Bombay HC Quashes SCNs Against Foreign Exporter, Says Customs Act Had No Extra-Territorial Reach Pre-2018

The Bombay High Court has quashed show cause notices issued by customs authorities against a German textile machinery manufacturer and its Indian subsidiary, holding that the notices were without jurisdiction and that a foreign exporter cannot be made liable for alleged misdeclaration by Indian importers for a period prior to the 2018 amendment to the Customs Act.

A Bench of Justice G. S. Kulkarni and Justice Aarti Sathe held that proceedings initiated against a foreign entity situated outside India were unsustainable in law.

The court noted that the Customs Act did not extend to foreign territory at the relevant time, observing that “Further, the foreign exporter, i.e., Petitioner No. 1 is admittedly situated outside India, hence qua the Petitioner, the applicability of the Act did not extend to the territory outside India at the relevant point of time.”

It further recorded that extraterritorial operation was introduced only later, stating that “This amendment, therefore, would apply with effect from 29th March 2018, and specifically in cases where there is a contravention or any offence which is committed outside India by any person. Therefore, the extraterritorial applicability of the Act has been introduced by way of this amendment only post-2018 and to such a limited extent.”

Since the transactions in question were prior to this amendment, the Court held that the law could not be applied to the petitioners, noting that “In the facts of the present case, even otherwise, the alleged misdeclaration of the imports was much prior to 2018 and hence the provisions, if at all, of the amended Section 1 of the Act would not apply in the facts of the present case. Also the alleged acts of the importer, as held above, the foreign exporter cannot be foisted with any liability within the framework of the law qua the lack of jurisdiction of the customs officers.”

In this backdrop, the court concluded that “Thus looked from any angle, we are of the considered view that the impugned show-cause notices in all the three petitions ought not to have been issued to the Petitioners, and therefore the same are liable to be quashed and set aside, including any recovery notices that may have been issued in pursuance thereto.”

The petitions were filed by Karl Mayer STOLL Textilmaschinenfabrik GmbH and Karl Mayer India Private Limited. The Directorate of Revenue Intelligence had alleged that certain Indian importers who imported between 2014-2017 misdeclared “warp knitting machines” as “fully fashioned high-speed knitting machines” to claim exemption benefits under customs notifications.

Based on this investigation, show cause notices were issued proposing penalties under Sections 112 and 114AA of the Customs Act on the ground that the petitioners had aided or abetted the alleged misdeclaration. The petitioners challenged the notices before the High Court.

The court found that the department had sought to proceed against the foreign exporter without establishing any role in the alleged wrongdoing. “This liability has been foisted without attributing any role to the Petitioners. This, to our mind, is certainly not the scheme of the Act,” the court observed.

Emphasising the statutory framework governing imports, the bench held that responsibility rests with the importer once goods enter India. “On a conjoint reading of the above provisions, it is clear that the responsibility post importation of goods in India rests with the importer, and the foreign exporter cannot be made liable for the violation in respect thereof.”

The Court also found that the department had failed to produce any material to show that the petitioners had abetted the alleged misdeclaration.

“Neither has any evidence been adduced by the Department to show the active role played by the Petitioners in perpetrating the alleged mis-declaration of the imported goods. We are therefore of the view that in the absence of any ingredients which are prescribed in Section 112 of the Act, the Petitioners cannot be made liable for the penalty as sought to be imposed by the impugned show-cause notices.”

In the absence of jurisdiction as well as any material to show involvement of the petitioners, the Court held that the requirements for invoking penalties under Sections 112 and 114AA were not satisfied.

Holding that the show cause notices suffered from a lack of jurisdiction and legal basis, the Court quashed them along with all consequential proceedings.

For Petitioner: Advocates Abhishek A.Rastogi, with Pooja M.Rastogi, Meenal Songire,.Aarya More, Chayank Bohra.

For Respondents: Advocates Nitee Punde with Mamta Omle