Safari Fine Clothing Pvt. Ltd. vs Union of India

Akil Kureshi, J. (Oral)—The petitioners have challenged an order dated 14-2-2014 passed by the Development Commissioner, Kandla Special Economic Zone, under which the said authority imposed a penalty of Rs. 2,97,08,269/- on the company and personal penalties of Rs. 5.00 lacs each on the directors of the company. The order also contained certain other and consequential directions. This order was challenged by the petitioners before the appellate authority, and upon the appeal being rejected, they filed this petition.

Brief facts are as under :

2.1. The petitioner No. 1 is a private limited company. Rest of the petitioners are its directors. The petitioner No. 1 company has established an industrial unit at Kandla Special Economic Zone ("KASEZ" for short). Noticing certain irregularities committed by the company, the competent authority issued a show cause notice dated 11-12-2013 to the company in which he proposed the following actions against the company.

"Now therefore M/s. Safari Fine Clothing Pvt. Ltd., Plot No. 387, Kandla Special Economic Zone, Gandhidham are hereby directed to show cause to the Development Commissioner, Special Economic Zone, Kandla in terms of Section 16(1), 16(2) of the SEZ Act, 2005, Rule 54 of SEZ Rules, 2006, Section 9 of the Foreign Trade (Development and Regulation) Act, 1992 [for short "FT(D&R) Act, 1992"] and Rule 10 of Foreign Trade (Regulations) Rules, 1993, as to why -

(i) The Letter of Approval F. No. KASEZ/IA/1852/2001-02/9780, dated 5-10-2001 as amended from time to time for their authorised operation should not be cancelled for violation of provisions of the SEZ Act, 2005 and SEZ Rules, 2006.

(ii) The duty of customs amounting to Rs. 1,91,907/- (One Lakh Ninety-One Thousand Nine Hundred & Seven) leviable on the offending goods should not be recovered from them along with applicable interest.

(iii) Penalty should not be imposed on them as per provisions of the Rule 25 of the SEZ Rules, 2006 and under the Section 9 of FT(D&R) Act, 1992.

The notice is required to submit their written reply latest by 16-12-2013 before 11:00 hrs.

The Noticee may appear for personal hearing before the Unit Approval Committee on 17-12-2013 at 11:00 hrs."

2.2 The company participated in such proceedings and opposed the proposal. The competent authority, however, by the impugned order dated 14-2-2014 held that the petitioners had diverted the goods in domestic tariff area without payment of the customs duty which comes to Rs. 1,91,907/-. On the basis of such findings, he passed the following order.

"In view of the above facts and circumstances on records and the provisions of SEZ Act, 2005 and SEZ Rules, 2006 and Foreign Trade (Development & Regulation) Act, 1992, in respect of show cause notice F. No. KASEZ/CUS/Inquiry-Safari Fine/2013-14/dated 11-12-2013 issued to M/s. Safari Fine Clothing Pvt. Ltd., KASEZ -

(i) I revoke the suspension of the Letter of Approval F. No. KASEZ/IA/ 1852/2001-02/9780, dated 5-10-2001 as amended from time to time, issued to M/s. Safari Fine Clothing Pvt. Ltd., KASEZ which was suspended vide this office letter F. No. KASEZ/IA/1852/2001, dated 4-12-2013, with a warning that in case any violation of conditions laid down in the said Letter of Approval is noticed in future, the same shall be cancelled forthwith. Henceforth the unit may continue their operation i.e. import and physical export of the goods. However no Domestic Tariff Area sale will be allowed till payment of all duties and penalties to the Government exchequer as imposed upon them by this order.

(ii) I impose the penalty of Rs. 2,97,08,269/- (Rupees Two Crores Ninety Seven Lakhs Eight Thousand Two Hundred & Sixty-Nine) only, under Section 11 of the Foreign Trade (Development & Regulation) Act, 1992, as amended from time to time for their act of diverting the goods to Domestic Tariff Area which were supposed to be brought in KASEZ mainly for the purpose of exports;

(iii) I uphold the demand of Customs duty amounting to Rs. 1,91,907/- (One Lakh Ninety-One Thousand Nine Hundred & Seven) leviable on the offending goods along with applicable interest and order to be recovered from them.

(iv) I impose personal penalty of Rs. 5,00,000/- (Rupees Five Lakhs only) on each director of M/s. Safari Fine Clothing Pvt. Ltd., KASEZ for their action and omission done by them in the case under Section 25 of the SEZ Act, 2005 i.e. on

(1) Shri Daljeet Singh Sandhu

(2) Shri Kuldeep Singh Grewal

(3) Shri Manjit Singh Makkar

(4) Shri Manmohan Singh

(5) Shri Kamal Makkar

(6) Shri Tarjit Singh

(7) Shri Hatim H. Hamdani

(8) Shri Anil Gupta

All the duties and penalties should be deposited to Government exchequer within 30 days of receipt of this order."

