CESTAT Mumbai- Section 114A penalty is not sustainable in absence of culpability

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Mumbai Bench, in its final order dated 13th May 2025, allowed the appeal filed by M/s Apar Industries Ltd., quashing a customs duty demand of ₹71.05 lakhs, redemption fine of ₹25 lakhs, and penalties imposed under Section 114A of the Customs Act, 1962. The Tribunal held that DEPB scrips used for imports prior to their cancellation remain valid, and any demand raised after their cancellation cannot retrospectively affect lawful imports.

Background of the Case

Appellant: M/s Apar Industries Ltd., Mumbai
Issue: Customs demand and penalty based on use of DEPB scrips alleged to be fraudulently obtained by original holders
Notification Involved: Customs Exemption Notification No. 34/97-Cus. dated 07.04.1997
Period of Dispute: Imports during July to November 1998
Show Cause Notice Issued: 30.09.2002
Duty Demanded: ₹71,05,031
Redemption Fine: ₹25,00,000
Penalty Imposed: ₹25,00,000 under Section 114A

Department’s Allegations

Apar Industries used DEPB scrips that were cancelled by DGFT in 1999 due to alleged fraudulent documents submitted by the original holders.
The Department argued that since the scrips were later found to be tainted, the exemption availed on the strength of these scrips should be withdrawn retrospectively.
It imposed duties and penalties even though the scrips were valid at the time of import and customs clearance.

Appellant’s Defense

The DEPB scrips were purchased in good faith for valuable consideration from original holders via banking channels.
There was no allegation of fraud or misrepresentation on the part of Apar Industries.
The scrips were valid and verified by Customs before imports were cleared.
Show Cause Notice was issued beyond the six-month limitation period, without invoking the extended period under the proviso to Section 28(1).

CESTAT’s Key Observations and Findings

Validity of DEPB Scrips at Time of Import:
- Once a DEPB scrip is validly issued by DGFT, it remains operative unless and until it is cancelled.
- Cancellation after clearance cannot invalidate imports made while the scrip was valid.
- Relied on Supreme Court judgments in:
  - East India Commercial Co. Ltd.
  - Sneha Sales Corporation
  - Taparia Overseas Pvt. Ltd.
  - Leader Valves Ltd.
  - Pee Jay International
Distinction Between Forged and Fraudulently Obtained Scrips:
- The Tribunal clarified that a forged scrip (not issued by DGFT) is void ab initio, but a fraudulently obtained yet validly issued scrip is only voidable, not invalid from inception.
- Since Apar’s scrips were genuine and not forged, exemption was rightly availed.
Violation of Limitation under Section 28:
- The Show Cause Notice was issued beyond six months, and the Department did not invoke or justify the extended limitation period under the proviso to Section 28(1).
- As such, the entire demand was barred by limitation.
No Mens Rea or Collusion:
- There was no evidence of collusion, mis-statement, or suppression by Apar Industries.
- The Tribunal held that Section 114A penalty is not sustainable in absence of culpability.

Final Judgment by CESTAT Mumbai

Duty Demand of ₹71,05,031 – Set Aside
Redemption Fine of ₹25,00,000 – Set Aside
Penalty under Section 114A – Quashed
Interest – Not Payable
Appeal Allowed in Full

Legal Significance

This judgment is a landmark precedent reaffirming that:

DEPB scrips validly issued and not forged are legally enforceable, even if later cancelled.
Customs cannot retrospectively invalidate imports conducted in good faith.
Extended period of limitation must be expressly invoked with reasons, else the demand is unsustainable.

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Source: CESTAT Mumbai

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