Court’s Decision
The Delhi High Court quashed the adjudication order passed by the Commissioner of Customs, New Delhi, which had imposed a penalty under the Customs Act, 1962 on a freight forwarding company. The Court found that the order was based on assumptions and conjectures, lacking evidentiary support. It held that the Customs Commissioner had erred in holding the petitioner liable without a clear finding of collusion, abetment, or intentional involvement in the alleged misdeclaration of imports. The Court noted emphatically, “Adjudication cannot be based on imagination or assumptions. It has to be based on material on record.”
Facts
The petitioner is a freight forwarder engaged in the business of providing logistics services to various importers. The company was engaged by certain clients to arrange shipments from Hong Kong to India. Upon examination of some consignments, the Customs authorities found alleged discrepancies in the declared goods, primarily the misdeclaration of undervalued and prohibited items.
Following this, show-cause notices were issued to the importers, customs brokers, and the petitioner. The Commissioner of Customs passed an order imposing penalties on several parties, including the petitioner, alleging abetment in the misdeclaration and undervaluation of goods under Section 112(a) and 114AA of the Customs Act, 1962.
The petitioner challenged the order under Article 226, arguing that it was not an importer or customs broker and had no role in the declarations made before the Customs authorities.
Issues
- Whether the petitioner, as a freight forwarder, could be held liable under the Customs Act for the misdeclaration of goods imported by its clients?
- Whether the impugned order passed by the Commissioner of Customs was sustainable in law in the absence of evidence establishing active involvement or mens rea?
Petitioner’s Arguments
The petitioner argued that it was merely a freight forwarder and did not act as a customs broker or an importer. It had no involvement in the filing of Bills of Entry or the preparation of invoices or declarations before the Customs authorities. It had merely facilitated transportation of goods as requested by the consignors/importers.
The petitioner contended that it had no knowledge of any misdeclaration and was not involved in valuation or declaration of contents of the consignments. It further submitted that there was no material on record to suggest that it had abetted or connived in the offence, and yet, the adjudicating authority imposed penalty solely based on the assumption that the petitioner should have known about the misdeclaration.
Respondent’s Arguments
The Customs Department argued that the petitioner’s consistent involvement in multiple import transactions related to undervalued or misdeclared goods indicated collusion. The Commissioner relied on certain statements recorded during the investigation where officials of the importing companies admitted to undervaluation and improper imports.
The Department further argued that as a freight forwarder, the petitioner was expected to exercise due diligence and could not escape liability by claiming ignorance of the nature of goods it handled.
Analysis of the Law
The Court examined the scope of Sections 112(a) and 114AA of the Customs Act, 1962. It emphasized that for penalty under these provisions, there must be evidence of mens rea, i.e., knowledge or intention to abet or be involved in the violation.
The Court held that the act of being a service provider for shipment, in the absence of any material showing that the petitioner was aware of or participated in the misdeclaration, cannot attract liability under these penal provisions. The Court also distinguished between ‘suspicion’ and ‘evidence,’ observing that suspicion, however strong, cannot take the place of proof.
Precedent Analysis
The Court relied on the following judgments:
- CC v. Sanjivani Non-Ferrous Trading Pvt. Ltd., 2019 (365) ELT 3 (SC) – The Supreme Court held that in absence of direct evidence proving the active involvement of the accused in undervaluation, penalties cannot be imposed merely on assumptions.
- CCE v. PSI Data Systems Ltd., 2003 (151) ELT 533 (SC) – The Court reiterated the need for actual evidence to establish culpability under tax statutes.
- CC v. Samsung India Electronics Ltd., 2015 (319) ELT 25 (Del.) – The Delhi High Court emphasized that show-cause notices and penalty orders must be founded on cogent evidence and not conjecture.
These cases were used to highlight that in the absence of a direct link or conclusive material, adjudication cannot be sustained against a third-party service provider.
Court’s Reasoning
The Court found that the impugned order lacked any finding that the petitioner had actively participated in the misdeclaration or undervaluation of the imported goods. No statements of the petitioner were relied upon; nor was any evidence placed on record suggesting a conspiracy or concerted action.
It observed, “The Commissioner has not recorded any finding of collusion, abetment or intent. In fact, there is no direct evidence implicating the petitioner.” The Court also noted that the impugned order did not specify the precise role of the petitioner in the chain of import or how its conduct amounted to a violation under the Act.
Therefore, the Court concluded that the entire basis of penalty was speculative and unsustainable.
Conclusion
The Delhi High Court quashed the adjudication order passed against the petitioner and held that in the absence of any material implicating the freight forwarder in the alleged offence, penalty could not be imposed. The Court underscored that mere association with the import transaction does not ipso facto lead to culpability unless accompanied by evidence of knowledge, intent, or collusion.
The Court further clarified that while authorities are empowered to investigate and penalize misconduct under the Customs Act, the burden lies squarely on them to prove allegations with evidence, especially when dealing with third-party service providers.
Implications
This ruling reinforces the principle that penal provisions under the Customs Act require strict proof of guilt and cannot be invoked lightly against service providers merely on the basis of their logistical involvement. Freight forwarders and other third-party intermediaries are not liable unless it is clearly shown that they had knowledge or participated in the customs violation.
It also serves as a caution to adjudicating authorities to base their findings on tangible evidence rather than assumptions, thereby upholding principles of natural justice and due process.
Cases Referred and Their Relevance
- Sanjivani Non-Ferrous Trading Pvt. Ltd. (2019) – Highlighted the need for evidence to impose penalties under Customs laws.
- PSI Data Systems Ltd. (2003) – Emphasized the principle that suspicion cannot substitute proof.
- Samsung India Electronics Ltd. (2015) – Reiterated that penalties cannot be sustained on assumptions or vague inferences.
All these decisions reinforced the High Court’s view that the penalty order was unsustainable.
FAQs
1. Can a freight forwarder be penalised under the Customs Act for the importer’s misdeclaration?
Only if there is clear evidence showing that the freight forwarder had knowledge of or participated in the misdeclaration. Mere association with the consignment is insufficient.
2. What is the evidentiary threshold under Sections 112 and 114AA of the Customs Act?
There must be clear, cogent evidence establishing mens rea or active involvement. Assumptions or suspicion do not meet the threshold.
3. Can penalty orders under the Customs Act be challenged under writ jurisdiction?
Yes, if the order is arbitrary, lacks evidence, or violates principles of natural justice, it can be quashed under Article 226.