Case Law Details

Case Name : Sumit Wool Processors Vs Commissioner of Customs (Import) / (Export) (CESTAT Mumbai)
Appeal Number : C/184/12-MUM C/228/12-MUM C/233/12-MUM C/242/12-MUM C/284/12-MUM C/408/12-MUM
Date of Judgement/Order : 31/08/2015
Related Assessment Year :
Courts : All CESTAT (770) CESTAT Mumbai (146)

Urvashi Porwal

Urvashi PorwalBrief of the Case

In the case of Sumit Wool Processors vs. Commissioner of Customs (Import) / (Export) it was held that it is a settled law that even a license obtained by fraud or mis-representation of facts is only voidable and not void ab-initio. It is good in law until it is avoided. Thus even a license obtained by fraud or mis-representation is valid in law until such time that it is cancelled by the licensing authority. Therefore no recovery can be made from a bonafide purchaser of the scrip.

Brief facts of the Case

The Directorate of Revenue Intelligence (DRI) investigated the cases of over valuation of export goods. Investigations revealed that some exporters namely M/s Nidhi Textiles, M/s Milan Exports, M/s Madhuri Impex Pvt. Ltd., Madhuri Synthetics, M/s Mahavir Synthetics, M/s Laxminath Exports who are all merchant exporters inflated the FOB value of their exports significantly and obtained the DEPB Scrips/DFIA Licenses against such exports. The DEPB scrips were sold to various transferees on the basis of endorsement of transferability by the DGFT. Appellants in the present appeals are such transferees of the DEPB scrips, DFIA licenses and Focus Market scrips. The transferees imported the goods against such scrips and availed the duty credit/exemption available under the scrips under Notifications such as 89/2005-Cus, 40/2006-Cus. The gross inflation in the FOB value of exports resulted in   excess duty credit availability on the DEPB scrips. Importers/transferees who made imports under these scrips could therefore avail the credit obtained fraudulently resulting in loss of Revenue to the Government. The investigation by DRI culminated in issue of show cause notices to the exporters and the transferees/importers of the DEPB/DFIA documents. The impugned orders have been passed holding the goods exported and imported liable to confiscation. The demand of duty has been confirmed against the importers i.e. transferees of the scrips under Section 28 alongwith confirmation of penalties under Section 28AB. Penalties have also been imposed on the exporters and importers under Section 112/114A. When the matter was investigated and referred to the licencing authority, the Joint DGFT cancelled all the DEPB/DFIA scrips ab-initio. Only transferees are in appeal before us.

Contentions of the Assessee

The assessee contended that they are transferees of Licenses issued under DEPB/DFIA/Focus Market schemes under the Foreign Trade Policy. The Licenses are endorsed as transferable by the licensing authority. Further, the exports effected by the original licensees and against which exports the licenses are granted, are duly verified by the Customs by an endorsement made to that effect on the shipping bills. That apart at the time of exports, the Shipping Bills have been duly assessed by the proper officer of customs. After the licenses were endorsed as transferable by the licensing authority, the appellants had acquired the same for valuable consideration and as such the appellants are bona fide transferees of the licenses. The licenses were valid and subsisting when the same were acquired by the appellants and at the time of import of goods by the appellants under the said licenses. Much after the clearance of the goods by the Appellants, they received Show Cause Notices issued by the DRI in which it was contended that the original licensee-exporters had overvalued the export goods and had, therefore, obtained the same by fraud/ mis-representation/ falsification of records and the licensing authority on being informed by DRI, had suspended the licenses. The licenses have subsequently been cancelled ab-initio. The suspension and cancellation of the licenses have taken place much after the import and clearance of the goods there under.

It is a settled law that even a license obtained by fraud or mis-representation of facts is only voidable and not void ab-initio. It is good in law until it is avoided. Thus even a license obtained by fraud or mis-representation is valid in law until such time that it is cancelled by the licensing authority. In the present cases, the licenses were valid and subsisting at the time when the appellants purchased the same as transferees and also when the goods were imported and cleared and the subsequent suspension or cancellation of the licenses cannot affect the imports made prior to such suspension and cancellation. Reliance was placed in this behalf on the following judgments:

(a)          East India Commercial Company Ltd vs. CC 1983 (13) ELT 1342. (SC)

(b)          UOI vs. Sampat Raj Dugar 1992 (58) ELT 163 (SC)

(c)           CC vs. Sneha Sales Corporation 2000 (121) ELT 577 (SC)

(d)          Chemi Colour Agency and another vs. CC IE 1987 (30) ELT 175.

(e)          M. Lallubhai & Co v Collector: 1989 (43) ELT 127:

(f)           K.Uttamlal (Exports) Pvt. Ltd. vs. Union of India 1990 (46) ELT 527.

