Demand of Customs Duty has got constitutional roots. Under Article 265 of the Constitution of India, no tax will be levied except as authority of law. Every legislation on taxation will have a charging section to levy tax or duty and a collection machinery to recover the taxes, duties so levied. The absence of either of them is likely to render the tax law unconstitutional.
Provisions under Custom Act 1962 for Demand of Duty
Under the Customs Act, 1962, Section 12 is the charging section and Section 28 set out mechanism for the collection of duties. Section 28 is the only provision in the Act which provides for demand and collection of duty in cases where it has not been levied or has been short-levied or erroneously refunded. It also provides for payment of interest which has been paid or part paid or erroneously refunded. Thus Section 28 covers all types of cases. This section also takes care of the Principal of Natural Justice and provides for issue of Notice to the person concerned and Hearing. In essence, Section 28 incorporates the principles of Audi Alteram Partem and also prescribes for limitation, which are very important and fundamental aspects of the rule of law, without which proceedings will be vitiated.
The duty of Customs as well as Excise and Service Tax are self assessed in terms of Section 17(1) of the Act, therefore, there is possibility that duty inadvertently or advertently has been paid at lower side than the duty actually payable, then in such situation aid of Section 28 of the Customs Act is taken.
The section 28 speaks of three kind of situations firstly non-levy, secondly short levy and thirdly erroneous refund . The law is well settled that a Show Cause Notice under section 28 of the Act can be only issued subsequent to clearance of the goods under 47 of the Act. In following situation usually demands of Customs duties are issued under the vires of Section 28.
Circumstances Laying for Demand of Duty
When declared classification found to be wrong and thereby goods found contrary to declaration;
Duty erroneously refunded;
Customs duty paid at concessional rate though concession was not available;
Goods cleared under exemption notification whose conditions are violated by the importer or exporter;
When there is suppression of material particular viz value and goods cleared on manipulated documents.
Demand of Duty is Subject to Restrictions
The power of recovery of escaped duty under section 28 is not absolute and unfettered and having limitation of one year and five years as the case may be, depending upon whether the act which led to leakage of duty is intentional or unintentional ;
(a) In case of erroneous escape of duty under Section 28(1), the proper officer can raise demand within one year from relevant date from the person who is saddled with responsibility to pay duty/interest. Analogous provision in Central Excise Act is Section 11A(1)(a). (b) In case of collusion or willful mis-statement or suppression of the facts, the proper officer shall serve notice within five years from the relevant date on the person chargeable with duty or interest in terms of Section 28(4). Parallel provisions in Central Excise Act is 11(A)(4).
With regard to applicability of extended period of five years, the Apex Court in Rainbow Industries v CCE, 1994(74) ELT 3 SC has held that two ingredients must be present i.e willful suppression /mis- declaration and the intention to evade duty. It was held that power to extend period from one to five year is exceptional and hence have to be applied strictly and cautiously. It was also held that mere inaction is not suppression of facts.The conscious and deliberate withholding of information is suppression. Further, in the case of Provisional Assessment, the limitation of time period is not applicable.
Where the Limitations Do not Apply
The limitation is also not applicable in case of breach of post import conditions attached to the notification and when benefit of duty exemption has been taken, then the onus lies on the importer/exporter to comply with the condition of exemption notification and in such cases obligation is of continuous nature therefore limitation is not applicable. In such cases customs authorities are well within their power to recover duty whenever it comes to their notice that owner/persons has violated the conditions stipulated therein in exemption notification. In the case of M/s Bombay Hospital Trust v Commissioner of Customs,Sahar,Mumbai,2005(188) E.L.T,374(Tri-LB) held that when a post-importation conditions in an exemption notification is not fulfilled, the Department has the power to recover escaped duty in terms of Section 12 of the Customs Act,1962.
Now, the question comes what is the relevant date for issue of Show Cause Notice
Relevant Date for issue of SCN
In a case where duty is not levied/short levied or interest is not charged the ,date on which proper officer makes an order for the clearance of the goods.
