Financial Benefits To Assessee Can't Be A Ground To Levy Interest Without A Statutory Provision: Bombay High Court

The Division Bench of Justices K.R. Shriram and A.S. Doctor observed that there was no substantive provision which obligated the assessee to pay interest or penalty on CVD or SAD, leviable under the Customs Tariff Act, 1975, or on the surcharge leviable under the Finance Act, 2000.

The Court held that when penalty is imposed by way of additional tax, the constitutional mandate requires a clear authority of law for imposition of the same. The bench added that the Settlement Commission cannot pass an order beyond the provisions of the Customs Act, 1962 and that the fact that the assessee derived financial benefits cannot be a ground to order payment of interest in the absence of any statutory provision.

Show cause notices were issued to the petitioner- Mahindra & Mahindra Ltd., on the ground that it did not declare the entire amount payable in connection with the goods imported by it, amounting to misdeclaration with an intent to evade payment of customs duty. Under the said show cause notices, a demand of differential customs duty was raised against the petitioner.

The petitioner filed applications before the Settlement Commission for settlement of the demand raised against it. The Settlement Commission passed an order holding that the customs duty liability, as proposed in the show cause notice, was payable by the petitioner. The Settlement Commission also held that the petitioner had derived financial benefit by not paying the differential duty that was payable by him and hence, the petitioner was liable to pay interest on the differential customs duty, along with penalty.

Against this, the petitioner filed writ petitions before the Bombay High Court.

The petitioner- Mahindra & Mahindra Ltd., submitted before the High Court that the Settlement Commission had passed an order levying penalty and interest on the differential amount of additional customs duty/ countervailing duty (CVD) and the special additional duty of customs (SAD), which the petitioner had allegedly evaded.

The petitioner contended that none of the relevant provisions contained in the Finance Act, 2000, relating to levy of surcharge, and the Customs Tariff Act, 1975, relating to levy of CVD and SAD, provide for imposition of penalty or interest on the chargeable duty.

The petitioner added that Section 28AB of the Customs Act, 1962, which provides for interest on delayed payment of duty, is applicable only for basic customs duty leviable under Section 12 of the Customs Act, 1962. It argued that the Finance Act, 2000 and the Customs Tariff Act, 1975 do not borrow the provisions of Customs Act, 1962 relating to levy of interest on delayed payment of duty. Hence, it contended that the revenue department had no power under the law to impose penalty or interest.

The petitioner argued that in a petition filed under Article 226 of the Constitution of India, against the order of the Settlement Commission, the Court should only be concerned with the legality of the procedure followed and not with the validity of the order. However, it added that if the order passed by the Commission is contrary to the provisions of law, which has caused prejudice to the assessee, the Court must certainly intervene.

To this, the revenue department contended that the additional customs duty and the special additional duty of customs, or the surcharge, though charged under different statutes, are duties of custom and that they form a part of the total customs duty. The department added that since the petitioner had misstated the assessable value of imported goods by undervaluing them, the Settlement Commission was justified in directing the petitioner to pay interest and penalty on the differential customs duty. Thus, the department argued that the Court should not interfere with the order passed by the Commission.

Section 28AB of the Customs Act, 1962 provides that where any duty has not been levied or has been short levied, due to collusion, wilful misstatement or suppression of facts, the assessee is liable to pay interest in addition to the duty as determined under the relevant provision of the Customs Act.

The Court observed that in view of the judgment of the Apex Court in Jyotendrasinhji versus S.I. Tripathi and Ors. (1993), the order of the Settlement Commission is in the nature of a package deal and therefore, the assessee should not be permitted to accept what is favourable to him and reject what is not. However, the Supreme Court had held that if the court is satisfied that the order of the Commission is contrary to the provisions of the law, the court must intervene.

The bench referred to the provisions of Section 3 and Section 3A of the Customs Tariff Act, 1975, relating to levy of additional customs duty/ countervailing duty (CVD) and the special additional duty of customs (SAD), respectively.

