Case: Commnr. Of Customs, Kandla Vs. M/S. Essar Oil Ltd.

Sometime during 1997 respondent no.1 imported plants and machineries worth Rupees 600 crores for its refinery project. These imported goods were stored in private bonded warehouse, one of which is closed. The licences for the warehouses were valid upto 24.11.1999. General bond of Rs. 120 crores was executed by respondent no.1 under Section 59(2) of the Act to secure payment of customs duty. Between 18 and 23.2.1999 respondent no.1 submitted 84 ex-bonds bills of entry which were assessed to customs duty at the prevalent rate and corresponding TR- Challans for payment of duty were handed over to the assessee.3. On 24.2.1999 assessee-respondent no.1 wrote to ICICI Ltd. stating that there was possibility of imposition of duty on refinery goods and requested them to immediately release funds to avoid project cost over-run. On the same day inter office memo was issued by Shri S.R. Aggarwal (Respondent no.2) to Shri P.R. Ashok (respondent no.3) Stating that ICICI Ltd. had indicated their desire to disburse a sum of Rs. 100 crores so that the Countervailing Duty (in short CVD) amount to be paid before pronouncement of the Union Budget, 1999. The memo pointed out that the necessary documentation was in process and remittance of the funds by telegraphic transfer to the State Bank of India (SB) Jamnagar would be done immediately thereafter. Respondent no.3 was requested to complete the paperwork with customs authorities.4. On 25.2.1999 respondent no.3 wrote a letter to the Superintendent of Central Excise Bonded Warehouse, Jamnagar, requesting him to pass necessary order for out of charge for the goods concerned. This letter is of considerable importance in the present dispute. This letter has to be considered along with letter of same date (i.e. 25.2.1999) written by respondent no.3 to Assistant Chief Accounts Officer (Excise & Customs) Rajkot. The controversy in the present matter basically revolved round this document. In the first letter reference was made to the challans issued for payment of duty on the bonded goods and the original acknowledgment of the Assistant Chief Accounts Officer towards payment of customs duty with applicable interest. The details of goods with relevant challans were also enclosed. The payment was made by cheque no. 1175298 dated 25.2.1999 for Rs. 60,03,85,603 in favour of Assistant Chief Accounts Officer SBECNC in line with the trade notice no. 73/85, copy of which was enclosed. It was indicated that action was being taken as per direction of Assistant Commissioner (Technical) at Rajkot. It was further indicated that the payment had to be made at Rajkot office due to banks strike. In the letter dated 25.2.1999 addressed to the Chief Accounts Officer, Excise and Customs, Rajkot, it was indicated that due to banks strike on that day they were depositing the customs duty on the goods at the regular bank. Therefore, they had enclosed cheque no. 1175298 dated 25.2.1999. A declaration was made that respondent no.1 had sufficient bank balance in its account in State Bank of Saurashtra, Jamnagar on whom the cheque was drawn and same shall be honored and cleared by the bankers as and when presented by the concerned office. On 25.2.1999 the application was endorsed for acceptance by the Assistant Commissioner and were accepted and processed. Consequently, the warehousing licence was cancelled on the strength of the cheque payment though the goods were not physically moved from the warehouse.5. After the banks strike was over, the cheque was deposited for collection at the Rajkot, on 27.2.1999. On the same day at the close of office hour the rate of customs duty was enhanced from nil basic duty to 5% on the Union Budget.6. On 1.3.1999 respondent no.1 wrote to this bank that they were arranging for transfer of funds from Mumbai by 2.3.1999. As the funds were not received in the revenue accounts, respondent no. 1s banker at Saurashtra prepared an inter office memo advising appellants bank at Rajkot that the cheque issued by respondent no.1 had been returned unpaid. However, the memo was not sent to the bank, as respondent no.1 wrote several letters to their banks at Jamnagar requesting that cheque be withheld till funds were arranged by them. On 16.3.1999 finally respondent no.1 arranged funds to cover the cheque amount with was honored and credited to the Governments account on 17.3.1999.7. Investigations were carried out by various governmental agencies and respondents 2 to 4 were arrested on 6.5.1999. Their bail application was rejected by concerned magistrate. On 17.5.1999 the Gujarat High Court granted bail to them on the unconditional undertaking by their counsel appearing before the High Court that the amount of enhanced customs duty will be paid in three instalments by 31st July, 1999. On 22.8.1999 a show-cause notice was issued to the respondent no.1 - assessee proposing to levy duty on the imported goods under Section 15(1)(c) of the Act. It was alleged that fraud was practised by respondent no.1 in connivance with the other respondents and an attempt was made to defraud revenue and evade duty. Reference was made to the background facts as highlighted above. It was also pointed out that Mr. J.K. Singh, Director of the respondent no.1 company stated that there was no requisition for imported goods in February, 1999. Statement of respondent no.2 recorded on 5.5.1999 showed that funds were expected to be arranged, respondent no.1 decided to make payment by cheque. Respondent no. 2 admitted that discussions