Bona Fide Buyer Of Duty-Free Import Licence Not Liable For Exporter's Fraud: Calcutta High Court

The Calcutta High Court has recently held that a bona fide purchaser of a duty-free import licence cannot be made liable for the exporter's fraud when the purchaser had no knowledge of it.

It observed that a licence obtained through fraud or misrepresentation is not automatically void or non-existent. Where the licence was genuinely issued by the competent authority and remained uncancelled, it continues to be valid until it is avoided in accordance with law.

"A bona fide purchaser of a duty-free import licence for value, who had no notice of any irregularity on the part of the exporter/original licence holder who obtained the licence, and where the licence has not been cancelled by the issuing authority, cannot, on the facts and circumstances of the present case, be required to pay duty, interest, and redemption fine in respect of an import made using that licence. The question is answered in favour of the appellant and against the respondent", the Court said.

A Division Bench comprising Justice Rajarshi Bharadwaj and Justice Sudip Deb observed while allowing an appeal filed by Comet Overseas Pvt. Ltd. against an order of the Customs, Excise and Service Tax Appellate Tribunal CESTAT.

Comet Overseas had purchased a transferable Duty Free Import Authorisation DFIA licence issued by the Directorate General of Foreign Trade DGFT to Gemini Overseas Ltd. for ₹14.51 lakh. Using the licence, Comet Overseas imported Mulberry Raw Silk Yarn without payment of customs duty.

Subsequently, an investigation by the Directorate of Revenue Intelligence DRI found that Gemini Overseas had exported fabric made of Noil Yarn while declaring it as Natural Silk Fabric predominantly made of Mulberry Raw Silk for the purpose of fulfilling its export obligation. Gemini Overseas later admitted that the description of goods in its export documents was incorrect.

Customs thereafter demanded duty of ₹22.87 lakh from Comet Overseas, along with interest and a redemption fine of ₹15 lakh. A penalty of Rs.10 lakh was also imposed under Section 112 of the Customs Act.

CESTAT set aside the penalty after finding that Comet Overseas had no knowledge of the nature of the goods exported by Gemini Overseas. However, it upheld the duty demand, interest and redemption fine.

The High Court noted that the DFIA licence was genuinely issued by the DGFT and had been validly endorsed as transferable. The licence had also not been cancelled by the DGFT or the Regional Authority.

Relying on the Supreme Court decisions in East India Commercial Co. Ltd. v. Collector of Customs and Collector of Customs v. Sneha Sales Corporation, the Court observed that a licence obtained by fraud does not automatically become void and remains effective unless avoided in the manner prescribed by law.

The Court distinguished cases involving forged or non-existent licences, noting that the present case involved a genuine licence which was subsequently found to be based on fraudulent certification at the export obligation stage.

The Bench also noted that Comet Overseas had purchased the licence for consideration through proper banking channels and was found to be a bona fide purchaser without knowledge of the irregularity.

The Court held that the licence was voidable rather than void and remained a valid and subsisting instrument at the time of the import.

It further held that Comet Overseas, being a bona fide purchaser for value without notice, could not be made liable for duty, interest and redemption fine arising from the fraud committed by a third party.

"...the appellant, being an unimpeached bona fide purchaser for value without notice of the irregularity, cannot be fastened with liability for duty, interest, and redemption fine arising from the fraud of a third party of which it had no knowledge", the Court said.

Accordingly, the High Court allowed the appeal and set aside the CESTAT order to the extent it upheld the duty demand of ₹22.87 lakh, interest and redemption fine of ₹15 lakh.

The Court quashed the said liabilities, while the setting aside of the Section 112 penalty by CESTAT remained undisturbed.

For Appellant: Agnibesh Sengupta, Sanjay Baid, Advocates.

For Customs Authority: Uday Shankar Bhattacharya, Advocate