In a case where duty is provisionally assessed under section 18 of the Customs Act,1962, the date of adjustment of final assessment;
In a case where duty or interest has been erroneously refunded, the date of refund.
In any other case, date of payment of duty or interest.
Case Laws on Relevant Date for issue of SCN
In the case of Bharat Charitable cancer Hospital v CC(2007) 216 ELT 567 (CESTAT), it was held that there is no time limit or limitation for recovery of duty, when post import conditions are violated. The duty is required to recovered under Bond/undertaking given by the party, for the post import breach of conditions attached to the notification.
Effect of Notice for period beyond five/one year
In UOI v Maheshwari Woolen Mills-AIR 1993 SC W 483= AIR 1993 SC 125 , SC has observed that entire notice does not become invalid when issued beyond five years, the only effect is that department will not be entitled to collect duty beyond five/one year.
However, in certain cases Show cause Notice is not required to be issued, if duty liability and interest under Section 28AA is discharged by importer/exporter ascertainment or by proper officer before service of Notice in terms of S.28(1)(b) and the proper officer is informed about this. This is a mandatory provision. If the amount paid fails short, then the proper officer shall proceed to issue Notice.
Another question which required to be consider in cases of transfer of license, who is liable for duty, actual importer or exporter- When in the case of transfer of license issued by DGFT, duty liability is of actual importer and not of exporter who acquired the said license by the misstatement. The same view was held in K Sons Overseas v CC 2001(132) ELT 93(CEGAT). The exporter cannot be held as a deemed importer for the purpose of duty liability. However by the Applicability of Section 28AAA- Duty liability of person, who had obtained authorization or scrip by misstatement or suppression or collusion – The said provisions inserted w.e.f 28.05.2012.The said provisions gives mandate to demand/recover duty from exporter who has obtained the scrips from DGFT by means of misstatement or suppression of facts or collusion. Later he may transfer the license to another person. The transferee may clear the goods without payment of customs duty on the basis of such instrument. In such cases transferee is importer and liable for payment of customs duty under Section 28 of the Act. If the demand has been confirmed on the importer(transferee) under section 28 of the Act, the demand of recovery cannot be made from the transferor. Section 28AAA(4). The recovery can be made either from the transferor or from transferee and not from both.
Who can issue the SCN ?–
As per the reading of Section 28, it is clearly and cogently suggests that the SCN should be issued by the Proper Officer. The proper officer is defined in Section 2(34), which says that in relation to any function, proper officer means , who have assigned those function by Board or by Commissioners. The Apex Court in the case of Commissioner of Customs vs. Sayed Ali reported in 2011 (265) E.L.T.17(SC), in the context of the definition of proper officer under section 2(34) of the Customs Act, has held and observed that it is only such a Customs Officer, who has been assigned the specific functions of assessment and re-assessment of duty in the jurisdictional area where the import concerned has been effected, by either the Board or the Commissioner of Customs, in terms of section 2(34) of the Act, would be competent to issue notice under section 28. Board Circular 24/2011 which deals with monetary powers of adjudicating authority in respect of cases falling under Section 28 , Duty Drawback and under other Export Promotion Scheme. In this regard ,the provisions of Section 122 is also relevant which talks about adjudication of confiscation and penalties and proceeds on the value of the goods liable to confiscation. Section 122 read as under
The aforesaid Board Circular has linked the power of adjudication with duty amount or amount of duty drawback Scheme/Export incentive amount, whereas Section 122 bas on the value on the value of the goods.
In Konia Trading company v CC(2004) 170 ELT 51 CESTAT, it was clarified that Notification no 17/2002-Cus (NT) dated 07.03.2002 specified jurisdiction of DRI officer as “ whole of India”. Hence, it was held that they are competent to issue SCN. Same view was upheld in Chandra Impex v C.C(2008) 224 ELT 583 (CESTAT) and Mahesh India (2009) 243 ELT 339 (Bom HC DB). Now this position has been finally confirmed amending section 28(11).