As noted, the petitioners appealed against the said order of the competent authority. Such appeal was dismissed. Upon which this petition was filed. One of the prayers of the petitioners was to declare Section 11(2) and 11(3) of the FT(D&R) Act, 1992, as ultra vires under Article 14 of the Constitution. By an order dated 12-8-2016 we had held that such challenge is not valid. On other grounds of the petitioners, however, we have issued notice to the respondents.

Appearing for the petitioners, learned advocate Mr. Paresh Dave raised the following contentions :

(1) There was no proposal in the show cause notice to impose penalty under Section 11(2) of the FT(D&R) Act, 1992. The competent authority therefore committed a serious error in imposing such penalty on the company.

(2) The show cause notice was issued only to the company and not to the directors. Therefore without issuing any show cause notice and without hearing the directors, the competent authority imposed personal penalties of Rs. 5.00 lacs on each of them which was wholly impermissible.

(3) In any case imposition of penalty of Rs. 2.97 crores (rounded off) for customs duty, evasion of Rs. 1.91 lacs (rounded off) was excessive and arbitrary.

On the other hand, learned advocate Mr. Nikunt Raval for the department opposed the petition contending that the show cause notice contained allegations of breach of Section 11 of the FT(D&R) Act, 1992. Omission to specifically mention Section 11(2) of the FT(D&R) Act, 1992, in the show cause notice therefore would not be fatal. The petitioners at any rate had sufficient notice and reasonable opportunity to defend themselves against the penalty.

Having heard the learned advocates for the parties and having perused the documents on record, we may recall in the show cause notice the competent authority raised the following three proposals.

(i) Why the letter of approval granted to the company should not be cancelled for violation of the provisions of the SEZ Act, 2005?

(ii) Why the customs duty amounting to Rs. 1,91,907/- for diversion of the goods should not be recovered with interest?

(iii) Why the penalty should not be imposed under the provisions of Rule 25 of the SEZ Rules, 2006 and under Section 9 of the FT(D&R) Act, 1992?

On the other hand, when the final order came to be passed the Development Commissioner did not cancel the approval of the company but let-off the company with a warning, imposed a penalty of Rs. 2.97 crores (rounded off) on the company under Section 11 of the FT(D&R) Act, 1992, and further personal penalties of Rs. 5.00 lacs on each of the directors of the company. He confirmed the duty demand of Rs. 1.91 lacs on the diversion of the goods. He further provided that till all the duties and penalties are paid, no domestic tariff area sale shall be allowed. This order except to the extent it confirmed the duty demand must fail for multiple reasons. Admittedly, there was no proposal in the show cause notice for imposition of penalty under Section 11(2) of the FT(D&R) Act, 1992. Section 11 pertains to contravention of provisions of the Act, Rules, Orders and foreign trade policy. Under sub-section (1) of Section 11 it is provided that no export or import shall be made by any person except in accordance with the provisions of the Act, Rules and orders made thereunder and the foreign trade policy from time to time. Under sub-section (2) of Section 11 the competent authority could impose penalty where any person makes or abets or attempts to make any export or import in contravention of any provision of this Act or any rules or orders made thereunder or the foreign trade policy, he shall be liable to a penalty of not less than ten thousand rupees or five times the value of the goods or services or technology in respect of which any contravention is made or attempted to be made. Being penal provision, surely the penalty cannot be imposed against any person or entity without reasonable opportunity of being given to defend himself. The show cause notice contained no proposal for any penalty under Section 11 of the FT(D&R) Act, 1992. It only contained a proposal for penalty under Rule 25 of the SEZ Rules and Section 9 of the FT(D&R) Act, 1992. Neither of these two provisions pertain to penalty. Rule 25 of the SEZ Rules has no relation to penalty whatsoever. If the reference in the notice was to Section 25 of the SEZ Act wrongly referred to the Rule 25, the said provision contained vicarious liability in case the offender is a company. Section 9 of the FT(D&R) Act, 1992, pertains to issuance of, suspension and cancellation of licences under which the competent authority has power to issue a licence or suspend the licence or cancel the same. Thus clearly the show cause notice never envisage the provisions of Section 11 of the FT(D&R) Act, 1992. No such penalty could be imposed merely referring to some allegations in the show cause notice. If the show cause notice contained not only broad allegations but also in specific terms the proposal for recovering the penalty under Section 11 of the FT(D&R) Act, 1992, we could perhaps save the action of the department even ignoring that the proposal referred to a wrong provision in the final portion of the show cause notice. However, no such proposal can be noted in the body of the show cause notice also.

Much stronger is the case of the directors of the company. Against them there was no notice at all. The show cause notice in question was issued against the company. The directors of the company therefore had no opportunity to defend against any adverse consequences. The competent authority straight-way imposed penalty of Rs. 5.00 lacs on each of the directors without ever putting them to notice or granting them an opportunity to defend themselves against such proposal.

In view of these discussions, it is not necessary to go into the last contention of the petitioners of the penalty being excessive. The impugned order as confirmed by the appellate authority is set aside. Since we have set aside the impugned order on the ground of lack of opportunity, this would not prevent the department from initiating fresh action against the petitioners, if otherwise, permissible in law.