APRIL 18, 2020

By Ms Lakshmi Menon, Partner and Advocate, Ms Tridipa Banerjee, Associate, Lakshmikumaran & Sridharan, Attorneys

SECTION 28AAA was introduced into the Customs Act, 1962 vide Section 122 of the Finance Act, 2012 ¹. Section 28AAA enables recovery of customs duty from a person who has obtained an instrument through collusion, wilful mis statement or suppression of facts and the said instrument has been utilised by person other than the person to whom it has been issued. The purpose behind insertion of section 28AAA has been elaborated in the highlights of budget changes as "to provide for recovery of duties from the person to whom an instrument such as credit duty scrips was issued where such instrument was obtained by means of collusion or wilful misstatement or suppression of facts. Since the provision now has the force of law, action for recovery of duty can be initiated under the said provision."

What could have driven the legislature to introduce this new Section for recovery of duty short paid or not paid from the exporter, which goes contrary to underlying principle of Section 28 of the Customs Act authorising recovery of customs duty short paid or not paid etc. from the person chargeable to duty (in case of imports, the importer) and no other person.

In the case of Jupiter Exports, the Bombay High Court ² had affirmed that duty under Section 28 could only be recovered from "a person chargeable to duty" and that such a person would be the importer in the case of import duty and the exporter in the case of export duty. The High Court went on to affirm the proposition that import duty cannot be recovered from the exporter. As exporter is not the importer, he (exporter) cannot be made chargeable to duty, as the demand for duty has to be based on law and not on equity or moral considerations. This case involved use of an invalid licence by the importer, who was not connected with the fraud committed by the exporter of the goods.

For years, the Indian courts have been fraught with numerous cases where the importers have been saddled with customs duty demand under Section 28 for importing goods against transferrable duty credit scrips, advance authorizations, REP licenses, SIL, etc. obtained through fraudulent means. Coupled with that, the licensing authorities have also cancelled such scrips etc.

One of the earliest landmark decisions which lays down numerous propositions of law in the context of licenses obtained through misrepresentation is East India Commercial Co. Ltd. Calcutta v. Collector of Customs, 1983 (13) ELT 1342 (SC). Thereafter, there has been a slew of decisions delivered by courts across the country in the context of transferable licenses/scrips which were obtained through fraudulent means.

A perusal of all the said decisions (which were initiated prior to introduction of Section 28AAA) would show that the customs authorities initiated action for recovery of duty from the transferee-importer (and in some cases, jointly and severally with the exporter), who many a times were not even party to the fraud by the transferor/exporter. In all these cases, the exporter/transferor was instrumental in getting the scrips/licenses issued from the licensing authorities by mis-representation etc.

There are decisions holding that since the transferee/importer was a bona fide purchaser of such DEPB scrip, in absence of any allegation of mis-representation, collusion or suppression against him, the extended period of limitation could not have been invoked for demanding duty ³ .

At the same time, there are decisions which holds that ‘Fraud Vitiates everything' and, therefore, the transferees/importers will be liable even when the fraud has been perpetrated by the transferor ⁴. Few of these decisions pressed into service the doctrine "caveat emptor" to hold against the importer-transferee.

The importer/transferee purchase the transferable scrips from the open market, as permitted under law. No degree of caution or due diligence exercised by him was proving to be fool proof against fraudulently obtained scrips, which was also not detected either by the custom department or by the licensing authorities. As far as the department is concerned, not initiating action in connection with the fraudulent scrips would have resulted in revenue loss and would have effectively resulted in validating such actions by the exporter/transferor. The department, was also handicapped in initiating demand proceedings under Section 28, against the exporter. Such proceedings could be successful, only if the importer and exporter (who obtained the scrips, licenses, authorisations etc.) were the same. The only limited action against the exporter could be imposition of penalty under Sections 114, 114AA and 114AAA. Therefore, there was next to no means to hold such transferors/exporters accountable, as Section 28 of the Customs Act, 1962 allows an action to be initiated against an importer who is chargeable to duty for recovery of duty short levied, non-levied or erroneously refunded. However, it does not address a situation wherein a person who is not chargeable to duty can be made accountable for the same. As a result, either oblivious importers were being penalised for using such invalid scrips that were flooding the market ⁵ or the Government was invariably suffering Revenue leakage ⁶.

Until the introduction of Section 28AAA, the exporter who was instrumental in the revenue loss, was not within the reach of Section 28.

Section 28AAA: Duty recovery mechanism from transferors/exporters?

Section 28AAA provides for recovery of duties from the person to whom an instrument such as credit duty scrips was issued, where such instrument was obtained by means of collusion or wilful misstatement or suppression of facts and the said instrument has been utilised. Vide this provision, action can also be initiated against the person to whom such instrument had been issued, even if the mis-representation and suppression has been done by the employee or an agent of such person.