Further in CC v Jagdish Cancer and Research Institute 132 ELT 257= (2001) 6 SCC 483 2001 AIR SCW 2854 (SC 3 member bench), it was held that Notice under section 124 of the Customs Act, can be issued by AC/DC, even if it is incidentally demanding duty.
If the substance of the notice is cleared, non-mentioning or wrong mentioning of rule or section will not vitiate the Notice, if all essential ingredients of statute are mentioned and no prejudice is caused. This view was held in BSE Brokers Forum v SEBI 2001 AIR SCW 628(SC 3 member bench) that as long as impugned power is traceable to statute mere omission or error will not vitiate the Notice.
Now, coming to the issue of clerical, arithmetical error occurred due to accidental slip or omission in the Notice and its remedy, it may be noted that if subsequent notice is issued clarifying earlier notice or correcting a mistake, it will be called corrigendum. In that case original notice is valid and period of limitation will be from date of first notice. The same correction is done under the vires of section 154 of the Act. The customs officer on their own or being pointed out can correct the mistakes at any time occur due to clerical or arithmetical mistakes. This view was held in Hindustan Fertilizer Corporation v Collector 1993 (63) ELT 648 (Tri-LB) that any consequential relief can be allowed to flow to the assesse by the applying Section 154. A power vested in authority to correct a mistake or error includes a power to grant consequential relief, if any. When notice is entirely on different grounds, it will be treated as new show cause notice and period of notice will be effective from date of new notice.
In this regard in CCE v Kasturi Foods and Chemicals Ltd 1992(59) ELT 68 (CEGAT), it was held that if earlier notice did not indicate amount of duty demanded and if the same is demanded by another notice, the same will be considered as a fresh notice and not mere corrigendum. Addendum giving additional material on same show cause notice is not a fresh show cause notice.
Now another question which comes into mind and without it action initiated under Section 28 cannot be completed i.e Service of Show Cause Notice issued under Section 28 of the Act means It is controlled by the provisions of Section 153 of the Act. Parallel section is 37C(1) of Central Excise Act,
By Registered post or by Courier, approved by Commissioner of Customs( provision regarding courier has been made w.e.f 28.05.12.
If not possible to serve by above methods, then by displaying it on Notice Board.
Presumption in cases of service by post- In CC Alavi Hajiv Palapetty Mohammed (2007) 6 SCC 555=77 SCL117 , it was held that if notice is sent by post, it is presumed to be served ,when document is properly addressed, pre-paid and sent by registered post, unless contrary is proved. The Notice is deemed to have been delivered in normal course, though it is a rebuttable presumption. This observation of Apex Court has legal backing of Section 27 of General Clauses Act, 1897.
Notice under Section 28 to Agent – Liability of Principal and Agent has been dealt in Section 147 of the Act. The said provisions are based on the doctrine of Indian Contract Act, 1872, wherein service of notice to agent is valid service of Notice. However, when goods are cleared from Customs, duties of Agent ends as he has a limited liability
In Reliance Telecom Ltd CC (2004) 172 ELT 86 (CESTAT), it was held that when service is made to the assesses in time when same is not received, the party has to prove it contrary. When order, decision does not reach to the party, sending is not complete as no, communication of order to them. The party by filing affidavit deny the receipt, then the department has to prove by evidence that the order was served properly.
Another issue Whether demand of duty is justified under Section 125(2) of the Customs Act,1962 ?. Confusion is palpable in departmental authorities. It is observed that for demand of duty different provisions are applied.
Section 125 is read as under;–Option to pay fine in lieu of confiscation.-
(1) Whenever confiscation of any goods is authorized by this Act, the officer adjudging it may, in the case of any goods, the importation or exportation whereof is prohibited under this Act or under any other law for the time being in force, and shall, in the case of any other goods, give to the owner of the goods [or, where such owner is not known, the person from whose possession or custody such goods have been seized,] an option to pay in lieu of confiscation such fine as the said officer thinks fit:
Provided that, without prejudice to the provisions of the proviso to Sub-section (2) of Section 115, such fine shall not exceed the market price of the goods confiscated, less in the case of imported goods the duty chargeable thereon.
