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Judgment
S. Nagamuthu, J.—In exercise of the powers conferred by sub-section (1) of Section 25 of the Customs Act, 1962, in the public interest,
the Central Government issued a notification exempting capital goods, when imported into India by an importer specified in column (2) of the
notification, from so much of the duty of customs leviable thereon which is specified in the First Schedule to the Customs Tariff Act, 1975, as is in
excess of amount calculated at the rate specified in the corresponding entry in column (3) of the said notification and the whole of the additional
duty leviable thereon u/s 3 of the Customs Tariff Act, subject to certain conditions. One such condition enumerated in the notification is that the
importer, at the time of clearance, shall produce to the Assistant Commissioner of Customs or Deputy Commissioner of Customs a certificate from
the licensing authority for having executed a bond under paragraph 45 of the Policy.
The term, ""Licensing Authority"", has been explained in the very same notification, which reads as follows:-
(iii)""Licensing Authority"" means an authority competent to grant a licence under the Import (Control) Order, 1955, made under the Imports and
Exports (Control) Act, 1947 (18 of 1947), or the Director General of Foreign Trade appointed under the Foreign Trade (Development and
Regulation) Act, 1992 (22 of 1992) or an officer authorised by him to grant a licence under the said Act.
The term, ""Export and Import Policy"" also has been explained in the same notification as follows:-
(ii)""Export and Import Policy"" means the Export and Import Policy, 1 April 1992-31 March 1997 published vide Public Notice of the Government
of India in the Ministry of Commerce, No. 1-ITC (PN) 92-97, dated the 31st March 1992, as amended from time to time.
Yet another condition of the said notification is that the importer, at the time of clearance of the said capital goods shall make a declaration
before the Assistant Commissioner of Customs or Deputy Commissioner of Customs, in such form as he may specify, binding himself to pay on
demand an amount equal to the duty leviable on such capital goods but for the exemption contained herein in respect of which the conditions
specified in column (2) of the notification have not been complied with.
As per the above said notification, an importer has to fulfil his export obligation within the time prescribed in the licence. The petitioner is a
Company, by name, ""M/s. FAL Industries Limited"", who was manufacturing various products, including Typewriters and Air Purifiers. The
petitioner Company was also involved in export of the above products. The petitioner Company obtained licence from the first
respondent/Directorate General of Foreign Trade, bearing No. P/CG/2100700, dated 27.08.1992, under the Scheme, known as, ""Export
Promotion Capital Goods Scheme"" (hereinafter referred to as, ""The Scheme""). As per the terms of the licence, the petitioner Company could
import goods worth CIF value of Rs. 64,27,044/-. As per the terms of the licence, the machinery to be imported would be eligible for
concessional rate of interest at 15%, in terms of the Customs Notification No. 160/92, dated 20.04.1992.
In terms of the above licence, admittedly, the petitioner Company imported materials under Bill of Entry No. 44076, dated 22.12.1992, for a
CIF value of Rs. 59,59,050/- and paid concessional customs duty of Rs. 8,68,724/-. As per the terms of the licence and notification, the petitioner
duly executed a bond, thereby undertaking to pay interest at the rate of 24%, in the event of failure to fulfil the export obligation in terms of the
licence. Admittedly, the petitioner Company did not fulfil the above export obligation as per the terms of the licence. Therefore, the second
respondent/Deputy Director General of Foreign Trade, by his proceedings in F. No. 20/66/93/EPCG.III, dated 26.11.2002, demanded interest at
the rate of 24%, which works out to Rs. 64,87,912/-. The said order of the second respondent is under challenge in this Writ Petition.
I have heard Mr. S. Murugappan, the learned counsel appearing for the petitioner; Mr. D. Vijayakumar, the learned Additional Central
Government Standing Counsel for the respondents 1 to 3; and Mr. N. Vijayaraj, the learned counsel appearing for the fourth respondent for the
fourth respondent and I have also perused the records carefully.