(g)          Kantilal Manilal and Company versus Union of India 1994 (69) ELT 240.

(h)          Wearon Exports Private Limited vs. Union of India – 2004 (163) ELT 149

(i)            CC v Jupiter Exports 2007 (213) ELT 641.

(j)            Taparia Overseas P. Ltd v UOI 2003 (161) ELT 47

(k)           Ajay Kumar & Co v CC 2006 (205) ELT 747 upheld in 2009 (238) ELT 387.

(l)            CC v Patiala Castings P. Ltd 2012 (283) ELT 269

(m)         Binani Cement Ltd. Vs. CC-2010(259)ELT 247 upheld by Gujarat High Court in tax appeal No. 832 of 2009 by order dated 30-6-2010

(n)          Prayagraj Dyeing & Printing Mills p. Ltd. Vs. UOI-2013(290) ELT 61(Guj)

(o)          Commissioner Vs. Rajnarayan Jwalaprasad-2014(306)ELT 592(Guj)

Since a license obtained by fraud/ mis-representation is only voidable and not void it follows that if before it is avoided a third party acquires such license bona fide for value and without notice of the fraud, the rights of such third party are protected.

It is a settled law that if the seller of the goods had acquired the same under a voidable transaction (as distinguished from void) and such seller sells such goods to an innocent buyer who pays for the same and acquires the same without notice of any fraud by which the seller had obtained such goods, the rights of such innocent purchaser stand protected. Reliance is placed in this behalf on the following judgments:

(a)          Taparia Overseas P. Ltd v UOI 2003 (161) ELT 47

(b)          Ajay Kumar & Co v CC 2006 (205) ELT 747 upheld in 2009 (238) ELT 387.

(c)           CC v Patiala Castings P. Ltd 2012 (283) ELT 269:

Only condition of the relevant notification which applies to the transferee is that the license should have been made transferable, and other conditions of the Notification do not apply to the transferee. Therefore the benefit of Notification would be available to the transferee as held in the case of Goodluck Industries Ltd. Vs. CC[1999(108) ELT 818]. This decision has been affirmed by the Hon’ble Supreme Court in [2000(120) ELT A66 (SC)]. This view has also been approved by the Supreme Court in Jindal Dye Intermediate Ltd. Vs. CC [2006(197) ELT 471(SC)].

Contentions of the Revenue

The Revenue contented that the investigation clearly established that the said exporters had indulged in the act of exporting low value made ups and fabrics in the guise of high value made ups and fabrics deliberately with an intention to avail undue and illegal export benefits under DEPB/DFIA schemes. In doing so, the exporters created fictitious/bogus records of purchase (invoices) of the goods eventually exported by them, so as to create a fictitious record of having purchased the goods from fictitious/non existing local suppliers at much higher values than the real price paid for purchase thereof from local shops in Surat etc. Further an element of 11% brokerage was also included in the said invoices to further increase the recorded cost of procurement though no such brokerage was ever paid. Further in order to get back the money shown to have been paid for such high value purchase of goods, the exporters had effected a maze of financial transactions which involved creation of discounting of the cheques drawn in the name of non existing/fictitious local suppliers by using the services of financial brokers. The entire gamut of well planned acts of commission, aimed at defrauding the Government through misuse of the DEPB/DFIA schemes, is further proven by the evidence collected during the investigation locally and at Dubai (through diplomatic sources) that the value declared by the Dubai based purchasers of the exported goods is just a fraction (average 6.7% ) of the value declared by M/s. Nidhi Textiles and others at the time of export before the Indian Customs. No right or benefit can accrue from the ab-initio void scrips and no credit of duty was available to the transferee importer in terms of Notification No.34/97-Cus. The goods imported have also been rightly held liable for confiscation since the conditions of notification 34/97 Cus have not been fulfilled and duty amount confirmed. These scrips were not obtained by fraud and hence the transferee cannot be allowed to be beneficiary of the fraud. Hence, transferees are liable to make good the loss of duty suffered by the revenue. In this regard reliance is placed on the Judgement of Hon’ble CESTAT in the case of Friends Trading Co. Vs.CC-2011(267) ELT 57 (Tri.Del) affirmed by Hon’ble P&H High Court. And Hon’ble CESTAT Final Order in the case of Pee Jay International Vs. Commissioner of Customs, Amritsar.

