CESTAT Hyderabad Upholds ₹20 Lakh Penalty On Hong Kong Firm Director, Rejects Extra-Territoriality Defence

The Hyderabad Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) on 15 May upheld a penalty of Rs. 20 lakh imposed on Ashok Kharey, director of Hong Kong based Maxx Access Ltd., holding that foreign nationals can be penalised under the Customs Act where their conduct has a direct nexus with customs fraud and duty evasion in India.

Technical Member A.K. Jyotishi and Judicial Member Angad Prasad dismissed Kharey's appeal, observing:

"Once manipulated invoices were knowingly prepared and utilized for Customs clearance in India, the offence stood completed within Indian Territory. A person situated outside India, who consciously and deliberately participates in fraudulent importation into India, cannot seek immunity merely because of the conspiracy (acts of appellant) originated outside India".

The case arose from a Directorate of Revenue Intelligence (DRI) investigation into alleged undervaluation of furniture imports from China and Hong Kong by Indian importers. The department alleged that Ashok Kharey coordinated procurement from Chinese manufacturers, facilitated visits of Indian buyers, supervised exports and arranged dual invoices, one showing actual transaction value and another showing suppressed values for customs clearance in India.

It further alleged that the lower value invoices were used before Indian customs authorities for clearance of goods, while the differential amounts were remitted through unofficial channels. Authorities initiated penalty proceedings under Sections 112(a) and 114AA of the Customs Act.

Kharey contended before the Tribunal that proceedings could not be sustained against him in the absence of action against the foreign company and argued that prior to the 2018 amendment to Section 1(2) of the Customs Act, the statute had no extra territorial application.

Rejecting this contention, the Tribunal held that the foreign company remained beyond the enforcement reach of Indian customs authorities during the relevant period and therefore no proceedings were initiated against it.

However, it found that Kharey actively participated in the undervaluation scheme and that the invoices arranged by him were used for customs clearance in India. It held:

"....the appellant, though an officer of the said foreign company, had actively participated in the impugned transactions and the acts contributable to him were not confined to a foreign territory alone and had a direct and substantial nexus with activities under taken within India. The legal consequences of such acts, therefore, squarely arose within the territory jurisdiction of India. In these facts and circumstances, the provisions of the Customs Act were fully applicable to the appellant even prior to the statutory amendment".

The Tribunal observed that once parties knowingly prepared and used manipulated invoices before Indian customs authorities, the offence acquired sufficient territorial nexus with India. It further held that "...merely because the appellant held office in a foreign company, he cannot claim immunity from liability or penal consequences arising out of acts personally committed by him which attracts penal provisions under Customs Act".

The Bench also rejected the argument that absence of proceedings against the foreign company barred penalty proceedings against Kharey. It held that his liability remained independent and flowed from his personal role in the offence and observed:

"The present case reflects carefully designed mechanism involving dual invoicing and clandestine transfer of differential consideration. Such acts cannot be treated as procedural or technical violations".

Holding that Kharey's active and conscious participation in customs fraud stood established, the Tribunal concluded that penalties under Sections 112(a) and 114AA of the Customs Act were legally sustainable.

Accordingly, the CESTAT dismissed the appeal.

For Appellant: Shri B. Venugopal, Advocate

For Respondent: Shri B. Subhas Chandra Bose, Authorized Representative