Delhi High Court Upholds Interest Imposition on Countervailing and Special Additional Duty: “Settlement Commission’s Order Must Be Accepted in Its Entirety and is Final and Binding”

Court’s Decision

The Delhi High Court, in a detailed judgment, dismissed the petition filed by the petitioners challenging the interest imposed on the countervailing duty (CVD) and special additional duty (SAD) in connection with goods imported under the Advance Authorization scheme. The petitioners contended that the imposition of interest on these duties was unauthorized and contrary to law. The Court rejected this argument, emphasizing that the Settlement Commission’s order, being in the nature of a settlement, was final and binding. The Court further confirmed that the imposition of interest was in line with the terms and conditions set out in Notification No. 18/2015-Cus, which stipulated interest if the export obligation was not fulfilled.

Facts

The case revolves around the petitioners—KBS Industries Ltd. and its director—who had imported copper products without paying customs duties under the Advance Authorization scheme. This scheme allows duty-free imports for goods that are meant to be exported later. The petitioners were granted Advance Authorizations to import materials without paying customs duties, on the condition that they fulfill certain export obligations. However, the petitioners failed to fulfill their export obligations and sold the imported goods in the local market.

Due to this failure to meet the export obligations, the Customs authorities initiated investigations and issued a show cause notice demanding payment of ₹2,35,24,597/- as customs duty. In addition to the duty, interest of ₹1,15,13,067/- was also levied due to delayed payment.

The petitioners, acknowledging their duty liability but disputing the computation of the interest, filed a settlement application under Section 127B of the Customs Act, 1962, seeking to resolve the matter through the Settlement Commission. The Settlement Commission accepted the duty liability of ₹2,35,24,597/- but directed the petitioners to pay interest of ₹1,15,13,067/-.

The petitioners challenged the interest portion of the order, arguing that there is no statutory provision for interest on CVD and SAD under the relevant provisions of the Customs Act.

Issues

1. Whether interest could be imposed on CVD and SAD in the absence of a statutory provision?
2. Whether the petitioners could selectively challenge the Settlement Commission’s order?
3. Whether Notification No. 18/2015-Cus, which imposed conditions for exemption and interest, was unconstitutional or beyond the statutory mandate?

Petitioner’s Arguments

1. Lack of Statutory Provision for Interest on CVD and SAD: The petitioners argued that CVD and SAD are not subject to interest, as no statutory provision explicitly mandates the imposition of interest on these duties.
2. Reliance on Bombay High Court Judgment: They cited the case of Mahindra & Mahindra Ltd. v. Union of India (2022 SCC OnLine Bom 3155), where the Bombay High Court ruled that interest could not be levied on CVD and SAD because there was no statutory provision for such interest.
3. Challenge to Notification No. 18/2015-Cus: The petitioners argued that the Notification under which the duty exemption was granted was discriminatory and arbitrary, and it was beyond the powers of the Central Government to impose such conditions on exemption.

Respondent’s Arguments

1. Binding Nature of Settlement Orders: The respondents (Union of India) contended that the Settlement Commission’s order is final and binding, as per Section 127J of the Customs Act, 1962. They argued that the petitioners could not selectively challenge parts of the order and had to accept the settlement in its entirety.
2. Interest as a Condition for Exemption: The respondents argued that the interest was levied in accordance with the terms of Notification No. 18/2015-Cus, which specifically mandated the payment of interest at 15% per annum if the importer’s export obligations were not fulfilled. Since the petitioners had failed to meet these obligations, the interest was lawfully imposed.
3. No Misdeclaration: Unlike the Mahindra & Mahindra case, where the issue was about misdeclaration to avoid payment of duties, in this case, the petitioners’ failure to comply with export obligations justified the imposition of interest.

Analysis of the Law

1. Finality of Settlement Commission Orders: The Court emphasized that orders passed by the Settlement Commission under Section 127C(5) are conclusive and cannot be reopened or selectively challenged. This is in line with the Sanghvi Reconditioners case (2010), where the Supreme Court held that once a party has agreed to settle a matter under the Settlement Commission, it cannot dissect the order to accept favorable parts while rejecting the unfavorable portions.
2. Imposition of Interest: The Court reviewed Section 25 of the Customs Act, 1962, which grants the Central Government the power to issue notifications exempting goods from duty, subject to conditions. In this case, Notification No. 18/2015-Cus required importers to fulfill export obligations and stipulated that interest would be charged at 15% per annum if these obligations were not met. The petitioners had voluntarily accepted these conditions and, therefore, the interest was lawfully imposed.
3. Statutory Framework: The Customs Act allows for the imposition of interest in cases where duties are exempted under certain conditions. Here, the petitioners had violated the conditions of the Notification, justifying the interest calculation.

Precedent Analysis

• Sanghvi Reconditioners (P) Ltd. v. Union of India (2010): The Court reaffirmed that Settlement Commission orders are binding, and the petitioners could not pick and choose which parts of the order to challenge.
• Mahindra & Mahindra Ltd. v. Union of India (2022 SCC OnLine Bom 3155): The Court distinguished the present case from this ruling, as the petitioners’ issue was failure to meet export obligations, not misdeclaration of duty.
• Union of India v. Mahindra & Mahindra Ltd. (2023 SCC OnLine SC 1435): The Supreme Court dismissed the SLP filed by the Revenue against the Bombay High Court decision but did not establish a general rule against interest on CVD or SAD.

Court’s Reasoning

1. Binding Nature of the Settlement: The Court made it clear that the Settlement Commission’s order is binding on both parties. The petitioners could not argue against the interest portion of the order selectively.
2. Legality of the Interest Imposition: The Court found that the Customs Act and the Notification expressly authorized the imposition of interest in cases where the conditions for exemption were not met. The petitioners’ failure to fulfill export obligations meant that they were liable for both the duty and the interest on the duty.
3. No Constitutional Violation: The challenge to the constitutionality of the Notification was rejected by the Court, which found no merit in the argument. The Court held that the Notification was issued under Section 25 of the Customs Act, which gave the Central Government the authority to stipulate conditions, including the payment of interest.

Conclusion

1. The petitioners’ challenge was rejected by the Court. The Settlement Commission’s order was upheld in its entirety, including the interest liability.
2. The Court ruled that interest at 15% per annum was lawfully imposed under the terms of the Notification No. 18/2015-Cus.
3. The Court also dismissed the petitioners’ challenge to the constitutionality of the Notification, as it was issued within the powers granted to the Central Government under Section 25 of the Customs Act.

Implications

• Importers who benefit from duty exemptions under the Advance Authorization Scheme must comply with the conditions set out in the applicable notifications, including export obligations.
• Settlement Commission orders are conclusive and cannot be selectively contested.
• The case emphasizes that interest on duties can be lawfully imposed when specific conditions for exemption are not met.

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