Held by Hon’ble CESTAT, Mumbai

The Hon’ble CESTAT stated that transferability of scrips are allowed after endorsement to that effect by the licensing authority i.e. It is seen that Customs are supposed to have verified the value of exports on the application for transfer of license as well as when they allowed import against the DEPB. We find that the goods in question are goods which are traded frequently; if the Customs had taken the trouble of delving into the records and made some inquiries, the obvious multiple fold over valuation could have been detected at the time of exports on basis of which DEPBs/DFIA Licences were granted as well as at the time of imports under the DEPBs/DFIA Licences. We find that the applications for transfer contained documents such as shipping bills which are signed by the custom officers. Thus the point is that the goods which are later detected by the DRI to have been overvalued, were allowed to be exported by the customs officers without pointing any discrepancies in the value and thereafter DGFT allowed transfer of the license on the basis of such documents.

In the circumstances, the Hon’ble Tribunal stated that when the goods were imported, they were imported under a valid licence and therefore it is not possible to say that the goods imported were those prohibited or restricted by or under Chapter IV of the Act within the meaning of Clause (8) of Section 167 of the Sea Customs Act.

The next question is whether the import of the said goods was contrary to law in any manner and whether the said goods are liable to be confiscated under the Customs Act. The only provisions relied upon by the appellants are Clauses (d) and (o) in Section 111 of the Customs Act. None of these clauses are attracted in the present case. Clause (d) contemplates an import which is contrary to any prohibition imposed either by the Customs Act or any other law for the time being in force. No such prohibition can be pleaded in this case since on the date of the import the said goods were covered by a valid import licence. The subsequent cancellation of licence is of no relevance nor does it retrospectively render the import illegal. [East India Commercial Co. Ltd. v. The Collector of Customs, Calcutta -1963 (3) S.C.R. 338 at 372.] Clause(o) contemplates confiscation of goods which are exempted from duty subject to a condition, which condition is not observed by the importer. Occasion for taking action under this clause arises only when the condition is not observed within the period prescribed, if any, or where the period is not so prescribed, within a reasonable period. It, therefore, cannot be said that the said goods were liable to be confiscated on the date of their import under Clause (o).

It is thus no doubt true that as a general rule, if a transaction has been originally founded on fraud, the original vice will continue to taint it, and not only is the person who has committed fraud is precluded from deriving any benefit under it, but an innocent person is so likewise, unless there has been some consideration moving from himself. In the cases at hand, it is not in dispute that all the petitioners had obtained licences for valuable consideration without any notice of the fraud alleged to have been committed by the original licence holders while obtaining licences. If that be so, the concept that fraud vitiates everything would not be applicable to the cases where the transaction of transfer of licence is for value without notice arising out of mercantile transactions, governed by common law and not by provisions of any statute.

On the above canvas, having examined the well settled, established and well recognised concept of law that the effect of fraud is not to render the transaction void ab initio but renders it voidable at the instance of the party defrauded and transaction continues valid until the party defrauded has decided to avoid it.

Alternatively, assuming that licence comes to an end upon it is suspension and/or cancellation, it is laid down that the date of import of goods would be the date on which the Bill of Entry was presented under section 46. This legal position is clear from the decision of the Apex Court as laid down in Union of India v. Apar Ltd. 1999 (112) E.L.T. 3 (S.C.) and Garden Silk Mills v. Union of India – 1999 (113) E.L.T. 358 (S.C.). The same is the view taken by the Apex Court in Sampat Raj Durgar case (cited supra). Imports against replenishment Licences were permitted duty free if the importers produced an import Replenishment Licence the goods or the materials were imported into India. In the instant cases when the goods were imported into India, and even when the Bills of Entry ware filed, neither were the licences suspended nor the same cancelled. In all these cases, Bills of Entry were filed by the petitioners well before the suspension and/or cancellation of the licences in question, thus the imports were made under valid licences, the goods could not be subjected to levy of customs duty in the peculiar facts and circumstances of the cases in hand.

The transfer of DEPB scrips in the present cases will be governed by the provisions of the statute that is the Sale of Goods Act. In such a case, the effect of misrepresentation in the present cases has not rendered the transaction between the original license holders and the transferees void ab-initio but rendered it voidable at the instance of the party( in this case importer)defrauded and transaction continues to be valid until the party defrauded has decided to avoid it. In the present case the licences/scrips were transferred to the appellant importers who had no knowledge of the misrepresentation by the exporters in obtaining them. The Bills of Entry were filed by the appellant importers well before the cancellation of licenses, thus imports were made under valid licenses. Therefore goods could not be subjected to levy of Custom duty for imports under Licences nor could availment of credit in DEPB scrips be denied.

In view of analysis above based on judicial pronouncements, the Hon’ble CESTAT set aside the confiscation, demands of duty and interest and penalties.


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One response to “Recovery cannot be made from bonfide purchaser of DFIA/DEPB license – CESTAT”

  1. Manish says:

    Please upload a copy of the judgment or give link

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