CESTAT Sets Aside Section 114AA Penalty Due to Failure in Establishing Proof of Intentional Use of Manipulated Scrip [Read Order]

The New Delhi Principal Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) held that a penalty under Section 114AA of the Customs Act, 1962 cannot be sustained in the absence of evidence showing that the importer had knowledge of or intentionally used false or incorrect documents. While the Tribunal upheld the rest of the impugned order, it set aside the separate penalty of ₹10 lakh imposed under Section 114AA.

The appeal arose from proceedings relating to the misuse of a Focus Market Scheme scrip that was originally issued for a nominal value but was fraudulently enhanced and registered in the Customs EDIsystem. In this case, GFC Weld House, the appellant, had used the scrip to discharge customs duty on imported goods. Following an investigation, the Department alleged that the scrip had been manipulated and issued a show cause notice demanding duty with interest and proposing penalties.

The matter was heard by a Bench comprising Justice Dilip Gupta (President) and P.V. Subba Rao (Technical Member). The Tribunal noted that the issue of duty demand and penalty under Section 114A was no longer res integra in view of the Supreme Court’s decision in Munjal Showa Ltd., which held that forged or fake duty credit scrips are void ab initio and that fraud vitiates all transactions.

In light of this settled position, the importer did not contest the duty demand or the penalty under Section 114A. However, with respect to the penalty imposed under Section 114AA, the Tribunal examined whether the statutory requirement of “knowingly or intentionally” using a false or incorrect document was satisfied. It observed that there was no material on record to establish that the importer was aware of the fraudulent enhancement of the scrip or had participated in its manipulation.

The Tribunal emphasised that Section 114AA specifically requires proof of knowledge or intent, which was absent in the present case. Accordingly, the Tribunal partly allowed the appeal by setting aside the penalty imposed under Section 114AA, and upheld the remaining portion of the impugned order.

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