By TIOL News Service

CHENNAI, DEC 23, 2009: THE petitioner is engaged in the manufacture of pharmaceutical products. They claim to have exported the medicines manufactured by them to various countries, more particularly to African nations, under the incentive scheme, i.e., Duty Entitlement Pass Book (DEPB scheme), extended by the Director General of Foreign Trade (DGFT) exercising powers under the Foreign Trade (Development & Regulation) Act, 1992.

The office premises of the petitioner company, its Managing Director and others were searched on 27.10.2005 and certain documents were seized by DRI. On completion of investigation and, on the basis of the statements recorded, the impugned show cause notice dated 02.02.2007 was issued by the 1st respondent DRI. It is stated therein that specific intelligence, gathered by the officers of Directorate of Revenue Intelligence, Regional Unit, Hyderabad, indicated that the FOB value, of the goods exported by the petitioner, were highly inflated to avail DEPB (Duty Entitlement Pass Book) benefits in a fraudulent manner and that they were bringing overseas remittances, through illicit channels, into their bank accounts in the guise of export proceeds. By the impugned proceedings the petitioner company, its Managing Director and others were, jointly and severally, called upon to show cause as to why:-

++   The consignments exported through Chennai Port , with a FOB value of Rs.111,88,77,595, should not be held liable for confiscation.

++ The FOB value of Rs.111,88,77,595/- declared in the shipping bills should not be rejected and the DEPB credit availed by them for Rs.11,27,74,483/- should not be denied;

++ DEPB credit amounting to Rs.11,27,74,483/-, already availed by M/s VPL, should not be recovered;

++ Penalty should not be imposed;

++ The foreign currency equivalent of Rs.97,89,61,683/- remitted into the account of M/s VPL, and already withdrawn, should not be held liable for confiscation;

The case of the respondents DRI, in short, is that M/s. Venkat Pharma Limited and M/s. Sravani Implex Pvt. Ltd, both sister concerns, exported goods, under the export promotion scheme viz., DEPB, during the years 2000-2005 mostly to African countries, that, at the relevant time, the scheme provided incentives in the form of credit certificates, between 12% to 15% on the value of exports, which was required to be utilized for payment of customs duty, that, in order to gain undue advantage of the scheme, the petitioner had inflated the value of exports several times, that the over invoiced amounts were remitted into the petitioner's account by hawala operations, that one such hawala operator Sri Gollapudi Venu was engaged in the call diversion racket in U.S.A. & U.K. i.e., illegal diversion of telephone calls through VOIP (Voice Over Internet Protocol), that the amounts so earned had to be sent to India despite absence of a legal channel, that the petitioner required foreign remittances into their bank accounts to project the same as sale proceeds in order to gain DEPB benefits on the overvalued export goods, that, in order to circumvent the legal channel of sending money to India, certain individuals had paid M/s. Essvi Associates and M/s. PVS Corporation with a request that the amounts paid by them be transferred to their kith and kin in India, that the amounts so collected were remitted by these companies into the account of VPL in the guise of sale proceeds, that these remittances exceeded Rs. 100 crores, that the petitioner had floated companies in Nairobi, South Africa and USA, that they had fabricated/prepared purchase orders in their office at Hyderabad, had shown these firms as purchasers of the supplies made by the petitioner to African countries, that M/s. Essvi Associates and M/s. PVS Corporation had transferred funds through these floated firms also, that foreign exchange, equivalent to Rs.32 crores, was remitted into the petitioner's account by Sri G. Venu, KRK International and M/s. PVS. Corporation, that these remittances were not the sale proceeds of the goods exported and, as such, the petitioner was not eligible to claim DEPB, that the petitioner, on receipt of such foreign currency in their account, had obtained Bank Realisation Certificates (BRC) from the respective banks and had produced them, as proof of realization of sale proceeds, along with the shipping bill endorsed by the Customs authorities as proof of export, that, by submitting such documents to the DGFT, they had obtained credit certificates, ranging from 12% to 15% of the inflated value of exports, that the petitioner had opened 22 bank accounts in fictitious names affixing photographs of their junior level employees, that the foreign remittances were transferred from the petitioner's account into these accounts from which cash was withdrawn and paid to G. Venu, that introduction, for all these fictitious bank accounts, was given by the Managing Director of the petitioner company and the signatures of all these account holders were impersonated by the General Manager of the petitioner company, (a first cousin of the Managing Director and Directors of VPL), that the total value of the transactions in these fictitious accounts was around Rs.120 crores, that the petitioner had also exported narcotic drugs, prohibited under NDPS Act viz., Ephedrine, in the guise of regular medicines to African countries during the years 2000 to 2002, that the ephedrine tablets so exported to African countries were sold at 1000 US$ per carton for a total value of Rs.10 crores, that the amounts so collected were also transferred in the guise of sale proceeds of regular medicines through M/s. Reliance Pharma Limited, a company floated by the petitioner at Nairobi, Kenya, that they had also availed DEPB credit on such illegal supplies of narcotic drugs exported in the guise of regular medicines, that a complaint had been lodged before the Metropolitan Sessions Judge, Hyderabad and that the trial was nearing conclusion.