The main contention of the learned counsel for the petitioner is that under the Customs Act, there is no provision for levying interest for failure to
comply with the export obligation in terms of the licence. The learned counsel would further contend that in the Foreign Trade (Development and
Regulation) Act, 1992 and the Foreign Trade (Regulation) Rules, 1993 also, there is no provision which empowers the second respondent to
demand interest for the failure to comply with or fulfil the export obligation in terms of the licence.
The learned counsel for the petitioner would, however, admit that a bond was duly executed in terms of the licence, under which, the petitioner
Company agreed to pay interest at the rate of 24%. But, the learned counsel for the petitioner would contend that such condition, which has been
imposed in the bond, is wholly without jurisdiction for want of sanction of law and therefore, the same is void. In such view of the matter,
according to the learned counsel, the demand of interest made on the condition, which is void, is illegal and therefore, the impugned order is liable
to be set aside.
In order to substantiate his contention, the learned counsel for the petitioner would rely on an unreported judgment of a Division Bench of this
Court in Commissioner of Customs (Sea) vs. M/s. Meirs Pharma India Private Limited (C.M.A. No. 3221 of 2004), dated 06.12.2010. The
learned counsel further relies on an unreported judgment of a learned Single Judge of this Court in M/s. Gayathri Stickers vs. The Director General
of Foreign Trade (W.P. No. 21948 of 2002), dated 30.10.2012. The learned counsel also relies on two other judgments of the Hon''ble Supreme
Court in V.V.S. Sugars vs. Government of Andhra Pradesh and Others, reported in 1999 IND LAW SC 374 and India Carbon Ltd. etc. Vs.
State of Assam, . I will make discussion about these judgments at the appropriate stages of this order.
But, the learned Additional Central Government Standing Counsel appearing for the respondents 1 to 3 would vehemently oppose this Writ
Petition. According to him, the interest demanded by means of the impugned order is not within the purview of the Customs Act. It is his
contention that if any interest is to be demanded as per the provisions of the Customs Act, then, it is for the authority under the Customs Act, to
make a demand by following the procedure established in the Customs Act itself. He would tacitly admit that the interest demanded in the
impugned order is not in terms of the Customs Act. But, he would submit that the interest demanded in the instant case is on account of the
contractual obligation between the second respondent and the petitioner herein. In other words, according to the learned standing counsel, the
petitioner had executed a bond, thereby, undertaking to pay interest at the rate of 24%, in the event of failure to fulfil the export obligation. This
creates a contractual obligation, under which, according to the learned counsel for the respondents 1 to 3, the petitioner is liable to pay interest at
the rate of 24%.
The learned Additional Central Government Standing Counsel appearing for the respondents 1 to 3 would further very seriously refute the
contention of the learned counsel for the petitioner that the said condition is void. According to the learned standing counsel, the demand for
interest is legal and the condition is not void. For that proposition, the learned counsel would rely on Rule 6 of the Foreign Trade (Regulation)
Rules, 1993. Under sub-rule (2)(b) of Rule 6 of the said Rules, the licensing authority has got power to demand execution of a bond by the
applicant for complying with the terms and conditions of the licence. It is under this Rule, a bond was required to be executed by the petitioner and
accordingly, the petitioner executed the bond. Therefore, according to the learned standing counsel, the execution of the bond incorporating the
said clause for payment of interest cannot be stated to be void. For this proposition, the learned counsel relies on a judgment of the Hon''ble
Supreme Court in Rexnord Electronics and Controls Ltd. Vs. Union of India (UOI) and Others, wherein, the Hon''ble Supreme Court has held
that the interest payable under the bond cannot be equated to the interest payable under the provisions of the Customs Act. The Hon''ble Supreme
Court has further held that payment of interest under the bond is a contractual obligation and the Settlement Commission has no power to grant
immunity to interest covered by such bonds. Eventually, the Hon''ble Supreme Court has held that such demand for payment of interest under a
bond, which is on account of a contractual obligation can be sustained. In view of the above position, the learned standing counsel for the
respondents 1 to 3, would pray for dismissal of this Writ Petition.
I have considered the above submissions.
