Customs Law Does Not Recognise 'Substantial Compliance' In Matters Of Warehousing: CESTAT Hyderabad

The Customs, Excise, and Service Tax Appellate Tribunal (CESTAT), Hyderabad, has recently ruled that Customs law does not recognise the concept of “substantial compliance” in warehousing.

It rejected Oswal Minerals Ltd.'s argument that its imported manganese ore substantially remained under the custody of the same warehouse operator.

“Customs law does not recognise the concept of “substantial compliance” in matters concerning warehousing. What the statute requires is deposit of the imported goods in the warehouse specifically approved and licensed under the Customs Act. Storage of warehouse goods in any premises other than the approved bonded warehouse cannot be treated as compliance merely because both premises were under the management of the same operator.,” the tribunal observed.

A bench comprising Judicial Member Angad Prasad and Technical Member A.K. Jyotishi delivered the ruling. It held that an importer cannot avoid its statutory obligations by delegating transportation, handling or warehousing activities to an agent or contractor.

The case concerned imported Gabon-origin manganese ore that was brought in through Visakhapatnam Port. Oswal Minerals had obtained permission to move the cargo to a designated public bonded warehouse.

Instead, the goods were taken directly to Dolphin Yard, an open private yard belonging to Green Energy Resources. The yard was not the warehouse approved for storing the cargo.

The department then initiated proceedings, alleging that the goods had been diverted from the designated warehouse to an unauthorised premises.

The adjudicating authority held the goods liable to confiscation under Section 111(j). It imposed an ₹80 lakh redemption fine under Section 125 and a ₹9 lakh penalty under Section 112(a).

The Commissioner (Appeals) upheld the order.

Before the tribunal, Oswal Minerals argued that the diversion was an independent act of the warehouse operator. It contended that the cargo remained under the operator's effective control and that there was no intention to evade customs duty or clandestinely clear the goods into the domestic market.

The tribunal rejected the defence. It held that the permission granted under Section 60 was specific to the designated warehouse and did not authorise storage at another location without further permission.

Section 147 creates a statutory fiction under which acts done by an authorised agent are deemed to have been done with the knowledge and consent of the owner or importer unless the contrary is established. Oswal Minerals had not produced contemporaneous correspondence, written instructions, or other material showing that the warehouse operator acted beyond its authority or contrary to its directions.

The tribunal also noted that statements and contemporaneous communications indicated that the movement and storage of the cargo at Dolphin Yard were known to persons connected with the importer.

It further held that warehousing is subject to strict compliance with the conditions imposed under the Customs Act. “Once an importer elects to avail the warehousing facility, he is bound by the obligations arising under Section 59 and 60 and cannot unilaterally alter the place of storage merely on grounds of commercial convenience or operational difficulty,” it observed.

The tribunal rejected the argument that confiscation under Section 111(j) required proof of actual duty evasion or clandestine clearance. It held that the provision applies when imported goods are removed contrary to the permission granted by the proper officer.

“The Customs Act envisages strict regulating control over warehouse goods and any unauthorised diversion from the approved warehousing chain constitutes an independent contravention irrespective of whether duty evasion has actually occurred,” the tribunal observed.

The tribunal also upheld the ₹80 lakh redemption fine. It held that provisional release of the goods against a bond and bank guarantee did not extinguish the adjudicating authority's power to subsequently order confiscation and impose a redemption fine.

It further sustained the ₹9 lakh penalty under Section 112(a). The tribunal held that the importer had failed to ensure that the goods were transported to and deposited in the designated bonded warehouse.

The appeal was dismissed. The tribunal upheld the confiscation, redemption fine and penalty.

For Appellant: Advocate Dr. L. Venkateswara Rao, 

For Revenue: Kakarala Prasanth Kumar, Authorised Representative