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Petitioner: M/S. Kamran Industries VS Respondent: The Collector Of Customs (Exports), Karachi And
Court Name: Sindh High Court Judge(s): Salahuddin Mirza, Ghous Muhammad Title:M/S. Kamran Industries vs The Collector Of Customs (Exports), Karachi And
JUDGMENT
Reported As: (PTCL 1996 CL. 1) Result: Petition allowed Judgment JUDGMENT DR. GHOUS MOHAMMAD, J.-1. The petitioner a partnership concern in this case established an assembly unit of electronic items in the Export Processing Zone, Karachi (hereafter: EPZ) subsequent to a sanction letter No. INV-12-094 dated 10.2.1992. It is averred by the petitioner in the memo of petition that the assembly unit in the EPZ had been installed by it upon the government's undertaking that the goods imported in to the EPZ would be exempt from customs duties and sales tax at the import stage, while the normal import restrictions enforced in Pakistan shall be inapplicable to the EPZ. Subsequently, the petitioner imported spare parts of cassette players purchased in a random job lot sale from one M/s. Pearl Industrial Company, Hong Kong vide proforma invoice dated 4.9.1992 certified by the exporter. The contents of the invoice were repeated in the certificate of import issued by the EPZ dated 7.10.1992, while the petitioner filed a bill of entry for clearance of the goods reiterating the contents of the invoice and claimed exemption on customs duties and sales tax at import stage. 2. It is an admitted position that the clearance of the goods was stopped by the Customs authorities, while the Collector of Customs (Exports) issued a show cause notice in November 1992 threatening to impose a penalty under Section 32 read with Clause 14 of Section 156(1) of the Customs Act, 1969 on the following grounds: (i) that the invoiced value at US$ 10,000 was under declared and the normal/correct price of the
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entire consignment was at USS 103,144/-. (ii) the invoice as well as the bill of entry revealed a declaration of spare parts of cassette players including lot of screw, pulley, rod, brackets, motors, locks, spring belts as well as incomplete mechanisms. It was stated in the show cause notice that since the mechanisms were complete this was essentially a misdescription. (iii) the petitioner lacked the necessary infrastructure to assemble the imported components. 3. The petitioner vide letter dated 26.11.1992 repelled the above referred show cause notice essentially raising the following arguments:- (i) under SRO No.881(I)/80 dated 23.8.1980, the Federal Government had exempted the whole of customs duties and sales tax at import stage on all the goods without any exception, imported into and exported from the EPZ. Accordingly, any misdeclaration, under-declaration and non- declaration was of no consequence as the same was not likely to benefit the petitioner. (ii) it was not the case of the Customs Department that the quantity of the spare parts imported was wrongly declared. Furthermore, the individual items/pieces were uneven and could not form a certain number of completed sets of cassette players; (iii) that the petitioner had the requisite infrastructure to assemble the component parts which did not require a very big structure or factory. The petitioner could well assemble the imported components through screw drivers and pliers. 4. The Collector Export rejected the contention of the petitioner and imposed a penalty of Rs. 100,000/- under Section 32 r/w Clause 14 of Section 156(1) of the Customs Act, on grounds of under valuation as also misdescription, The reason given for under valuation was the same as in the show cause notice, that the imported items were grossly under-valued and their real value was USS 103,144 instead of USS 10,000 declared. As regards misdescription of goods the petitioner contended before the Collector that since the motors in the imported items were missing the same constituted incomplete mechanisms and it was wrong to construe the same as complete mechanisms. The Collector Export, however, gave a finding that mechanisms are complete even if they are without motors or if the motors are separately packed. It is pertinent to note that no reason or adverse finding was given regarding the lack of infrastructure in the order by the Collector. 5. Aggrieved against the order of the Collector the petitioner filed an appeal before the Member (Judicial) C.B.R, who vide his order dated 3.4.1993 dismissed the contention of the petitioner in a cavalier fashion, while only giving a finding that mechanisms are complete even if the same are without motors and accordingly the impugned action was justified. 6. The petitioner in view of dismissal of the appeal received recovery notices dated 8.4.1993 and 25.4.1993 requiring payment of Rs. 100,000/- within fifteen days first, and then seven days, failing which coercive actions under Section 202 of the Customs Act were threatened. 7. The petitioner feeling aggrieved against the orders of the Collector and the Member (Judicial) as also the recovery proceedings did not file the revision under Section 196 of the Customs Act but