[(2) Where any fine in lieu of confiscation of goods is imposed under Sub-section (1) the owner of such goods or the person referred to in Sub-section (1) shall, in addition, be liable to any duty and charges payable in respect of such goods.
Duty under Section 125(2) can be recovered only if the option of redemption is exercised. When the option is not exercised then the duty is not recoverable. Section 125(2) as amended by the Customs (Amendment) Act, 1985 is enacted only to particularize the person who is liable to pay duty and fine in case the goods are redeemed. It is submitted that Section 125(2) does not create automatic liability to pay duty even if the goods are not being redeemed. If this submission that duty shall be payable under Section 125 irrespective of the exercise of option to redeem the goods on payment of fine in lieu of confiscation is accepted, then the term ‘in addition to’ in Section 125(2) would be rendered redundant and otiose. If the option to redeem the goods is not exercised, then, the goods remain confiscated and vests in Central Government in that event not in figment of imagination it can be envisaged that duty would be payable by the owner albeit the goods have vested in the government . Nothing will be more harsh than this and against the principle of equity.
The expression ‘shall be liable’ in Section 125(2) does not refer to absolute obligation. The word ‘liable’ in Section 125(2) indicates that there is a possibility of attracting obligation to pay duty. Such possibility will occur or happen if the goods are being redeemed. This gives rise to contingency. Thus, the word ‘liable’ in Section 125(2) is decisive of the matter as it establishes that if the goods are not redeemed, possibility of payment of duty does not arise at all. Under Section 125(2) it is not the importer but owner or the person in possession of the goods is liable to duty conclusively establishes that the liability to pay duty in terms of Section 125(2) will arise only if the goods are redeemed.
In the scheme of Customs Act, under Section 47, customs duty is payable only when clearance of the goods is sought from the customs control. Where the goods are not sought to be cleared from the customs, they may be disposed off under Section 48. In that case, duty will not be payable merely because of the importation of goods. Therefore, if the goods are still lying in the customs control on account of absolute confiscation or on account of non- exercise of the option to redeem goods, the duty will not be payable at all. This clearly proves that when goods are cleared from Customs control and become the part of goods of land mass then duty is paid. Then how in case of non-exercise of redemption, duty will be recovered.
When owner/person will be liable to pay duty automatically, then the absurd situation would be that in every case, the moment an order of confiscation is made with an option to pay fine in lieu of confiscation, the owner would have to pay duty even if the option to redeem the goods is not exercised. Thus, the duties of customs leviable on importation gets crystallized on assessment and has to be paid before seeking an order for clearance of the goods. Where the imported goods are confiscated before an order for clearance is made with an option to redeem the goods on payment of fine in lieu of confiscation, then the duty on such goods does not become payable on imposition of fine in lieu of confiscation but has to be paid before seeking clearance of the goods. In such a case if the clearance of the goods is not sought for, the question of paying duty does not arise at all.
On this issue there are various contrary judgments but important decisions will be discussed hereunder wherein Section 125 is scrutinized.
In case of Commissioner Of Customs (Import) Vs Wockhardt Hospital And Heart passed on 28 April, 2006, by Hon’ble Bombay High Court, it was held that where the goods are confiscated under Section 111(o) with an option to redeem the goods on payment of fine in lieu of confiscation imposed under Section 125(1), the revenue is entitled to recover the duty payable on such goods on passing an order under Section 125(1) and it is wholly irrelevant as to whether the owner has exercised the option to redeem the goods or not. In this case, it was also observed that Tribunal in several cases has held that the duty is not payable under Section 125(2), if the option of redemption is not exercised. This was found not a correct interpretation. Where the liability to pay duty is consequential to confiscation then on confiscation, if the goods are permitted to be redeemed by imposing fine, then on such imposition of fine duty automatically becomes payable. It was laid down that passing of order and imposition of fine warrants the demand of differential duty under Section 125(2) irrespective of the fact whether the owner exercised the option to redeem the confiscated goods or not. In such cases, duty becomes payable on imposition of fine in lieu of confiscation and the same has to be paid on passing an order under Section 125(1). In such cases fine may not be payable on imposition of fine, however, duty has to be paid on passing of an order under Section 125(1).
