SEPTEMBER 26, 2024

By Radheshyam Sharma, Advocate & Kanya Saluja

IN the 27th Report of the Standing Committee of Finance 2005-2006, Section 114AA of the Customs Act, 1962 was proposed to be inserted after section 114A through Clause 24 of the Bill. It was done keeping in view the increase in fraudulent export practices, where exports were only reported on paper but no actual goods were shipped. It was proposed that such illegal actions and misuse of export incentive schemes should now be strictly punished through, among other things, fines and penalties, which can be five times the value of the commodities. The new measures were then feared by industry representatives as they could be harassed through coerced false statements. To mitigate such possibility of coercion, the Ministry clarified that no person summoned under Section 108 of the Act can be coerced into stating something which is not corroborated by the documentary and other evidence in an offense case. Nonetheless, the Committee advised that the Government should exercise due diligence and care in monitoring the implementation of the provision to make sure that it does not result in undue harassment. Thereafter, by The Taxation Laws (Amendment) Act, 2006, No. 29 of 2006 w.e.f. 13-07-2006, Section 114AA of the Act was inserted.

Section 114AA reads -

Penalty for use of false and incorrect material. -  If a person knowingly or intentionally makes, signs or uses, or causes to be made, signed or used, any declaration, statement or document which is false or incorrect in any material particular, in the transaction of any business for the purposes of this Act, shall be liable to a penalty not exceeding five times the value of goods.

However, over the years, trade has been representing that Section 114AA is being indiscriminately applied against them without any corroborative evidence and justification. Penalty under Section 114AA of the Act can be invoked only in case of use of any false document, statement or declaration made intentionally for import or export transactions, including cases where exports have not taken place physically but only on paper or foreign exchange remittance has not been received in India by the exporter. The field formations are indiscriminately invoking Section 114AA even in routine matters prompting the interference of Tribunals and Higher courts.

The Hon'ble Andhra Pradesh High Court has in case of Jai Balaji Industries [2018 (361) ELT 429 (AP)] held that incorrect value of the imported goods per se cannot amounts to any of the acts referred to in Section 114AA. In the absence of some tangible material to show that the illegal import/export was with the knowledge of the importer/exporter, no penalty can be imposed on him. In the case of Commr . of Customs v. Buhariwal Logistics = 2015-TIOL-2901-HC-DEL-CUS the court while dismissing appeal from the Comm. of Customs observed that unless knowledge of the illegal acts of the agent/employee is able to be attributed to his employer/principal, no penalty can be imposed under Section 114AA.

It must be established that the person acted intentionally. In the case of Commr . of Customs v. Trinetra Impex (P) Ltd. = 2019-TIOL-2506-HC-DEL-CUS; the court observed that CHA acted merely as a facilitator on the strength of documents received from the importer. ‘There is no sufficient material on record to show that the CHA was actively involved in the fraudulent availment of the exemption by the importer, warranting levy of personal penalty.‘

It is imperative to note that Section 114AA is penal in nature and thus should be applied rationally and cautiously, where sufficient proof must be gathered to impose penalty under Section 114AA. In the case of Insaaf Qureshi v. C.C. Mundra, 2024 SCC OnLine CESTAT 635; CESTAT observed that;

"…the Appellant declared the value of goods in the Shipping Bill based upon the information given to him by the exporter and is not expected to investigate and find out the correct value of the goods. There is no material available on records that Appellant had knowledge of over valuation of the goods. In any case, Appellant who apparently acted in a bona fide manner in terms of the instructions of the exporter cannot be penalized on the ground of abetment of any offence of the exporter. ”

Section 114AA continues to be misused despite the assurance provided by the Ministry and the court orders. The Customs Authorities are required to determine existence of some declaration, statement or document which is false or incorrect in material particulars produced or used intentionally or knowingly. In a number of instances, it is seen that the penalty under Section 114AA has been imposed on technical/procedural grounds. It is important to distinguish between procedural and substantive requirements to impose penalty. The substantive requirement is to prove knowledge or intention where false or incorrect material was used. In cases where the substantive requirement is not met, a procedural non-compliance should not be a reason for imposing penalty under Section 114AA of the Customs Act.

Such a penalty cannot be imposed mechanically. It is imperative to see whether the quantum of penalty is proportionate to the degree of offense. In a batch of Writ Petitions [No. 3429, 3433, 6105, 12582, 12604, 12622, 12649 of 2024] filed before the Bombay High Court, the orders passed by the Additional Commissioner of Customs (Export), ACC, Mumbai were challenged as the penalties imposed were exorbitant. The Hon'ble Division bench observed that the impugned orders were unreasoned. The High Court [Kailas Dhondibhau Argade 2024-TIOL-1617-HC-MUM-CUS ] set aside the impugned orders and sent them back for de novo consideration directing the Adjudicating Authority to pass afresh Reasoned order.

In view of the complaints of harassment by misusing the provision of Section 114AA of the Customs Act, there is an urgent need that the CBIC comes out with some guidelines after due consultations with all the stakeholders.

[The author Radheshyam Sharma is a former GST Commissioner and founder of Law at Par. Kanya Saluja is an Associate with Law at Par. The views expressed are strictly personal.]