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impugned the said orders and proceedings under Art. 199 of the Constitution in the instant Constitutional Petition. 8. We have heard the arguments of Mr. Mohammad Farogh Naseem, the learned counsel for the petitioner and Mr. Syed Tariq Ali, the learned standing counsel for the Government and Customs Authorities. 9. Mr. Mohammad Farogh Naseem, the learned counsel for the petitioner has vehemently and extensively raised multifarious and multidimensional arguments. His first contention is that since the petitioners were admittedly exempt from customs duties and sales tax under SRO 881 (I)/80 dated 23.8.1980 there could possibly be no motive to evade tax. Any misdeclaration, under- declaration and non-declaration would be absolutely of no consequence, while any action to scrutinize the value or description of the invoice would be completely irrelevant. Mr. Farogh Naseem submitted that the petitioner could possibly gain no advantage from the alleged under-valuation or misdescription in the invoice. Accordingly, no penalty could be imposed. In support of this contention he has placed reliance upon: (a) Additional Commissioner of Income Tax, Madras II v. Murgugan Timber Depot, reported in (1978) 113ITR 99 decided by the Madras High Court; (b) Malpani Chemical Works v. State of Bihar (1986) 61 STC 193 also reported in S.V. Aiyer's Digest of Sales Tax Cases 1985-90, Volume II 1992 Edition, at pp. 1311 and 1312, decided by the Patna High Court; (c) Public Prosecutor v. D. Khader Khan (1938-50) 1 STC 142 decided by the Madras High Court; (d) Gwalior Investment Co. (Pvt.) Ltd. v. State of Maharashtra, (1986) 62 STC 363 (also reported in S.V. Aiyer's Digest of Sales Tax Cases 1986- 90, Vol. II, 1992 Edition, at pp. 1317-18), decided by the Bombay High Court. The first case i.e. Addl. Commissioner of Income Tax, Madras v. Murgan Timber Depot, touched upon the import of section 271(1) of the Indian Income Tax Act, 1961 which provides for penalty, inter alia, in respect of concealment and furnishing of inaccurate particulars. In that case the court was of the view that a penalty was essentially a deterrent to prevent tax evasion and when there could possibly be no likelihood of the assessee being assessed to tax no penalty could be levied. Mr. Farogh Naseem attempted to draw the parallel between the allegations of the Customs Department of under-valuation and misdescription with the contents of section 271(1) of the Indian Income Tax Act which provides for a penal action against concealment and furnishing of inaccurate particulars. According to the learned counsel, the dicta of the case was applicable on all four corners to the case of the petitioners. In the second case Malpani Chemical Works v. State of Bihar the Patna High Court was of the view that where the petitioner enjoyed an exemption, the sales tax authority had no jurisdiction to impose a penalty for non-payment of tax for the period during which the exemption was in subsistence. In that case the court struck down the show cause notice issued by the sales tax authority to levy penalty for non-payment of tax. In the third case Public Prosecutor v. D. Khader Khan, the Madras High Court held that the burden was upon the prosecution to affirmatively establish that the assessee/accused was liable to pay the general sales tax under the Madras General Sales Tax Act, 1939 before any penal action could be taken against him for non-payment. Mr. Farogh Naseem has invited our indulgence to interpret this
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judgment for the proposition that in all cases of penalties touching upon violation of fiscal laws, the tax departments/prosecution should first establish the existence of chargeability to tax before any penal action could be resorted to. He has contended that since admittedly the petitioner is exempt from tax, the prosecutor/respondents in the instant petition cannot possibly discharge the prerequisite burden of establishing the chargeability of tax on the petitioner/assessee. Accordingly, no penalty is leviable. In the fourth case referred by Mr. Farogh Naseem, Gwalior Investment Co. (Pvt.) Ltd. v. State of Mahrashtra, the Bombay High Court held that penalty under section 36(2)(c) of the Bombay Act could only be levied after the main assessment had been completed and tax determined thereunder. Mr. Farogh Naseem has vehemently contended that since in the present case there was no question of finalizing the main assessment, the petitioner being exempt from tax, there was no justification to have levied the impugned penalty. 