were held with ICICI Ltd. on 3.2.1999. Funds were not provided by the said financial institution and ultimately the funds were arranged from the Punjab National Bank. Statements of Nitin Bhatt and P.R. Ashok i.e. respondent nos. 4 and 3 respective were recorded which, inter alia, indicated that respondent no.1 wanted to avoid any adverse impact of the budget. Investigation further revealed that sufficient fund was not there in respondent no. 1s account till evening of 24.2.1999. False declaration was made regarding sufficiency of funds on 25.2.1999. Investigation also revealed that one of the departmental officials i.e. respondent no. 6 A.K. Thakker had manipulated dates and instead of the actual date of 26.2.1999, he had indicated that the action was taken on 25.2.1999. Statement of Shri L. Ghosh, Chief Manager of State Bank of Saurashtra at Jamnagar indicated that the cheque as issued by respondent no.1 was intended to be returned to the clearing bank at Rajkot and telephonic information to this effect was given to the Chief Manager of the bank at Rajkot. A written notice was prepared. The same was not sent at the request of respondent no.1 and contrary to the established practice and procedure of the bank and governing regulations cheque was not dishonored. The instructions of State Bank of Saurashtra Manual, inter alia, provides and requires that non-payment of clean demand bill must be advised to the purchasing office and advice must be sent by telegram. The advice is to be sent not later than the close of the day following the close of the day following the presentation of the Bill. A departure was made in the present case. The concerned, Bank was requested not to dishonour the cheque. As late as on 3rd March, 1999 oral information was given to Customs officials about non-availability of funds. Thereafter on several dates the assessee requested the Banks to delay action at their ends. The trade notice referring to which letter was written to accept cheque was not applicable to the Banks strike as the same was a pre-notified strike and was for two days.8. Statement of Mr. Rak Hashiya, of State Bank of Saurashtra, Rajkot was to the effect that normal procedure was to return the cheque on the day it is presented if the funds were not there. His further statement was to the effect that he had advised N.C. Goplani that the cheque may be retained for two to three days only after both the customs authorities and the respondent no.1 give consent letter, failing which the cheque was to be returned. He was informed on 5.3.1999 that there was no written consent of the customs authorities. The show cause notice referred to the correspondences between respondent no.1 and the bankers. It was alleged that the undertaking in the letter of respondent no.1 dated 25.2.1994 clearly shows fraudulent attempt to misuse the bonafide facilities given in terms of trade notice was the respondent no.1 was fully aware that they had not received the funds at Jamnagar. After referring to the various aspects the investigating authority came to conclude that the duty rate on February 1999 was effectively nil and hence any variation could only be upwards. Though no funds were transferred to the respondents bank in the evening of 24.2.1999, a letter was issued containing clear mention about availability of funds. The accusations in essence were that there was deliberate mis-declaration to ensure evasion from rate changes. Since the rate of duty was enhanced prior to encashment of cheque, there was liability to pay enhanced rate of duty. The clearance of goods was effected without payment of appropriate duty. There was no requirement of the imported goods by respondent no.1 which created a fiction of deemed duty payment and deemed removal, with the full knowledge that there was non-availability of funds. There was no scope of clearance in terms of Section 68 in the absence of duty being paid. The cancellation of warehousing licence was obtained by fraud as duty had not been deposited. Hence duty payable is covered under Section 16(1)(c) of the Act. Action was taken against the customs officials i.e. respondent nos. 5 to 7 for their alleged abatement in the action and the act of collusion as established by manipulation of records. They had done or omitted to do acts which acts or omissions rendered the goods liable for confiscation. Accordingly, respondent no.1 was required to show cause as to why goods removed contrary to terms of the permission for such removal should not be confiscated under Section 111(j), and since goods were removed on cancellation of licence based on false declaration without payment of duty at the rate prevalent on 17.3.1999, duty shall not be demanded and it was proposed in addition, to levy penalty on respondents 2 to 7 and interest on respondent no.1.After considering show-cause reply filed by respondent no.1 the Commissioner Customs House, Kandla (in short Commissioner) confirmed the demand of duty and also directed confiscation of goods and imposition of penalty. It is to be noted that respondent no.1, inter alia, contended that there was no certainty that the rate of duty will be enhanced and that they acted under a bona fide belief that the funds would be available on 25.2.1996. They also claimed bona fide error of judgment and lack of collusion with officers. The stand was not accepted by the Commissioner. Appeals were filed before CEGAT by the present respondent.11. So far as Issue No.1 is concerned, the Commissioner held that the duty could not be treated as paid on 25.2.1999 