Supreme Court Upholds Customs Duty on Forged DEPB Licenses: Munjal Showa Ltd. vs. Commissioner of Customs (23 September 2022)

Introduction

Date of the Judgment: 23 September 2022

Citation: 2022 INSC 432

Judges: M.R. Shah, J. and Krishna Murari, J.

Can a company that unknowingly uses forged documents to avoid paying customs duty be held liable, even if they weren’t directly involved in the fraud? The Supreme Court of India recently addressed this question in a case involving forged Duty Entitlement Passbook (DEPB) licenses. This judgment clarifies that the use of forged documents, even without direct knowledge of the fraud, can lead to the imposition of customs duty. The bench, comprising Justices M.R. Shah and Krishna Murari, delivered a unanimous decision.

Case Background

M/s. Munjal Showa Ltd. imported goods through Inland Container Depot (ICD), Ballabgarh, using Transfer Release Advices (TRAs) issued by the Bombay Custom House. These TRAs were based on DEPB licenses. Upon verification, it was discovered that the DEPB licenses were not genuine. The goods were cleared in May/June 2003. On 05.08.2003, the Assistant Commissioner, ICD, Faridabad, informed Munjal Showa Ltd. that the TRAs and DEPB licenses were forged, requiring them to deposit the duty with interest.

Munjal Showa Ltd. responded on 07.08.2003, expressing surprise and stating they would file a First Information Report (F.I.R.) against the transferor. They deposited the duty under protest on 12.08.2003. A show-cause notice was issued on 03.10.2006, alleging evasion of duty. The Commissioner of Customs, on 17.10.2007, held the DEPB licenses void, making the exemption inadmissible. The Customs, Excise and Service Tax Appellate Tribunal (Tribunal) upheld the duty liability, and the High Court dismissed the appeal, leading to the Supreme Court appeal.

Similarly, M/s. Friends Trading Co. imported goods and filed a Bill of Entry on 24.11.2000. They availed an exemption under Notification dated 07.04.1997, against a DEPB Scrip dated 14.11.2000. This DEPB Scrip was found to be fraudulently procured by their predecessor, making it void. A demand for duty was raised on 04.10.2005, which was affirmed by the Tribunal and the High Court. The High Court relied on its decision in the Munjal Showa Ltd. case.

Timeline:

Legal Framework

The primary legal provision at issue is Section 25 of the Customs Act, 1962, which allows the government to grant exemptions from customs duty. In this case, the appellants availed of exemptions based on DEPB licenses, which were later found to be forged. The relevant part of Section 25 states:

“If the Central Government is satisfied that it is necessary in the public interest so to do, it may, by notification in the Official Gazette, exempt generally either absolutely or subject to such conditions (to be fulfilled before or after clearance) as may be specified in the notification, goods of any specified description from the whole or any part of the duty of customs leviable thereon.”

The case also involves the invocation of the extended period of limitation for issuing a show-cause notice. The department argued that the fraud vitiated the entire transaction, justifying the extended period.

Arguments

Appellant’s Arguments:

• The appellants argued that the extended period of limitation could not be invoked because there was no intent to evade payment of duty and that they were not aware of the fraud.
• They relied on the Supreme Court’s decision in Commissioner of Customs (Preventive) Vs. Aafloat Textiles India Private Limited and Ors., (2009) 11 SCC 18, arguing that an inquiry was required to determine if the buyer had knowledge of the forged DEPB licenses.
• They contended that since they were not the original perpetrators of the fraud, they should not be penalized.

Respondent’s Arguments:

• The respondents argued that the DEPB licenses were forged and fake, rendering them void from the beginning (void ab initio).
• They contended that the appellants, as beneficiaries of the forged licenses, were liable to pay the customs duty.
• They asserted that fraud vitiates everything, justifying the invocation of the extended period of limitation.
• They argued that the knowledge of the buyer about the fraud is immaterial for the purpose of duty liability.