Counsel for the petitioner, would submit that Customs officers had no jurisdiction to deal either with grant of DEPB credit or its withdrawal even when it was established that such DEPB credit was granted without justification, that the DEPB licence had been granted, by the DGFT, under Act 22 of 1992, that, under Circular No15/97 dated 3.6.1997 issued by the Central Government, it was only the licencing authority ie., DGFT who had the power to grant credit at the rates notified, that, in case of violation, the DGFT alone had the power to withdraw or claim back the credit and that the impugned notices were, therefore, without jurisdiction. So the Show Cause Notice is challenged before the High Court.

The High Court observed,

Taking the show cause notices at face value, and accepting the allegations made therein as true, the petitioner would not have been entitled to claim the benefit of DEPB credit i.e., import duty exemption but for the false declaration in the shipping bill.  The DEPB scrips, fraudulently obtained by the petitioner, has resulted in the revenue being deprived of the Customs (Import) duty legitimately due to them.  In Jain Shudh Vanaspati Ltd, the Supreme Court held that, as the clearance order, was obtained by fraudulent means, it would not bar issuance of a show cause notice for confiscation of the goods, that fraud, if established, unravelled all, that an order, when obtained by fraudulent means, did not have to be set aside before the ill-effects of the fraud could be set right by initiation of the process of confiscation of the fraudulently cleared goods.  

Fraud unravels all.  Questions regarding lack of jurisdiction of Customs officers to demand repayment of customs duty benefits, extended earlier to the petitioner by way of DEPB scrips, must be examined in the context of the allegations in the impugned show cause notice that the DEPB sc rips were obtained by fraudulent misrepresentation.  

The High Court after referring to a plethora of decided cases of the Apex Court and High Courts, held;

As the DEPB scrips have, admittedly, been sold to third parties, the only course open to the Customs Officers is to demand repayment of DEPB credit (i.e., Customs (Import) duty) from the petitioner.  Exercise of power to make such a demand is referable to Section 28(1) of the Customs Act.  The impugned show cause notices, which propose a demand for repayment of DEPB credit under Section 28(1) as it was availed by resort to fraudulent over-valuation of export consignments, cannot be said to have been issued without jurisdiction.

The petitioners' challenge to the jurisdiction of the Customs officials, to issue the impugned show cause notices, must fail.  Consequently, the petitioners must be relegated to their statutory remedy of filing their reply/objections to the show cause notices.  It is made clear that the observations made in this order are on the legal premise that the allegations in the show cause notices are true.  The observations made herein shall not be construed as a finding recorded on merits or on the truth or otherwise of the allegations in the show cause notices.  It is open to the petitioners to submit their reply/objections/additional objections, if any, to the show cause notices, both on issues of fact and law within four weeks from today.  The respondents shall, thereafter, consider such objections on its own merits, uninfluenced by any observations made in this order other than on the question of jurisdiction, and pass orders in accordance with law.

The writ petitions fail and are, accordingly, dismissed. 

After pronouncement of judgment, the Counsel for the petitioner, sought leave to prefer an appeal to the Supreme Court. As no substantial question of law, either on the interpretation of the Constitution or of general importance, which needs to be decided by the Supreme Court arises for consideration in these writ petitions, the High Court saw no reason to grant leave as sought for.  Oral application for leave is rejected.   

(See 2009-TIOL-715-HC-AP-CUS in 'Customs')