The Supreme Court, while granting relief to EMBIO Ltd ruled that penalty cannot be imposed under Section 11(2) of the Foreign Trade (Development and Regulation) Act, 1992 for not fulfilling the export obligation. The Section applies only when there is an allegation of making an export or import in contravention of the export and import policy.
This decision overturned the Karnataka High Court’s dismissal of the appellant’s writ petition and subsequent writ appeal, which had challenged the penalty order amounting to Rs. 23,38,882.
The bench of Justices Abhay S. Okha and Ujjal Bhuyan noted that Sub-Section (2) of Section 11 applies when any import or export is made in contravention of any provision of the FT Act, Rules, and orders made thereunder or the foreign trade policy.
The appellant, previously known as Emmellen Biotech Pharmaceuticals Limited before its amalgamation with Karnataka Malladi Biotics Limited as per the Bombay High Court’s order on March 24, 2009, initially approached the Karnataka High Court under Article 226 of the Constitution of India. Following the dismissal of the writ petition and the writ appeal, the matter escalated to the Supreme Court.
The case revolves around Karnataka Malladi Biotics Limited (Karnataka Biotics), which obtained an Export Promotion Capital Goods Licence (licence) allowing concessional customs duty rates for importing capital equipment. Under the licence, Karnataka Biotics was obligated to export finished goods worth US$ 2,59,948 within five years. However, due to financial difficulties, Karnataka Biotics was declared a sick unit under the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA).
The Commissioner of Customs issued a demand notice for differential duty, which Karnataka Biotics couldn’t pay, resulting in enforcement of a bank guarantee. Subsequently, a penalty of Rs. 23,38,882 was imposed on Karnataka Biotics for non-fulfilment of export obligations under the licence. Despite legal challenges, including a successful writ petition before the Karnataka High Court, the matter persisted through various stages due to the company’s amalgamation with Emmellen Biotech Pharmaceuticals Limited (now known as Embio Limited).
Embio Limited pursued legal recourse, culminating in a writ petition before the Karnataka High Court, which was dismissed. The dismissal was upheld in a writ appeal, citing the withdrawal of an earlier petition without reserving the right to revisit the issues. This led to the present appeal before the Supreme Court, seeking relief from the penalty imposition and the dismissal of the writ petition.
The senior counsel representing the appellant highlighted the rehabilitation scheme sanctioned by the Board for Industrial and Financial Reconstruction (BIFR) for Karnataka Biotics, which included a waiver of custom duty amounting to Rs. 33.30 lakhs due to the company’s failure to meet export obligations. This waiver, he argued, precludes the imposition of any penalty.
Additionally, he submitted that the Karnataka High Court had granted liberty to file a fresh writ petition after allowing the withdrawal of an earlier one, which was overlooked by both the single judge and the division bench.
Moreover, the senior counsel contended that Section 11(2) of FT Act does not authorise the imposition of a penalty for non-fulfilment of export obligations under the licence. Thus, he asserted that the penalty order was unlawful.
The supreme court identified a critical error in the judgments of both the Division Bench and the learned Single Judge regarding the withdrawal of the initial Writ Petition filed by Karnataka Biotics.
Furthermore, the apex court scrutinised the circumstances surrounding the imposition of penalties. The appellant’s predecessor, Karnataka Biotics, was obligated to export goods to fulfil conditions outlined in the licence, failing which penalties were imposed.
Further, the bench noted that “the allegation is of the failure to abide by the obligation to export the finished goods within a period of five years. So, there is no allegation of attempting to make an export or import, which is covered by Section 11 (2). There is no allegation against the appellant or its predecessor of making an export or import in contravention of the export and import policy. Section 11 (2) is a penal provision.”
Consequently, the court concluded that the penalty imposition under Section 11(2) of FT Act lacked legal grounds and was therefore unsustainable. Accordingly, the appeal was allowed.
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