Summary of Arguments

Issues Framed by the Supreme Court

The Supreme Court addressed the following issues:

1. Whether the Department was justified in invoking the extended period of limitation in the facts and circumstances of the case.
2. Whether the appellant(s) – buyer(s) was/were liable to pay the Customs Duty of which the exemption benefit was availed against the forged/fake DEPB licenses/Scripps.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

• Commissioner of Customs (Preventive) Vs. Aafloat Textiles India Private Limited and Ors., (2009) 11 SCC 18: The appellants relied on this case to argue that an inquiry was needed to determine if the buyer had knowledge of the fraud. However, the court distinguished this case, stating that it pertains to penalty and not duty liability.
• Section 25 of the Customs Act, 1962: This section allows for exemptions from customs duty. The court noted that the exemption was availed based on forged documents, thus making the exemption void.

Authorities Considered by the Court

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• The Supreme Court distinguished the case of Aafloat Textiles India Private Limited (supra), stating that it pertained to penalty proceedings and not to the liability of duty. The court held that the knowledge of the buyer about the fraud is immaterial for the purpose of duty liability.
• The Supreme Court noted that the exemption under Section 25 of the Customs Act, 1962, was availed based on forged documents, thus making the exemption void.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the principle that fraud vitiates everything. The court emphasized that the DEPB licenses were forged and void from the beginning. The fact that the appellants availed of exemptions based on these forged documents made them liable for the customs duty. The court also distinguished between duty liability and penalty, noting that the buyer’s knowledge of the fraud is relevant only for penalty proceedings, not for duty liability. The immediate payment of duty by the appellants, even under protest, was also a factor considered by the court, showing their understanding of the liability.

Fact:Law Ratio

Logical Reasoning

Key Takeaways

• The Supreme Court held that if an exemption is availed by using a forged document, the duty liability is absolute, irrespective of the knowledge of the buyer.
• Fraud vitiates everything, and any benefit availed based on forged documents is void from the start.
• The extended period of limitation can be invoked by the department in cases of fraud, even if the importer was not directly involved in the fraud.
• The knowledge of the buyer about the fraud is relevant only for penalty proceedings, not for duty liability.
• Importers must exercise due diligence in verifying the authenticity of documents used for claiming exemptions.

Directions

The Supreme Court directed the adjudicating authority to complete the penalty proceedings on remand within six months.

Development of Law

The ratio decidendi of this case is that the use of forged documents to avail customs duty exemptions makes the beneficiary liable for the duty, regardless of their knowledge of the fraud. This judgment clarifies that the principle of “fraud vitiates everything” applies to duty liability, and the extended period of limitation can be invoked in such cases. This case does not change the previous position of law but rather reinforces the existing legal principles.

Conclusion

The Supreme Court dismissed the appeals, upholding the customs duty demand on M/s. Munjal Showa Ltd. and M/s. Friends Trading Co. The court emphasized that the use of forged DEPB licenses to avail exemptions makes the beneficiaries liable for customs duty, irrespective of their knowledge of the fraud. This judgment reinforces the principle that fraud vitiates everything and clarifies the liability of duty in such cases.

Category

Parent Category: Customs Law

Child Category: Section 25, Customs Act, 1962

Child Category: Duty Entitlement Passbook (DEPB)

FAQ

Q: What is a DEPB license?

A: A Duty Entitlement Passbook (DEPB) license is a scheme that allows exporters to import certain goods without paying customs duty. It is meant to incentivize exports.

Q: What did the Supreme Court decide in this case?

A: The Supreme Court held that if an importer uses forged DEPB licenses to avoid paying customs duty, they are liable to pay the duty, even if they were not aware of the forgery.

Q: Does this mean that importers are always liable, even if they are victims of fraud?

A: Yes, for duty liability. The court clarified that while knowledge of the fraud is relevant for penalty proceedings, it does not affect the liability to pay customs duty.

Q: What is the principle of “fraud vitiates everything”?

A: This legal principle means that if a transaction is based on fraud, it is considered void and has no legal effect.

Q: What should importers do to avoid such situations?

A: Importers should exercise due diligence and verify the authenticity of all documents used for claiming exemptions. They should also ensure that they are dealing with reputable parties.

Q: What is the extended period of limitation in this context?

A: The extended period of limitation allows the customs department more time to issue a show-cause notice in cases of fraud or misrepresentation.