S.99A Customs Act | Final Report Containing Audit Findings Can Be Drawn Only After Apprising Auditee Of 'Objections': Delhi High Court

A division bench of Justices Yashwant Varma and Ravinder Dudeja discussed the power that stands enshrined in Section 99A (Audit) and stands further articulated in the Audit Regulations, particularly Regulation 5.

It held that by virtue of Audit Regulation 5(6), if the auditee be in agreement with the audit findings, it could voluntarily make additional payments of duty, interest or other sums that are found due and payable.

However, before such a report is finally drawn or issued, the proper officer by virtue of Audit Regulation 5(3) is obliged to place the auditee on notice of its intent to conduct such an audit.

This is followed by the proper officer requiring the auditee to furnish requisite information, documents or for that matter even samples of the goods imported or exported.

It is only thereafter and in terms of Audit Regulation 5(5) that the proper officer would proceed to formalise the objections in respect of the assessment.

In its 91-page judgment, the High Court said,

“As is evident from a reading of Regulation 5, the proper officer, after having apprised the exporter or the importer, as the case may be, of its intent to initiate an audit, is obliged to apprise the auditee of the objections before preparing the audit report. In case the auditee disagrees with the findings that appear in that report, a demand could be validly raised or created.”

It added, “As we read Audit Regulation 5, it becomes apparent that it is only after the disposal of any such objections that may have been invited that a final report containing the audit findings would come to be drawn.”

In the case at hand, the Petitioners were aggrieved by the audit objection issued by the Customs with respect to classification of its goods and availing of Merchandise Exports from India Scheme. More details of dispute here.

The High Court noted that the procedure explained above was not followed by the Department. In fact, to the contrary the Court noted, the Assistant Commissioner had required the petitioners to pay sums representing amounts which according to the authority had been wrongly claimed under the MEIS.

“A reading of the audit objection letter constrains us to observe that it clearly does not read as being the embodiment of the intent of the Assistant Commissioner to apprise the writ petitioners of any tentative conclusion that it may have arrived at. On the contrary, the audit objection letter is replete with definitive conclusions and thus clearly deprives the writ petitioners of the right to represent or establish that the issue of classification or the view harboured is incorrect or untenable. The petitioners would thus be clearly justified in asserting that they are essentially faced with a determination already made and a conclusion reached,” it held.

Court said the tone and tenor of the audit objection letter and the language in which it is framed could legitimately be construed by the noticee of the issue having been “predetermined”, said the Court.

It cited Oryx Fisheries Private Limited v. Union of India and Others (2010) in which the Supreme Court, while dealing with a challenge to the cancellation of the registration certificate of the appellant, had made observations with regard to the need for notices issued by any statutory authority to consist of reasoning as opposed to a simpliciter recordal of definitive conclusions.

Accordingly, the Court allowed the petition and quashed the audit objections.

Case title: Designco v. UoI (and other connected matters)

Case no.: W.P.(C) 14477/2022

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