Court’s decision
The CESTAT (Customs, Excise and Service Tax Appellate Tribunal, Mumbai), allowed the appeal filed by the importer by setting aside the confiscation, redemption fine, penalty under Section 114A, and interest imposed on the IGST liability arising from non-fulfilment of the “pre-import” condition under the Advance Authorization exemption scheme. The Tribunal held that Section 3(12) of the Customs Tariff Act, 1975, prior to its amendment on 16 August 2024, did not authorise imposition of interest, penalty, or confiscation. Relying on authoritative judgments of the Bombay High Court and the Supreme Court, the Tribunal ruled that the show cause notice itself was without authority of law, and therefore the consequential adjudication could not stand.
Facts
The appellant imported goods valued at over ₹54 crore under the Advance Authorization Scheme between October 2017 and December 2018. The exemption notifications issued during this period imposed a “pre-import” condition, requiring import of inputs before exports were undertaken. However, the appellant carried out exports using goods other than those imported duty-free, creating a potential breach of the condition.
In July 2023, the appellant voluntarily paid IGST of approximately ₹6.84 crore along with interest exceeding ₹4.94 crore, relying on the Supreme Court ruling in Cosmo Films Ltd. Nevertheless, a show cause notice dated December 2022 sought recovery of differential duty, interest, penalty under Section 114A of the Customs Act, and confiscation under Section 111(o). The Commissioner confirmed all demands, imposed ₹3 crore redemption fine, and appropriated the IGST already paid. The appellant challenged the imposition of these detriments, arguing that Section 3(12) of the Customs Tariff Act did not authorize penalty, interest, or confiscation for IGST.
Issues
- Whether interest, penalty, confiscation, and redemption fine can be imposed when the imported goods attracted IGST under Section 3(7) of the Customs Tariff Act due to breach of pre-import conditions.
- Whether Section 3(12) of the Customs Tariff Act, prior to its 2024 amendment, permitted application of penal provisions under the Customs Act.
- Whether Circular No. 16/2023, which sought interest recovery on IGST, had statutory authority.
- Whether the show cause notice itself was without jurisdiction.
Petitioner’s arguments
The appellant submitted that the payment of IGST, made voluntarily following the Supreme Court’s decision in Cosmo Films Ltd., regularised the imports. They argued that all detriments such as penalty under Section 114A, confiscation under Section 111(o), or redemption fine were unauthorized, because Section 3(12) of the Customs Tariff Act, as it existed during the period, did not import penal provisions of the Customs Act. They relied on the Bombay High Court rulings in Authorized Representative Sulphonates Pvt. Ltd. and the Tribunal’s earlier decision in Chiripal Poly Films Ltd. which held that unless the statute explicitly mentions penalty or interest, such levies cannot be sustained. They further argued that the 2024 amendment inserting penalties into Section 3(12) was prospective.
Respondent’s arguments
The department argued that the breach of the pre-import condition justified confiscation under Section 111(o) of the Customs Act and attracted mandatory penalty under Section 114A. They also claimed that IGST payment necessarily carried interest obligations under Customs Act provisions, and that Circular No. 16/2023 specifically authorised recovery of interest. The department further relied on CESTAT Kolkata’s ruling in Texmaco Rail Engineering Ltd., arguing that the term “including” in Section 3(12) permitted application of Customs Act procedures and penalties.
Analysis of the law
The Tribunal closely examined Section 3(12) of the Customs Tariff Act, 1975, noting that prior to 16 August 2024, it only permitted application of procedural provisions of the Customs Act for assessment and collection, not penal provisions. The Tribunal emphasised that penalties and confiscation are substantive liabilities requiring explicit statutory authority, and cannot be introduced by interpretative expansion of procedural clauses.
Further, Circular No. 16/2023, being merely an administrative instruction, could not impose liabilities without statutory basis. The Tribunal also observed that once IGST was paid, the breach of pre-import condition stood regularised, and therefore confiscation could not be invoked under Section 111(o).
Precedent analysis
1. Chiripal Poly Films Ltd. (CESTAT Ahmedabad)
This decision held that in the absence of an explicit charging provision permitting interest, penalty, or fine, such levies cannot be imposed on liabilities arising under the Customs Tariff Act. The Tribunal reiterated that machinery provisions cannot substitute substantive authority. This precedent formed the core of the appellant’s case and was accepted by CESTAT Mumbai.
2. Authorized Representative Sulphonates Pvt. Ltd. v. Union of India (Bombay High Court)
The High Court held that the unamended Section 3(12) did not authorize penalties or interest. It declared that the 2024 amendment adding penalties was prospective, and Circular No. 16/2023 was partly invalid for recovering interest without legal authority. CESTAT applied this ruling fully, as it is binding on all authorities within the State.
3. Orient Fabrics Ltd. (Supreme Court)
The Supreme Court held that when a statute does not expressly provide for penalty or confiscation, they cannot be imposed by applying penal provisions of another Act, unless expressly incorporated. The Tribunal relied extensively on this principle to reject the department’s confiscation and penalty.
Court’s reasoning
The Tribunal reasoned that IGST liability arises under Section 3(7) of the Customs Tariff Act, not under Section 12 of the Customs Act. Therefore, the consequences applicable to breach of Customs Act provisions could not automatically apply. In the absence of explicit statutory authority, no penalty, no fine, no confiscation, and no interest could be imposed.
The Tribunal also noted that the DGFT’s Trade Notice permitted regularisation of non-compliance simply upon payment of IGST. Once the appellant paid IGST, the entire import stood regularised, eliminating the possibility of confiscation under Section 111(o). Ultimately, the Tribunal held that the show cause notice itself lacked foundational jurisdiction.
Conclusion
The Tribunal set aside the order-in-original insofar as it imposed interest, penalty under Section 114A, confiscation under Section 111(o), and redemption fine under Section 125. It held that these detriments were without authority of law under the Customs Tariff Act. The appeal was allowed to that extent, and the show cause notice was declared invalid to the extent it proposed unauthorized demands.
Implications
This ruling significantly clarifies liability under the Advance Authorization Scheme:
• Pre-import breaches attract only IGST—not penalties, fines, interest, or confiscation—before the 2024 amendment.
• The decision aligns national jurisprudence by affirming that penalties require express statutory mandate.
• It protects importers from arbitrary penal actions where the statute does not authorize them.
• The ruling will directly impact thousands of importers who faced similar demands arising out of the pre-import condition between 2017–2019.