While observing that Section 28AB of the Customs Act, 1962, which provides for levy of interest on delayed payment of duty, is a taxing provision which creates and fastens liability on a party, the Court ruled that it must be strictly construed and must be governed by the language employed in the section.

Further, the Court noted that the Supreme Court in India Carbon Ltd. & Ors. versus State of Assam (1997) had held that interest on delayed payment of tax can be levied and charged only if the statute that levies and charges the tax makes a substantive provision to this effect. Therefore, the Apex Court had laid down that where there is no substantive provision requiring the payment of interest, the authorities cannot charge interest on tax for the purpose of collecting and enforcing the payment of tax.

Holding that there is no substantive provision in Section 3 or Section 3A of the Customs Tariff Act, 1975, or Section 90 of the Finance Act, 2000, requiring payment of penalty or interest, the Court ruled that there was no substantive provision which obligated the assessee to pay interest or penalty on CVD or SAD, or on the surcharge leviable under the Finance Act, 2000.

"As stated earlier, if penalty or interest has to be levied on CVD or SAD or surcharge, the authority has to be specific and explicit and expressly provided. The Customs Tariff Act, 1975 provides for additional customs duty and special additional duty but creates no liability for penalty or interest for additional duty or special additional duty. Likewise the Finance Act, 2000 under Section 90. That being so imposing penalty or interest on additional duty and special additional duty or surcharge which is not connected to the basic customs duty is unwarranted or without authority of law", the Court added.

Hence, the bench ruled that there is no provision under Section 3 or Section 3A of the Customs Tariff Act, 1975, or Section 90 of the Finance Act, 2000, that creates a charge in the nature of penalty or interest. It reiterated that when penalty is imposed by way of additional tax, the constitutional mandate requires a clear authority of law for imposition of the same.

"Therefore, penalty is not a continuation of assessment proceedings and penalty partakes of the character of additional tax. There must be a charging section to create liability. Section 3 and Section 3A of the Customs Tariff Act, 1975 are charging sections creating liability for CVD and SAD but does not provide for penalty. The mere fact that there is machinery for assessment, collection and enforcement of tax and penalty under the Customs Act, 1962 does not mean that the provision for penalty and interest in the Customs Act, 1962 is treated as applicable for penalty and interest under the Customs Tariff Act, 1975. The meaning of penalty or interest under the Customs Tariff Act, 1975 cannot be enlarged by the provisions of machinery of the Customs Act, 1962 incorporated for working out the Customs Tariff Act, 1975."

The Court refuted the contention made by the revenue department that the charging section for imposition of CVD and SAD or surcharge is Section 12 of the Customs Act, 1962.

While ruling that the charging sections for imposition of surcharge, CVD and SAD are Section 90(1) of the Finance Act, 2000, Section 3(1) and Section 3A(1) of the Customs Tariff Act, 1975, respectively, the Court ruled that imposition of interest under Section 28AB of the Customs Act on surcharge, CVD and SAD is incorrect in law.

Also, the Court added that the Settlement Commission cannot pass an order beyond the provisions of the Customs Act, 1962 and that deriving financial benefits itself cannot be a ground to order payment of interest in the absence of any statutory provisions for payment of interest.

Thus, the bench quashed the order of the Settlement Commission to the extent it required the petitioner to pay interest and penalty against the show cause notices, directing the revenue authorities to refund the penalty amount deposited by the petitioner together with interest.

Case Title: Mahindra & Mahindra Ltd. versus Union of India & Ors.

Citation: 2022 LiveLaw (Bom) 400 

Dated: 15.09.2022 (Bombay High Court)

Counsel for the Petitioner: Mr. Sriram Sridharan

Counsel for the Respondents: Mr. J.B. Mishra a/w. Mr. Dhananjay B. Deshmukh

Click Here To Read/Download Order