At the outset, I have to state that there need not be any confusion between the powers of the authorities under the Customs Act and the
powers of the authorities under the Foreign Trade (Development and Regulation) Act, 1992. Under the Customs Act, the demand for interest can
be made u/s 28-AA of the Act, for the failure to pay the determined customs duty within a period of three months from the date of such
determination. Such demand for payment of interest can be made by following the procedure contemplated in the Foreign Trade (Development
and Regulation) Act, 1992 and the Foreign Trade (Regulation) Rules, 1993, by the customs authorities.
Here in the instant case, the interest has not been demanded by the authorities under the Customs Act, in terms of any of the provisions of the
Customs Act. On the contrary, interest has been demanded by the second respondent viz., Deputy Director General of Foreign Trade. There is no
controversy before this Court that under the Foreign Trade (Development and Regulation) Act, 1992 and the Foreign Trade (Regulation) Rules,
1993, there is no specific provision empowering the second respondent to demand interest for the failure of the exporter to fulfil his export
obligation. It is on this ground, the learned counsel for the petitioner contended that the demand for interest in terms of the bond is illegal.
But, I find it very difficult to accept the said contention for more than one reason. Though, the Foreign Trade (Development and Regulation)
Act, 1992, does not make a specific provision empowering the authority to demand interest in the event of failure of the licensee to fulfill his export
obligation, under Rule 6(2)(b) of the Foreign Trade (Regulation) Rules, 1993, the second respondent has been empowered to require the licensee
to execute a bond for complying with the terms and conditions of the licence. If only such a bond is executed, the second respondent could issue a
licence. What are all the terms and conditions, which could be incorporated in the bond have not been elaborately dealt with in the Foreign Trade
(Development and Regulation) Act, 1992. The Rule 6(2)(b) of the Foreign Trade (Regulation) Rules, 1993, says that the applicant for a licence
shall execute a bond for complying with the terms and conditions of the licence. It is only in exercise of the said power conferred under Rule 6(2)
(b) of the Foreign Trade (Regulation) Rules, 1993, before issuing licence to the petitioner, the second respondent required the petitioner to execute
a bond. It is only in terms of the said Rule, the bond was executed. Therefore, it cannot be stated at any stretch of imagination that the execution of
the bond has got no sanction of law. I hold that the execution of the bond has a legal backing of the Foreign Trade (Development and Regulation)
Act, 1992 and the Foreign Trade (Regulation) Rules, 1993.
Admittedly, at the time when the petitioner applied for licence, he was required to execute a bond and accordingly, he executed the bond,
thereby, undertaking to pay interest at the rate of 24%, in the event of failure to fulfil the export obligation. Admittedly, the petitioner had failed to
fulfil the export obligation, though, he had imported goods by using the licence. It is also admitted that he paid less duty in terms of the licence by
making use of the Scheme. When it is not in controversy that the petitioner had failed to fulfil the export obligation, then, the second respondent is
entitled to enforce the terms of the bond.
In this regard, now, I may refer to the judgment of the Hon''ble Supreme Court in Rexnord Electronics and Controls Limited vs. Union of India
and others, reported in (2008) 12 Supreme Court Cases 156, the case referred to above. That was also a case, where a bond executed in terms
of the Customs Notification No. 160/92, dated 20.04.1992 (the notification, which is the subject matter in the present Writ Petition) was
considered. In that case, the exporter had executed a bond, thereby, agreeing to pay interest in the event of his failure to fulfil the export obligation.
