CESTAT Delhi Drops Penalty Under Section 114AA for Lack of Mens Rea in Fraudulent Scrip Case

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Delhi, in the case of GFC Weld House Vs Principal Commissioner, has once again clarified that the stringent penalty under Section 114AA of the Customs Act, 1962 cannot be imposed unless the Revenue clearly establishes that the assessee had knowledge of the falsity or incorrectness of the documents used, or acted with intent to use such false material.

While the Tribunal upheld the customs duty demand, interest, and penalty under Section 114A in line with binding Supreme Court precedent, it set aside the separate penalty of ₹10,00,000 levied under Section 114AA, noting the absence of any evidence that the assessee was aware of the fraudulent manipulation of the duty credit scrip.

Background of the Dispute

Origin of the Appeal

The matter reached CESTAT Delhi through an appeal filed by M/s GFC Weld House, Delhi challenging an order dated 21.10.2022 issued by the Commissioner of Customs (Appeals), New Customs House, New Delhi. The Commissioner (Appeals) had affirmed the order in original dated 07.10.2019 of the Joint Commissioner of Customs and rejected the assessee’s appeal.

The Joint Commissioner had adjudicated against multiple noticees, including GFC Weld House. Specifically, as regards the present assessee, the adjudicating authority:

  • Confirmed a customs duty demand of ₹1,93,573 under Section 28(4) of the Customs Act, 1962.
  • Levied interest under Section 28AA.
  • Imposed a penalty equal to the duty under Section 114A.
  • Additionally, imposed a separate penalty of ₹10,00,000 under Section 114AA.

The assessee approached the Tribunal to challenge these findings.

Facts: Use of a Fraudulently Enhanced Focus Market Scheme Scrip

Import Clearance Using Duty Credit Scrip

The case revolves around an import consignment cleared under the Focus Market Scheme using a duty credit scrip that had been fraudulently enhanced in value.

Key factual elements:

  • The assessee imported goods under Bill of Entry No. 9889269 dated 18.04.2013.
  • For payment of customs duty, the assessee utilised Focus Market Scheme scrip No. 0510332222 dated 22.08.2012.
  • This scrip had been issued by DGFT in the name of M/s Albatross Gems Pvt Ltd. for a genuine face value of ₹56,091.
  • Subsequently, the scrip was fraudulently altered to reflect a value of ₹25,67,974, representing an enhancement of about 50 times its original value.
  • The fraudulently modified scrip was then registered in the Customs EDI system at ICD Tughlakabad, New Delhi.
  • The tampered scrip was used by three different importers, including the present assessee.
  • GFC Weld House utilised the scrip to discharge customs duty of ₹1,93,573, which alone was more than three times the true original value of the scrip.

Customs authorities, upon investigation of this modus operandi, issued a show cause notice proposing:

  • Recovery of customs duty foregone,
  • Interest on such duty, and
  • Penalties on various parties involved, including the present assessee.

Assessee’s Stand: Bona Fide Purchase of Scrip

No Role in Fabrication or Manipulation

The assessee’s central defence was that:

  • It had purchased the duty credit scrip for consideration in the ordinary course of business.
  • The scrip was acquired under a bona fide belief that it was valid and lawfully issued.
  • The assessee had no involvement in:
    • Manipulating or altering the scrip value;
    • Illegally registering the scrip in the Customs EDI system; or
    • Any fraudulent scheme relating to the scrip.

On this basis, the assessee argued that:

  1. It should not be saddled with customs duty, as it was an innocent purchaser and user of the scrip; and
  2. Penalties, including those under Section 114A and Section 114AA, were unwarranted in the absence of culpable involvement.