10. The second argument raised by Mr. Farogh Naseem is that the Customs Authorities exceeded their jurisdiction to look into the question of valuation, description and misdescription of goods imported into the EPZ since the imports in issue entail no tax. In this regard he has placed reliance upon:- (a) Rules 3(4) and 3(7) of the Customs Export Processing Zone Rules, 1981 (hereafter: CEPZR, 1981) (b) L. T. & G.M. Ltd. v. The Collector of Customs reported in PLD 1988 Lah. 563; (c) M. G. Abrol. Additional Collector of Customs and another v. Shanti Lai, Chota Lai and Co. And another, 1984 ECR 503 SC, also reported in ECR *C Cus 458 SC, being ECR compilation of SC judgements including Privy Council decisions in Customs Cases 1932-1970, Volume 1 at p.458, decided by the Indian Supreme Court; (d) Union of India v. Tarachand Gupta and Bros. Reported in ECR *C 539 SC, also reported in ECR *C Cus 779 SC, being ECR compilation of SC judgments including Privy Council decisions in Customs Cases, 1971 - February 1989, Volume II at p.779. The Central Board of Revenue vide SRO No. 249(I)/81 dated 25.3.1981 framed the CEPZR, 1981 with a view to regulate and control the import and export of goods into and from the EPZ. In this regard, rule 3 which is of relevance is being reproduced as under:-- "3. Imports of goods into the Zones.-(1) subject to sub-rules (7) and (8) any goods can be imported into the Zones from abroad or from the Tariff Area. (2) A separate bill of entry in respect of goods imported for a Zone along with other documents showing details of the goods as required under the Act and the Rules made thereunder shall be presented to the customs Authorities for assessment and clearance. (3) Goods imported into a Zone shall be assessed in accordance with the existing procedure. (4) The exemption granted under Board's Notification No. SRO (I)/80 dated the 23rd August, 1980 shall be applicable to machinery, equipment, materials to be used solely within the limits of a Zone and goods imported into the Zone for warehousing purpose. (5) An investor or his licensed clearing agent duly approved and authorised by the Authority shall
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carry out necessary formalities regarding Customs clearance. (6) All goods so cleared shall be secured and forwarded to the Zone under Customs supervision, a pass shall be sent with the goods specifying the name of the importer and the clearing agent, if any, number of vehicle, description and quantity of goods with the marks and numbers and contents thereof and, on receipt of the goods in the Zone, the officer of Customs allowing the goods to enter the Zone shall retain the pass. (7) Admission of goods imported for a Zone shall not be refused except when the goods are liable to restrictions or prohibitions imposed on the grounds of public morality or order public security, public hygiene or health or for veterinary Qr phytopathological considerations, or relating to the protection of patents, trade marks or copy-rights. (8) Hazardous roods mag be allowed to be admitted to a Zone only when an area specially designed for its Storage is made available within the Zone. (9) Goods admitted to a Zone may remain there for such period as may be prescribed by the Authority." Mr. Farogh Naseem while referring to sub-rule (4) of Rule 3 as above has contended that the petitioner qualified for exemption irrespective of whether it used the imported items for manufacture or for warehousing. While further placing reliance upon sub-rule (7) of rule 3 he contended that the Customs authorities had the sole jurisdiction to look into the question as to whether the imported items fell into the prohibitory category of goods falling foul on grounds of public morality/order, public security public hygiene public health or whether the imported goods were prohibited due to veterinary or phytopathological considerations or related to protection of rights in intellectual or industrial property. The contention of the learned counsel for the petitioner is that till such the the exemption from tax was intact the customs authorities under these rules could only at best refuse clearance of goods on grounds of their falling under the prohibited category. On no other ground the clearance of the goods could be stopped. In the case oiL. T. And G.M. Ltd. v. Collector of Customs (referred above) Rustam S. Sidhwa J, (as he then was) held that the question of valuation and calculation of duty under the Customs Act did not arise where the goods were not dutiable. The relevant finding is reproduced as under:-- "10. Section 18 of the Customs Act