But, he did not pay interest. In the meanwhile, he approached the Settlement Commission u/s 127-H of the Customs Act, for immunity from
prosecution and for waiver of imposition of penalty, fine and interest under the Customs Act. The Settlement Commission accepted the said
request of the exporter and granted waiver of payment of penalty, fine as well as interest. Aggrieved over the same, the matter was taken up to the
Supreme Court. Before the Supreme Court, it was contended that the Settlement Commission, had not authority to waive the interest, which is
leviable under the bond executed in terms of the Scheme. It was further contended that as per Section 127-H of the Customs Act, the interest,
which is payable under the Customs Act alone could be waived by the Settlement Commission u/s 127-H of the Act. But, by the exporter, it was
contended that the Settlement Commission had power to waive the interest payable both under the Customs Act or under the Scheme. But, the
Hon''ble Supreme Court negatived the claim of the exporter. In that case, the Hon''ble Supreme Court has held that there was a vast difference
between the interest payable under the Customs Act and the interest payable in terms of a bond executed as per the Scheme floated under the
Foreign Trade (Development and Regulation) Act, 1992. The Hon''ble Supreme Court has further held that the Settlement Commission had power
to waive the interest payable under the Customs Act. But, in the said case, since, the interest was demanded not under the Customs Act, but, in
terms of the bond executed as per the Scheme, the Hon''ble Supreme Court has held that the Settlement Commission had no power to waive the
interest, which was required to be paid in terms of the bond executed.
While concluding so, the Hon''ble Supreme Court, in the said judgment i.e Rexnord Electronics and Controls Ltd. Vs. Union of India (UOI)
and Others, had occasion to elaborately deal with the Scheme under the Foreign Trade (Development and Regulation) Act, 1992 and the customs
duty payable under the Customs Act. In paragraph No. 16 of the said judgment, the Hon''ble Supreme Court has framed the following question:-
The core question which, therefore, arises for consideration is as to whether the term ""interest"" used therein would include within its fold
interest payable under the bond furnished by the appellant before the Director General of Foreign Trade.
In paragraph No. 25 of the said judgment, the Hon''ble Supreme Court has held as follows:-
The appellant having evaded payment of duty was bound to pay the same and furthermore was bound to pay interest in terms of the bond
executed by it. The Settlement Commission, therefore, could not have given any direction for deduction in regard thereto. As the Settlement
Commission, did not have any jurisdiction to waive the amount of interest payable under the bond, we do not see that any jurisdictional error has
been committed by it in directing the payment of the said amount which is otherwise payable. In any event the appellant is not prejudiced thereby
as irrespective of such direction, the appellant was bound to pay the interest payable under the bond.
In Rexnord Electronics and Controls Limited case (cited supra), the Hon''ble Supreme Court has referred to a Division Bench judgment of a
Bombay High Court in Tanu Healthcare Limited vs. Union of India, reported in (2007) 207 ELT 641 (Bom), wherein, the Bombay high Court has
held that ""6....payment of interest under the bond is a contractual obligation and the Settlement Commission has no power to grant immunity to
interest covered by such bonds.
Thus, from the above judgment, it is crystal clear that the interest payable as per the terms of the Customs Act is different from the interest
payable under the bond executed in terms of the Foreign Trade (Development and Regulation) Act, 1992. If any interest is to be levied under the
terms of the Customs Act, undoubtedly, the procedure contemplated under the Customs Act is to be followed by the customs authority to demand
customs duty together with interest. But, under the Foreign Trade (Development and Regulation) Act, 1992, though, there is no specific provision
for demanding interest in case of violation of terms and conditions of the licence issued under the Act, in terms of the bond such interest could be
demanded.
But, the learned counsel for the petitioner would rely on an unreported judgment of a Division Bench of this Court in Commissioner of
Customs (Sea) vs. M/s. Meirs Pharma India Private Limited (C.M.A. No. 3221 of 2004) (referred to above). I have carefully gone through the
said judgment. In my considered opinion, the said judgment cannot be taken as a precedent in respect of the law, which is under discussion in the
present judgment. In that case, the judgment of the Hon''ble Supreme Court in Rexnord Electronics and Controls Limited case (cited supra), was
not at all brought to the notice of the Division Bench. It was also not argued before the Division Bench that interest could be levied under a bond,
which is outside the scope of the Customs Act. The whole gamut of argument of the Customs Department before the Division Bench was that, as
per the provisions of the Customs Act, interest could be demanded for the failure of the exporter to fulfil the licence conditions issued under the
Foreign Trade (Development and Regulation) Act, 1992. The Division Bench, after having elaborately dealt with the provisions of the Customs
Act, ultimately held that for such failure to fulfil the export obligation in terms of the licence, the customs authority has got no power to demand
interest. Regarding that proposition laid down by the Division Bench, I am in full agreement. But, before the Division Bench, it was not at all argued
that the demand of interest could be made by the authority under the Foreign Trade (Development and Regulation) Act, 1992, in terms of the
bond, which is outside the purview of the Customs Act.