in view of the mis-declaration about availability of funds. The fact that funds were not available was not disclosed till 3.3.1999, even though concerned respondents had definite and specific knowledge. Commissioner relief upon Banks specific instructions regarding return of cheques in case of non-availability of funds. Reference was made to the cheque dishonour memo which was prepared but not issued due to request of the assessee. It was concluded that had the assessee correctly disclosed the facts, the application dated 25.2.1999 would not have been accepted.12. The CEGAT on the Issue No.1 observed that Commissioner failed to notice about non-applicability of Trade Notice. It was held that there was finding recorded that facility of cheque payment was not available because of false declaration. It was concluded that duty was paid on 25.2.1999 since payment of cheque relates back to the presentation and the cheque was not dishonored.13. With regard to Issue no.2, it was observed by the Commissioner that cancellation of warehousing license was obtained by fraud. Reference was made to the undertaking given before the High Court accepting liability to pay duty. Consequently it was held that there was no cancellation under Section 68. Therefore, provisions of Section 15(1)(c) were applicable.14. CEGAT held that as duty shall be treated to have been paid on 25.2.1999, requirements of Section 68 were complied with and, therefore, Section 15(1)(b) and not Section 15(1)(c) was applicable.15. As regards Issue No.3, Commissioner held that charge of evasion of duty by mala fide intent, wilful mis-declaration, suppression of facts was clearly established.16. CEGAT held that there was no willful mis-declaration, no evasion or short levy. The declaration was held to have been made under bona fide belief.17. Answering Issue No.4, Commissioner held that goods were liable for confiscation under Section 111(j) as deemed removal was contrary to the permission and fraudulent intention was clearly established. However, redemption fine of Rs. 20 crores was imposed.18. CEGAT held that there could not be any confiscation as goods had been cleared under aregards applicability of Section 114A, under Issue no.5, it was held said provision was not invokable. However, penalty of Rs. 10 crores was imposed under Section 112(b).20. Commissioner held that respondents 2 to 7 were involved in the fraud, in answering Issue No. 6. They were held liable to penalty under Section 112(a).21. CEGAT set aside the penalties holding that respondent nos. 2 to 7 had not committed any breach.

Court's reasoning:
So far as Issue No.3 is concerned, in view of the operative portion of the order of the Commissioner was to the effect that the goods valued at Rs. 599,26,00046 was to be confiscated under Section 111(j) of the Act as the imported goods except good worth Rs. 73.93 crores which were covered by corporate guarantee. Redemption fine of Rs. 20 crores in view of confiscation was imposed. Total demand of Rs. 96,26,91.711/- was confirmed under Section 28(1) proviso of the Act as also in terms of statement made on behalf of respondent no.1 before the Gujarat High Court on 17.5.1999. The duty was worked out on the basis of computation in the show cause notice. Penalty of rupees ten crores was imposed on respondent no.1 under Section 112(b) of the Act. Penalty of rupees one crore was levied on respondent no. 2 under Section 112(a). Penalty of rupees 25 lakhs and rupees 10 lakhs was imposed on respondents 3 and 4 respectively under Section 112(a) of the Act. Penalty of rupees 5 lakhs was imposed on Shri A.C. Sharma, Deputy Commissioner of Central Excise. Rupees 50,000/- and rupees 25,000/- were imposed as penalty respectively on customs officials i.e. S.P. Chaudhary and Shri K.N. Thakar under Section 112(a) of the Act. Recovery of interest leviable under Section 17(2) and Section 28AB of the Act was directed. Direction was given that deposits made towards duty were to be adjusted against duty and interest liability as determined. As noted above appeals were filed before CEGAT by the present respondents. Their basic stand was that Section 15(1)(c) had no application and it was Section 15(1)(b) of the Act which applied. It was submitted that when the cheque has been cleared and honored payment had to be treated to have been made on the date on which the cheque was handed over to the authority. There was no fraudulent intention involved. Respondent no.1 and its officials acted bona fide on the assurance given by ICICI Ltd. Negotiations for funds were going on since long. Therefore, the order of the Commissioner is not tenable.It is to be noted that the plea that in view of special statutory prescriptions reference to the trade notice was unnecessary does not appear to have been pleaded or considered by the CEGAT which proceeded only to determine the issue as to on which date the payment shall be reckoned to have been made. The entire case of the revenue was built around the alleged fraudulent acts of respondent no.1 and its officials and the customs officials. According to the revenue it was clearly a case where the declaration was done with fraudulent intention, with planned design to evade duty. Several aspects were highlighted to show that the respondent no.1 and its officials were acting with fraudulent intention. The Tribunal did not even consider the effect of those acts.From the factual scenario described it is clear that respondent no.1 was aware that there was no fund available. In fact, from 3.3.1999 it accepted the position