does not state how and in what manner the value of the goods imported is to be assessed and at what point of the the chargeability or liveability of the duty arises. What it only says is that the customs duties and regulatory duties, at rates prescribed in the Act, are to be levied on inter alia goods imported into or exported from Pakistan. Under the Customs Act, chargeability is under section 18, valuation of goods is under section 25 and rate at which the duty is to be assessed is under section 30. These different events may occur at different epochs of the, but unless the goods are chargeable to duty and the taxable event occurs under section 18 the question of valuation of goods under section 25 and calculation of duty payable at and particular rate under section 30 does not arise." (at p.572 - the underlining is ours for the sake of emphasis). In the second case cited by Mr. Farogh Naseem i.e., M.G. Abrol, Additional Collector of Customs and
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another v. Shanti Lai, Chota Lai and Co., goods were exported under a licence issued by the Export Trade Control Authorities of India. The Customs Authorities imposed penalties on the ground that the goods did not correspond to the terms of the licence issued. It was held by the Indian Supreme Court that the Customs Authorities had no jurisdiction to look into the description andj misdescription of goods, while it only had the jurisdiction to examine as to whether the goods fell under the prohibited category. Accordingly, the penalty imposed by the Customs Authorities was completely without jurisdiction. In this regard our attention is in particular invited to paragraphs 13 and 14 of the judgment delivered by Subba Rao J. Mr. Farogh Naseem has attempted to draw a parallel between the Indian decision and the present case to state the proposition that the Customs Authorities had no jurisdiction beyond the question to examine as to whether the goods brought into the EPZ fell under the prohibited category. A similar view was taken by a subsequent Indian Supreme Court in Union of India v. Tarachand Gupta and Bros, (referred above). In that case the assessee imported motor-cycle parts under a licence issued under the Indian Import and Export Control Order. The Customs Authorities, however, held that the items imported were complete motorcycles in knocked down condition. The Indian Supreme Court found the actions of the Customs Authorities to be bereft of jurisdiction, while it held that the Authorities could only ascertain as to whether the goods were imported in terms of the licence and could not go into the question of whether the goods were in a completely built shape or a knocked down condition. Mr. Farogh Naseem has argued that in view of these decisions the Customs Authorities could only scrutinize the consignments in issue in light of the CEPZR, 1981 and not otherwise, while under the said rules they could only go into the question of examining and scrutinizing as to whether the goods fell under the prohibited category. 11. The next contention raised by Mr. Farogh Naseem is that allegation of under-valuation cannot warrant a penalty under section 32 of the Customs Act inasmuch as that allegations of under- valuation cannot amount to a deviation in "material particular" which is a precondition for action under section 32. In this respect he has placed reliance upon:- (a) M/s. Eastern Rice Syndicate v. CBR reported in PLD 1959 SC (Pak.) 364; (b) M/s. Latif Bros. v. Deputy Collector Customs, Lahore, reported in 1992 SGMR 1083; (c) Rib Tapes (India) Pvt. Ltd. And another v. Union of India and others, 1986 (8) ECR 731 SC also reported as ECR *C Cus 1185 SC, being ECR compilation of Supreme Court judgments including Privy Council decision in Customs cases, Volume II, 1971 to February 1989, at p. 1185. In the first decision, M/s. Eastern Rice Syndicate v. C.B.R, a full bench of the Supreme Court of Pakistan dilated upon section 39 of the Sea Customs Act, 1978 which is the comparable provision to the present section 32 of the Customs Act, 1969. Writing for the court in that case, Cornelius J expressed the opinion that allegations of mere undervaluation by the Customs Authorities would not be enough to bring home prosecution under section 39 of the Sea Customs Act. In this regard it is pertinent to reproduce the relevant findings of the learned Judge which are as under:- There need be no doubt whatsoever that the word 'untrue' carries the sense of falsity to the knowledge of the person concerned. Thus, upon a point of mere valuation, if a declaration is made by such a person which on inquiry the customs authorities find, to be to low, that will not be by itself sufficient to prove that the declaration was false to the knowledge of the maker.."(at p. 368).