As I have already pointed out, in the instant case, interest is demanded not within the purview of the Customs Act, but, as per the terms of the
bond executed in terms of the Foreign Trade (Development and Regulation) Act, 1992. Thus, the Division Bench had no occasion to consider,
whether the authority under the Foreign Trade (Development and Regulation) Act, 1992, has got power to demand interest in terms of the bond
executed as per the licence in the event of failure to fulfil the export obligation. The Division Bench has further held that for such failure to fulfil
export obligation, the customs authority has got no power to demand interest. Regarding that proposition, as I have already pointed out, there can
be no second opinion. That was not a case where payment of interest was made by an authority under the Foreign Trade (Development and
Regulation) Act, 1992, in terms of the bond. Therefore, the judgment of the said Division Bench has got no application to the facts of the present
case at all.
The learned counsel for the petitioner would rely on yet another unreported judgment of a learned Single Judge of this Court in M/s. Gayathri
Stickers vs. The Director General of Foreign Trade (W.P. No. 21948 of 2002) (referred to above), dated 30.10.2012. In that case, of course,
the learned Single Judge in paragraph No. 16 has held as follows:-""16. In the light of the above said order, it is clear that interest cannot be levied
on duty amount by the respondents. When the above said order of this Court has not been challenged in appeal, I do not find any merit in the
arguments advanced by the learned counsel for the respondents 1 to 3 as well as the impugned order passed by the third respondent. Therefore,
as already held by this Court, no interest can be levied against the persons, who failed to comply with the conditions mentioned in the licence,
hence, this Court is inclined to allow this writ petition. Accordingly, the writ petition is allowed by setting aside the impugned order passed by the
third respondent.
With respect, I regret to state that I am unable to follow the said view taken by the learned Single Judge in the said judgment for the simple
reason that the judgment of the Hon''ble Supreme Court in Rexnord Electronics and Controls Limited case (cited supra), was not brought to the
notice of the learned Single Judge. It was also not argued before the learned Single Judge that the authority under the Foreign Trade (Development
and Regulation) Act, 1992, can enforce a bond, which creates a contractual obligation to demand for interest. Therefore, the said judgment of the
learned Single Judge cannot be taken as a precedent on the law, which is under discussion in this judgment.
The learned counsel for the petitioner would, nextly, rely on a judgment of the Hon''ble Supreme Court in V.V.S. Sugars vs. Government of
Andhra Pradesh and Others, reported in 1999 INDLAW SC 374 and similarly, yet another judgment of the Hon''ble Supreme Court in India
Carbon Ltd. etc. Vs. State of Assam, . In these two cases, the Hon''ble Supreme Court has held that unless there is a substantive provision in the
Tax Law for payment of penalty or interest, the authority cannot make such a demand for interest or penalty. Regarding this proposition also, there
is no quarrel before this Court.
But, in the instant case, as I have already concluded, it cannot be said that the interest cannot be demanded by the authority under the Foreign
Trade (Development and Regulation) Act, 1992, in the event of failure of the exporter to fulfil his export obligation in terms of the bond executed
and the licence issued. I am bound by the law laid down by the Hon''ble Supreme Court in Rexnord Electronics and Controls Ltd. Vs. Union of
India (UOI) and Others, , referred to above, wherein, the Hon''ble Supreme Court, after an elaborate discussion has held that a bond executed in
terms of the licence under the Foreign Trade (Development and Regulation) Act, 1992, creates a contractual obligation, under which, the authority
under the Act, can demand interest from the exporter for his failure to fulfil the export obligation.
In view of the above settled position of law, I am unable to find any infirmity in the impugned order of the second respondent/Deputy Director
General of Foreign Trade, dated 26.11.2002. In the result, this Writ Petition fails and accordingly, the same is dismissed. No costs.