Appellate Tribunal Refused to Extend Penalty on Understatement of Valuation of Machinery for Evasion of Customs Duty Beyond 118%, Penalty imposed of INR 7.17 Crores

The Company has imported Diamond/Metal Segments and cutting tools from a Chinese company. Invoices for such imports were prepared in two sets, wherein in one invoice, a lesser value of the same goods was disclosed for declaration beyond the customs authority. Such an under declaration was made with the sole intention of evading customs Duty. The Company understated the value of machinery by INR 6.07 crores. The Ld. Adjudicating authority imposed of INR 7.17 Crores, which is 118% of the contravened amount. Therefore, the Directorate of Enforcement (ED) filed an appeal before the Appellate Tribunal requesting enhancement of the penalty amount.

The Appellant contended that the penalty is not commensurate with the contravention amount and is in gross breach of Section 13 of FEMA, 1999, which provides for the imposition of a penalty up to 3 times of sum involved in the contravention.

Hon’ble Appellate Tribunal held that the penalty imposed by the authority is already to the tune of 118% of the contravention amount, which cannot be regarded as meagre or inadequate. Accordingly, the appeal is dismissed.  

1. Brief Facts of the case:

• M/s Sambhav Rocks India Private Limited (“The Company”) has imported Diamond/Metal segments and cutting tools from Chinese suppliers through undervaluation.
• Invoices were prepared in 2 sets, wherein one invoice disclosed the actual value and a parallel commercial invoice (containing the same details as the actual invoice) disclosed a lesser value for the same goods for declaration before the Customs authorities.
• Such under-declaration was made with the sole intention of evading payment of customs duty. 
• The Company paid the differential invoice value to the supplier in cash. 
• The total differential amount came out to be INR 6,07,11,240/-. 
• Against this amount, the total penalty of Rs. 7,17,69,225/-, which is 118% of the contravention amount. 
• Therefore, the Appeal is filed by the Directorate of Enforcement (ED) against the adjudicating order requesting enhancement of the penalty amount.

2. Relevant Legal Extract:

Relevant provisions of the Act are reiterated below for your ready reference:

1. Section 13(1) of the FEMA Act is reiterated below:

"If any person contravenes any provision of this Act, or contravenes any rule, regulation, notification, direction or order issued in exercise of the powers under this Act, or contravenes any condition subject to which an authorisation is issued by the Reserve Bank, he shall, upon adjudication, be liable to a penalty up to thrice the sum involved in such contravention where such amount is quantifiable, or up to two lakh rupees where the amount is not quantifiable, and where such contravention is a continuing one, further penalty which may extend to five thousand rupees for every day after the first day during which the contravention continues." 

3. Contention of the Appellant

The Appellant contended that:

• The imposed penalty is not commensurate with the contravention amount and is in gross breach of Section 13 of FEMA, 1999, which provides for the imposition of a penalty up to 3 times of sum involved in the contravention. 
• Therefore, the Appellant seeks the enhancement of the penalty imposed by the Ld. Adjudicating Authority. 
• The given case is one of gross and wilful violation of provisions of law wherein the respondents have taken steps to create fake bills to import goods at a lower price to evade the Customs authority.
• The differential amount was paid in cash to the associates of the foreign company whenever the associates used to visited India.
• Such a manner of payment is also in gross violation of Section 3(b) of the FEMA Act wherein making any payment to or for the credit of any person resident outside India in any manner is prohibited without the permission of the RBI. 
• The penalty to be imposed is a matter of discretion, but the said discretion needs to be exercised judicially in matters involving gross violations of the provisions of the Act. 
• The present case does not involve a technical default or other minor contravention of the provisions of law, but there was an attempt to cheat. The quantum of penalty must create deterrence; otherwise, it loses meaning. 
• Therefore, the Appellant prayed that the impugned order be interfered with and the penalty be enhanced. 

4. Analysis by Hon’ble Appellate Tribunal

The Hon’ble Appellate Tribunal made the following analysis:

• The grievance of the Appellant is only regarding the quantum of penalty imposed.
• However, considering the facts, we are unable to agree with the appellant that the penalty imposed was meagre and not commensurate with the contravention amount.  
• The Appellant relied upon the decision in The Assistant Director, Directorate of Enforcement v.  M/s Orissa Sponge Iron & Steel Ltd. FPA-FE-16/BBS/2022, wherein a penalty of INR 15 Lacs was imposed for the contravention of failing to report and submit Form FC-GPR within 30 days from the date of issue of shares against foreign direct investment of Rs. 67.50 Crores. In that case, the penalty imposed was minuscule compared to the amount of contravention. 
• However, in the given case, the penalty imposed by the authority is already to the tune of 118% of the contravention amount. 
• We have already held that a total penalty amounting to 118% of the contravention amount cannot be regarded as meagre or inadequate. 

5. Final Order

Hon’ble Appellate Tribunal Held that:

• The total penalty amounting to 118% of the contravention amount cannot be regarded as meagre or inadequate.
• Therefore, we do not find any reason to interfere with the impugned order.