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As regards the valuation of the imported items and fixation of the normal price, Cornelius J was of the view that the Customs Authorities should establish under-valuation by furnishing positive and direct proof of the prevalent price in the country of origin/export at the the of import, failing which the factum of the assessee making an "untrue" statement cannot be established. Once again the relevant observations are reproduced as follows:-- "If it is claimed by the authorities that he has made a mis-statement of price in his invoice that cannot, in our opinion, be established otherwise than by furnishing proof of the prevailing commercial price in the country of origin at the the of import. Without first making an attempt to furnish such evidences, it is impossible to see how the making of an untrue statement, within the meaning of section 39, and the consequent mischief of item (9-B) in section 167 can be imputed to anyone.''(see p. 373) Mr. Farogh ,Naseem submitted that the decision of the Supreme Court in Easter Rice Syndicate v. C.B.R. Referred above was relied upon by a subsequent full bench of the Supreme Court in M/s. Latif Brothers v. Deputy Collector, Customs (referred above). In the latter case the Supreme Court while adjudicating upon the import of section 25, 30, 32 and 156 of the Customs Act categorically held that the criterion for determining the value of goods under section 25 would be the prevalent commercial price in the country of origin at the the of import. The court was of the view that in case the Customs Authorities resorted to valuation, they had to produce a price list of similar goods of country of origin, while the onus was entirely upon the Department to establish that the importer had made a mis-statement by mustering evidence of parallel imports from the country of origin to belie the declared value. The court categorically held that in case such burden was not discharged the importer could not be held guilty under section 32 r/w section 156 of the Customs Act. In that case since the Customs Authorities failed to discharge the heavy onus of proof the orders of the Department/Authorities were set aside and the declared value was directed to be accepted. In the third case relied upon by Mr. Farogh Naseem Rib Tapes (India) Pvt. Ltd. And another v. Union of India and others (referred above) the Indian Supreme Court while adjudicating upon section III(m) of the Indian Customs Act, 1962 (which is the comparable provision in Indian to our section 32 of the Customs Act, 1969) categorically held that misdeclaration of value of imported goods did not constitute a misdescription in "material particular" in view whereof no penalty was leviable for under-valuation in the invoice price. 12. The next contention raised by Mr. Farogh Naseem touches upon violation of principles of natural justice and it is a three-fold argument which is as under:- (i) in terms of Customs General Order No.25 of 1973 dated 1.3.1973 the show cause notice issued by the Collector under section 32 ought to have specifically contained the precise basis for the finding of under-declaration and misdescription and the authorities ought to have confronted the petitioner with Copies , of evidence in parallel/identical cases; (ii) In view of non-observance of the CGO which tantamount to instructions and guidelines issued by the CBR, violation of section 195, 219 and 223 of the Customs Act is apparent and accordingly the impugned action has to be struck down in the exercise of constitutional jurisdiction; (iii) since the departmental authorities have not been able to confront the petitioner with any of the evidence and none of the same was even attached with the counter affidavit even before the court it has to be presumed that the matter was a case of no evidence and the findings of the Customs
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Authorities were based upon conjectures and surmises. 13. The next argument raised by Mr. Farogh Naseem is that the impugned show cause notice seemingly issued under section 32(1) does not meet the mandatory and essential requirements of that section. While placing reliance upon Ibrahim Textile Mills Ltd. v. Federation of Pakistan reported in PLD 1989 Lah. 47 the learned counsel has contended that under section 32(1) it was necessary to show that the person who made or filed the declaration or furnished the document in question was specifically cognizant of or had knowledge or comprehension of the fact that whatever declaration or statement he had made or the documents he had filed were incorrect or untrue in some material particular. In the absence of such precise allegations in the notice that the statements, declaration/documents were false in some material particular to the knowledge or belief of the petitioner the notices were vague and did not comply with the requirements of section 32 and hence had to be struck down as without jurisdiction, void ab initio and of no legal effect. 14. Mr. Farogh Naseem, the learned counsel for the petitioner, has further contended that the proceedings under section 32 are penal/criminal in nature and accordingly require the respondents to establish a mens rea on part of the petitioners. The learned counsel has argued that neither the show cause notice under section 32 nor the order of the Collector or even the appellate order of the Member (Judicial) have not at all given any finding that the petitioner possessed knowledge, or belief or through a fraudulent, mala fide intent attempted to wilfully enter into a default of the provisions of the statute. On this premise the learned counsel has extensively placed reliance upon:- (a) Quetta Textile Mills Ltd. v. Govt, of Pakistan reported in 1990 ALD 582; (b) Dawn and Co. v. C.I.T., Kerala reported in (1973) 87ITR 71; (c) Additional C.I.T, v. Chatur Singh Taragi reported in (1980) 41 Tax 95; (d) M/s. Humayun Ltd. v. Pakistan reported in 1985 CLC 304; (e) M/s. Murree Brewery v. Naseem,…
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