Effect of Forged Licenses: Fixing the Liability in Different Scenarios

Generally, in the case of forged DEPB or Chapter 3 scrips of DGFT (FMS/FPS etc) (Now MEIS)  it is often alleged by the investigating authorities  that purchaser/importer had purchased the said  licenses from such exporters, which are fraudulently obtained by them by way of overvaluation or by resorting to some mis-declaration.  And when same are being utilized for the payment of import duty, the import duty or duty forgone is recoverable from the importer.

Further, it is also alleged that when the said  license or scrips  are cancelled ab intio, by the DGFT authorities when same are obtained by fraudulent means , on the request of investigating authorities, therefore importer is responsible for the purchase of said licenses and their action rendered the import goods liable to confiscation under section 111(o) of the Customs Act, 1962 and attracts penalty under section 112(a) and 112(b) thereof and liable for duty recovery. In such cases entire case is build on the  fraudulently obtaining the scrips by the  exporter by way of mis-declaration of exports goods viz value, description etc. and later cancellation of the impugned licenses by the DGFT authorities ab-intio.

As the export is an independent transaction and it cannot be denied that whenever there is improper exportation, errant exporter and concerned parties are required to be penalized as per provisions of law for the contravention of relevant provisions.

However, it is felt the same charges shall not be implicated to the innocent importers  , who have purchased the license in an innocent way in good faith for valuable and lawful consideration in ordinary course of business.

It is a general principle of construction of taxing statute that it has to constructed strictly and assesse has to fall within the ambit and scope of clear letters of words and language of the statute. If the subject is falling within the letter of words then he shall be taxed and if his actions are such that he is not falling under the clear words of the statute, then he shall not be taxed on the basis of any analogy, inferences and presumption, how great inconvenience, it may cause to the judicial mind.

In this regard, it is required to examine the relevant and famous maxim Caveat Emptor which has got applicability and relevance thereof in such cases as the whole edifice of case is often based upon the said general principle of Caveat Emptor. This maxim is the basic principle of law in Sale of Goods Act, 1930, except in the case of fraud. It says that “Let the buyer be aware” when the sale is done in overt market but except in the case of fraud.

When the sale/transaction are done in usual and ordinary course of business and when one have taken all the reasonable care during the sale and even exercised the due diligence  but in spite of this  fraudulent practice of the exporter could not revealed , then how it can be said that importer is part of the said fraudulent means/tactics employed by the exporter. The fraud is defined in the Section 17 of the Indian Contract Act,1872 which is as under;

Fraud as defined U/s of the Indian Contract Act,1872

Fraud means and includes any of the following act committed by a party to contract or with his connivance or by his agent with intent to deceive another party thereto or his agent or to induce him to enter into the contract:

(1)  the suggestion as a fact of that which is not true by one who does not believe it to be true,

(2)  the active concealment of a fact by one who having knowledge or belief of the fact;

(3)  a promise made without any intention of performing it;

(4)  any other act fitted to deceive;

(5)  any such act or omission as the law specially declares to be fraudulent.

Bare perusal of the above definition clearly shows that when there is active concealment of the fact of overvaluation or misdeclaration of description by the exporter and he must have knowledge of the said fact even before exporting the goods and prior to selling of licenses. Therefore, the said act of the exporter coupled with prior knowledge and concealment of fact while obtaining the  licenses may amounts to fraud as stated above. Further, overvaluing the export goods or resorting to other mis-declaration  and obtaining the licenses on the basis of such export is clearly fall within the language of fraud. But at the same time, it cannot be said that by adopting fraudulent practices, importer have obtained the license as alleged .It is clear that for the fraud to stand on its ground there shall be pre-knowledge and same is not applicable when importer bought the license from the open/overt market therefore fraud cannot be attributed to his act.  When the fore knowledge is  not established  in proceedings clearly, malafide intention of importers cannot be proved that they have deliberately and intentionally brought the said license with having pre-knowledge and these are fraudulently obtained, therefore charges of fraud is even not remotely sustainable and not maintainable against the importer .

Another issue of great significance which required to be examined and answered that in the event of cancellation  licenses ab-intio by the Licensing authority i.e DGFT, which were sold for valuable consideration by the exporter to importer and which were  later utilized for payment of import  duty, whether the benefit can be denied  and   import duty  foregone along with interest is recoverable from importer under the S 28(4) of the Act. In this regard, we have to look into S. 27 of the Sale of Goods Act, 1932, which provides as follows

Subject to the provisions of this Act and of any other law for the time being in force, where goods are sold by a person who is not the owner thereof and who does not sell  them under the authority or with the consent of the owner, the buyer acquires no better title to the goods than the seller had, unless the owner of the good is by his conduct precluded from denying the seller’s authority to sell.  It means that the transferee  has no better title than the transferor i.e exporter. It is a general rule which says that no person can give what he does not possess but same is having  exception. In normal circumstances importer does not have any protection as the licenses were adjudged null and void and in that case duty is recoverable but when we will look into the provision of exception, it gives protection to innocent importer as they have purchased them in good faith and without notice of any defect or want of title on the part of the seller and for valuable consideration.

In such case a heavy reliance can be placed in the case of the Commissioner of Customs v Indu Exports (P) Ltd., wherein Honorable CESTAT Bangalore has held that even in the case of cancellation of DEPB scrip void ab-initio by the DGFT authority transaction done by the party i.e. payment of import duty through the said DEPB scrip will not become invalid. It was also held that as the goods were imported prior to the cancellation of license, the same could not held to be invalid. It was also held therein that when license is purchased by the appellants in a bona fide manner, it is invalid only from the date of suspension or cancellation. Imports having been made under valid license, the goods are not subjected to a levy of Customs duty. What the CESTAT means is that once the DEPB scrip is legally obtained by transfer and is utilized for payment of duty, subsequent cancellation on account of fraud by the person who originally obtained the DEPB scrip cannot be a reason for denying the exemption to the appellant.  It was also held that if the contract founded in fraud be questioned between the parties to the contract, in that event, as against a person who has committed fraud and who endeavors to avail himself any benefit of it, the contract is to be considered as null and void but it does not lays down that fraud intended by one man shall overturn a fair and bona fide contract or transaction with others. 

In view of the above, reasonable care, exercising due diligence and buying from open/overt market without any notice of defect and payment of valuable consideration gives goods protection and defense to the importer subject to he is not part of any fraudulent practice.

If you enjoyed reading this article, you would love below ones from mytaxviews.in:

• Provisions of interest under Customs Act
• The Law of Limitation and Customs Act,1962
• Self –Assessment under Customs Act
• Demand of Customs Duty: Constitutional View Point

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