Similarly in the case of Jagdish Cancer & Research Institute, the Apex Court inter alia held thus:
Whenever an order confiscating the imported goods is passed, an option, as provided under Sub-section (1) of Section 125 of the Customs Act, is to be given to the person to pay fine in lieu of the confiscation and on such an order being passed according to Sub-section (2) of Section 125, the person “shall in addition be liable to any duty and charges payable in respect of such goods”. A reading of Sub-sections (1) and (2) of Section 125 together makes it clear that the liability to pay duty arises under Sub-section (2) in addition to the fine under Sub-section (1). Therefore, where an order is passed for payment of customs duty along with an order of imposition of fine in lieu of confiscation of goods, it shall only be referable to Sub-section (2) of Section 125 of the Customs Act. It would not attract Section 28(1) of the Customs Act which covers the cases of duty not levied, short levied or erroneously refunded etc. The order for payment of duty under Section 125(2) would be an integral part of proceedings relating to confiscation and consequential orders thereon, on the ground as in this case that the importer had violated the conditions of notification subject to which exemption of goods was granted, without attracting the provisions of Section 28(1) of the Customs Act. A reference was made to a decision of this Court reported in Mohan Meakins Ltd. v. Commissioner of Central Excise, Kochi, wherein it has been observed in Para 6 “…. Therefore, there is a mandatory requirement on the adjudicating officer before permitting the redemption of goods, firstly, to assess the market value of the goods and then to levy any duty or change payable on such goods apart from the redemption fine that he intends to levy under Sub-section (1) of that Section”.
In an unreported Judgment of Hon’ble High Court of Bombay in the case of Sir Harkisondas Narottam Hospital (supra). The observation made therein to the effect that if the owner is not interested in redeeming the goods, then the Customs Act does not create any liability to pay the customs duty is only a prima facie observation made in the context of an issue relating to pre-deposit. Therefore, it cannot be said that in the aforesaid case, this Court has held that in each and every case, if the owner declines to exercise the option of redeeming the goods, the customs duty would not be payable.
Further, scope and applicability of Section 125(2) also came for scrutiny in case of Fortis Hospital Ltd vs. Commissioner of Customs, Import reported on April 17.04. 2015, in Tax Alert, the Supreme Court held that duty cannot be demanded under Section 124 and Section 125 of Customs Act, 1962, when option to re-deem the goods is not exercised by the assessee .
It was held by the Hon’ble Court that Show Cause Notice issued under 124 deals with the confiscation of goods and penalty and does not contain a clause for recovery of duty, it only becomes possible by application of Section 125(2) ,when owner/person exercise the option to redeem the goods. When the Department initiate action under Section 124 ,it must be alive with the situation that notice may not exercise the option to redeem the goods.
This does not mean that the Department is without remedy. This challenge will not apply to composite show cause notices issued under Section 28 and Section 124 of the Act.
In recent times, the same has been the practice of the revenue department. Further, as also held in the above decision, the Tax Department always has the avenue to issue a separate show cause notice under Section 28 to raise demand of duty, subject to provisions of limitation.
Author’s view and conclusion– Keeping in mind the provisions of Constitutional Law, the Customs Act,1962 and judgments discussed above, it is clear that collection machinery in customs is Section 28 only and duty can be demanded in this provisions only. When duty is demanded under Section 125(2) ,it will not survive as the machinery section is 28. Section 125(2) is a contingent provisions and only be effective when persons/owner is ready to redeem the confiscated goods. Therefore, complete machinery has been created under the provisions of Section 28.
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