Section 28AAA can come into play only if the following ingredients are satisfied, namely -

(a) An instrument ⁷ has been issued: Instrument has been defined to include any scrips, licenses issued under the Foreign Trade (Development & Regulation Act) bestowing a financial benefit under any of the fiscal schemes;

(b) The instrument has been obtained through collusion, wilful misstatement or suppression of facts : This means that the if the scrips have been obtained after proper disclosure before the licensing authorities, Section 28AAA cannot be invoked.; and

(c) Instrument should have been utilised by a person other than the person to whom it has been issued: This would imply that if the scrip remained un-utilised, no action can be initiated as against the exporter/transferor under this section.

As seen above, for the said section to come into play, fraud/suppression of facts etc has to be proved. There can be instances where the scrips have been issued incorrectly based on a wrong understanding of the law by the licensing authorities. On a strict interpretation of Section 28AAA, as per the authors, such as case is not covered by Section 28AAA. Then, only recourse for the department is to fall back on Section 28 and proceed against the importer. If the duty demand falls within the normal period of limitation, best of luck to the importers.

Unlike in the case of Section 28A, Section 28AAA does not prescribe any period of limitation for initiating action. Can this be interpreted to mean that proceedings under Section 28AAA can be initiated at any point of time? In cases of drawback recovery, no period has been prescribed for the same. However, courts through have read down the Rules by reading into the same a reasonable period ⁸ for initiating recovery proceedings. Therefore, it would have to be seen as to whether courts would read into the section a ‘reasonable period' for initiation of proceedings under Section 28AAA.

Yet another legislative set-back that exists within this section is that the authorities even after initiating proceedings against a fraudulent exporter can still go after the importer parallelly since the proviso to the section provides - "that the action relating to recovery of duty under this section against the person to whom the instrument was issued shall be without prejudice to an action against the importer under section 28." This, in effect, can also further open a floodgate to prospective litigations where the importers would still be chased by the Department for the same issue irrespective of whether duty has been recovered from the exporters or not. Therefore, the importer as well as the exporter will have to spend time and energy in defending the same issue.

Initiation of proceeding under the FTDR Act : Permissible for the same cause of action?

An interesting point that can be analysed in light of the above would be, whether parallel proceedings can be initiated and maintained by both the licensing authorities under the FTDR Act as well as the Customs authority under the provisions of the Customs Act, 1962. This question may arise more so because the cause of action for both proceedings would be same, namely scrips procured fraudulently under the FTDR Act.

In this context, it is pertinent to note that the jurisdiction of the DGFT and the Customs Authorities are mutually exclusive. The DGFT's ambit of power concerns determining the eligibility of the scrip, licence, etc. holder. They have the power to grant or cancel licenses granted by them ⁹. They essentially determine eligibility of an importer or exporter to avail the benefit of the policies formulated under the FTDR Act and the rules and regulations made there-under. Further, the DGFT is the final authority for determining whether or not the licenses and scrips have been issued correctly ¹⁰ . There is no prohibition under the FTDR Act or the Customs Act for initiating action under the respective Acts for the same cause of action.

By introducing section 28AAA, the legislature has resolved the mischief which was existing earlier. Whether, even after the introduction of this section, action will continue to be taken against the importer is to be seen. Therefore, to what extent the customs authorities will exercise restrain while initiating action for scrips issued fraudulently as against importer who are bona fide purchaser is to be seen with the passage of time.

[The views expressed are strictly personal.]

¹ D.O. Letter F. No. 334/1/2012-TRU, dated 1-6-2012

²- 2007-TIOL-329-HC-MUM-CUS

³Vallabh Design Products reported in - 2007-TIOL-842-HC-P&H-CUS and affirmed by the Apex Court in - 2016-TIOL-246-SC-CUS; Friends Trading Co. -2011-TIOL-406-CESTAT-DEL affirmed in 2011 (267) E.L.T. 33 (P & H).

⁴ Aafloat Textiles (I) P. Ltd. reported in - 2009-TIOL-42-SC-CUS; Tata Iron & Steel Co. Ltd. reported in 2015 (319) E.L.T. 546 (S.C.)

⁵ Friends Trading Co. reported in - 2011-TIOL-406-CESTAT-DEL affirmed in 2011 (267) E.L.T. 33 (P & H)

⁶ Binani Cement Ltd. reported in 2010 (259) E.L.T. 247 (Tri. - Ahmd.)

⁷ Explanation 1. - For the purposes of this sub-section, "instrument" means any scrip or authorisation or licence or certificate or such other document, by whatever name called, issued under the Foreign Trade (Development and Regulation) Act, 1992 (22 of 1992), with respect to a reward or incentive scheme or duty exemption scheme or duty remission scheme or such other scheme bestowing financial or fiscal benefits, which may be utilised under the provisions of this Act or the rules made or notifications issued thereunder.

⁸Famina Knit Fabs reported in - 2019-TIOL-2208-HC-P&H-CUS; Jairath International reported in -2019-TIOL-2459-HC-P&H-CUS

⁹ Rule 10 of the Foreign Trade (Regulation) Rules, 1993

¹⁰ Para 2.57 of the Foreign Trade Policy; Greatship (India) Ltd. reported in - 2016-TIOL-1018-HC-DEL-CUS; King Exports reported in 2011 (266) E.L.T. 388 (Tri. - Del.)