provides that in such cases duty shall be recovered from the person to whom the instruments (Such as DEPB) is issued. If law has been so clear that duty could be demanded from the transferee, there would have been no need to introduce Section 28AAA in the statute.

The plethora of judgments cited by the counsel for the Revenue were discussed in detail and thereafter distinguished as being not applicable to the facts of the present case.

Proceedings before Settlement Commission:

+ Some transferees, the exporter namely M/s. Rajat Pharma Ltd had approached to the Settlement Commission and deposited the entire amount of duty, thereafter matter was settled. In such cases it is obvious that duty cannot be demanded both from the exporter and the importers (who are before us). Further in terms of Section 127(J), every order of the Settlement Commission passed under Section 127 (C) shall be conclusive and no matter covered by such order shall be re-opened in any proceedings under this Act. Therefore duty demand against these importers are set aside on this ground also, apart from confiscation and penalties. In some cases, the exporter had deposited duty at the investigation stage on behalf of the importer also. In such cases too, the question of demanding duty to the extent of amount already deposited does not arise. In cases where the importer bought the goods on High Sea sales basis, misrepresentation of their part has not been proved. In any case we have stated in paras above that the transferees in cases of all appeals had no knowledge of mis-representation by the exporters.

The CESTAT, therefore, set aside the confiscation of goods imported by the appellants who are transferees of the licenses/scrips, demands of duty and interest and penalties.

The appeals were allowed.

In passing: No law or ordinance is mightier than understanding. -  Plato, Laws

(See 2015-TIOL-2090-CESTAT-MUM)