that there was no fund available and was asking for time to arrange funds. This according to us clearly indicated a fraudulent motive and the declaration given was certainly mis-declaration. Therefore, the CEGAT was not right in its conclusions about inapplicability of Section 51(1)(c) to the facts of the case. The demand of duty and order of confiscation by the Commissioner is clearly sustainable.44. So far the respondents 2 to 4 are concerned, the Commissioners findings were asRespondent No.2 - Sri S.R. Agarwal gave instructions from time to time for clearance of all imported goods before pronouncement of Union Budget 1999. There was no requisition from Essar Projects Ltd. (in short EPL) or the contractors for such goods. Incharge of finance portfolio was fully aware of the financial status of the assessee. In spite of his personal knowledge he instructed respondent No.3 (Sri P.R. Ashok) to complete the formalities. The intention to defraud is apparent from his fax message dated 24.2.1999 instructing to clear that goods at the current duty rate and not to expose to any change in the budget. His mala fide intents is apparent from the letters addressed by him to the Chief Commissioner and DRI authorities wherein he had significantly suppressed the fact that cheque had been tendered on the basis of a false declaration regarding availability of funds. All along he stuck to the plea that mere late realization was of no consequence and since cheque was not dishonored duty at post-budget rates cannot be levied.(2) Respondent No.3-Sri P.R. Ashok was fully aware of the fact about non-availability of funds. But he made a false declaration about sufficiency of funds. The cheque was not on a Bank at Jamnagar, but at Rajkot. This was a part of a well planned plan to perpetuate fraud.(3) Respondent No.4 - Sri Nitin Bhat was in charge of Customs clearance related work. In his letters to the Customs authorities he clearly stated about availability of funds when moving for cancellation of warehouse licence. He also played active part in ensuring that the Bank does not return the cheque.In view of the aforesaid, it was concluded by the Commissioner that in respect of the imported goods the aforesaid three persons have done or omitted to do acts which acts or omissions have rendered such goods liable for confiscation and they had also abetted in acts which they knew or had reasons to believe that the goods are liable to confiscation under Section 112(j) of the Act and rendered themselves liable to action under Section 112(a) of the Act. Accordingly penalties as noted above were levied on the respondents 2, 3 and 4.46. As regards the Departmental Officials (respondent 5 to 7) the Commissioner took note of several factors.(1) As regards Sri S.P. Chaudhuri it was noted that notwithstanding specific direction of Superintendent (Tech). Jamnagar to the effect that date of cancellation should be taken to be the date of actual removal of goods from warehouse". It was concluded that Sri Chaudhuri failed to ensure actual removal for the purpose of cancellation of warehouse licence. All the three officers failed to take note the physical removal of approximately 20.000 Mts. Cargo covered under 84 Bills of Entry from the bonded warehouse could not have been possible in a short span of one day. The officers acted in undue haste and resorted to backdating as a accepted by them in their statements. It was noted that the three officers were located far apart from each other. Therefore, processing the files at various stages and/ or places on the same day is not practicable. The sequence of processing files confirmed the backdating of documents which was admitted by the officers. The prime responsibility for scrutinizing the relevant documents was on Sri A.C. Sharma who failed to do that. The other officers committed acts of omission under the overall guidance and supervision of Sri Sharma. The plea for protection under Section 155 of the Act was rejected. Penalty under Section 112(a) in respect of each of the officers was levied.47. CEGAT did not consider the aberrations highlighted by the Commissioner and in a very cryptic manner dealt with the issues. No plausible reason has been indicated as to why the allegations which are quite serious in nature and the conclusions in relation thereto recorded by the Commissioner were not to be maintained. Only an abrupt conclusion was reached that Sri Thakur and Sri Chaudhuri had absolutely no connection with the acceptance of cheques. There was not even any reference to the allegations regarding accepted backdating or acting contrary to specific directions. Sri Sharma was given a clean chit in view of the finding recorded about the date on which receipt of payment has to be taken. Here again the allegations were not considered in the proper perspective. The findings regarding deemed removal are really inconsequential in the present dispute as the very foundation for removal was based on established fraud. Therefore, it is not necessary in the present dispute to go into the question regarding effect of deemed removal.48. The manipulative role of respondents 2 to 7 have been clearly established. They were clearly active participants in the well-planned deception and fraudulent acts pleading to evasion of duty. They had played major roles in the whole game of fraud and deception. There was clearly willful disregard and deliberate defiance of statutory provisions. Levy of penalty is clearly warranted. Impugned order of CEGAT is set aside and order of Commissioner is restored.