DECEMBER 21, 2020

By S Murugappan, Advocate, Chennai

SECTION 114A of Customs Act, 1962 provides for levy of penalty equal to duty in respect of cases where duty was evaded or not paid on account of collusion, wilful misstatement or suppression of facts on the part of a person liable to pay duty. It also provides for imposition of penalty equal to interest demanded in terms of Section 28(8).

Field formations of the CBIC (then, CBEC) raised doubts regarding levy of penalty equal to interest on the ground that when show cause notices specify the amount of duty, interest to be demanded is not specified or quantified. In the manner Section 114A is worded, such doubts ought not to have arisen at the first instance. However, in this context, in 2002, Board after noting that conjunction 'or' in Section 114A seems to be creating confusion at the field level, clarified that penalty equivalent to the duty plus interest is to be levied.

This clarification contained in Circular 61/2002 dated 20th September 2002 is being resurrected now and adjudicating authorities are being instructed to levy penalty equal to duty plus interest payable on such duty or in cases where penalty has not been levied in this manner, their orders are being reviewed before appellate authorities.

On the face of it, the clarification contained in the above circular appears to be misplaced and not in tune with the context in which the word 'interest' is used in Section 114A.

Section 114A reads as follows.

"Where the duty has not been levied or has been short-levied or the interest has not been charged or paid or has been part paid or the duty or interest has been erroneously refunded by reason of collusion or any wilful mis-statement or suppression of facts, the person who is liable to pay the duty or interest, as the case may be, as determined under sub-section (8) of section 28 shall also be liable to pay a penalty equal to the duty or interest so determined:

A perusal of the above will show that following are the various limbs of Section 114A.

i. Duty not levied or short-levied due to reason of collusion, wilful mis-statement etc.

ii. Interest not charged or paid or has been part paid due to collusion, wilful mis-statement etc.

iii. Duty or interest erroneously refunded because of collusion, wilful mis-statement etc.

iv. The person who is liable to pay duty, as applicable and as determined in terms of Section 28(8) is liable to pay penalty equal to duty, where duty is determined.

v. The person who is liable to pay interest, as applicable and as determined in terms of Section 28(8) is liable to pay penalty equal to interest, where interest is so determined.

Thus, determination of the duty payable or interest payable on account of collusion, wilful mis-statement etc. in terms of Section 28 is a 'prerequisite' to impose a penalty equal to duty or equal to interest so determined.

Interestingly, interest which is payable under the existing Section 28AA, when duty is paid belatedly is different from the interest, which is determined and demanded in terms of Section 28 as mentioned above. Section 28AA reads as follows.

'Notwithstanding anything contained in any judgement, decree, order or direction of any court, Appellate Tribunal or any authority or in any other provision of this Act or the rules made thereunder, the person, who is liable to pay duty in accordance with the provisions of section 28, shall, in addition to such duty be liable to pay interest, if any, at the rates fixed under subsection (2) whether such payment is made voluntarily or after determination of the duty under that section'.

This interest in terms of Section 28AA is consequential to the duty demanded and different from the interest that is determined under Section 28(8). It is also to be noted that the expression used in Section 114A is "duty or interest as the case may be". Thus, it is made clear, in a given situation it can be duty or interest that is determined in terms of Section 28(8).

The fact that interest determined under Section 28 is different from the interest payable in terms of Section 28AA will be clear from the first proviso to Section 114A where a concession in penalty is given when duty or interest as determined under Section 28(8) along with interest payable under Section 28AA is paid within a specified period. This proviso reads as follows.

Provided that where such duty or interest, as the case may be, as determined under sub-section (8) of section 28, and the interest payable thereon under section 28AA, is paid within thirty days from the date of the communication of the order of the proper officer determining such duty, the amount of penalty liable to be paid by such person under this section shall be twenty-five per cent. of the duty or interest, as the case may be, so determined:"

Thus, under no circumstances, penalty can be imposed equivalent to the duty demanded under Section 28(8) together with the interest payable in terms of Section 28AA.

Circular 61/2002 itself came to be issued after reference to Ministry of Law. The circular contains Law Ministry's opinion as enclosure. The relevant extract of law ministry's opinion reads as follows:

"In view of the above, it is clear to carry out the intention of the legislature it is occasionally found necessary to read the conjunction 'or' and 'and', one for the other… The administrative department may process the matter keeping in view the above expressed legal position in respect of the word 'or' as per intention of legislation"

The above extracts will reveal that the law ministry has asked the administrative ministry to see the legislature's intention and then decide the interpretation for the word 'or' appearing in Section 114A.

But without examining the legislature's intention, whatsoever, in the said circular, Board proceeded to conclude "In view of the above it is clarified that penalty under Section 114A of Customs Act 1962 should be equivalent to duty and interest. The above said clarification may kindly be kept in mind while imposing the penalty under Section 114A of the Customs Act."

Or, in other words, no exercise as indicated by Law Ministry was carried out. Instead, Board hurried to the conclusion that penalty should be equivalent to duty and interest without examining the context. The context in which the expression interest is referred to in Section 114A will be clear from that section itself and there is no scope to levy penalty equivalent to duty and the consequential interest which is otherwise payable in terms of Section 28AA. Interest in terms of Section 28AA is payable even without determination and without a specific demand.

Another aspect to be kept in mind is that the quantum of interest on the duty confirmed depends upon the actual date of payment of the duty so confirmed and is thus a variable. Therefore, it is not possible to determine and impose penalty equal to such interest at the time of passing an order.

Levy of interest in terms of Section 28AA itself is penal in nature as such interest is not on the basis of a contractual obligation between two parties. When duty due to the Sovereign State is not paid in time, the Customs Act provides for collection of interest on such duty. Therefore, on such penal interest, again, if further penalty equal to such interest in terms of Section 114A is levied it will be a case of 'penalties galore'.

Hence, it is high time that Board provides further clarification to the effect that the interest referred to in Section 114A is different from the consequential interest payable in terms of Section 28AA and penalties equal to such interest payable under Section 28AA cannot be levied in terms of Section 114A. This will stop avoidable litigation and explosion of appeal dockets.

[The views expressed are strictly personal.]