DEPB Scheme – Point to Ponder
By Rajendran K IRS(Retd)
DEPB Scheme (Duty Entitlement Pass Book) has been the most popular duty neutralization scheme for exporters besides other scheme like Advance licence, Export Promotion Capital Goods Scheme etc., The total duty foregone on account of benefits extended to 100% E.O.U, Software Technology Parks besides above mentioned scheme is estimated to be nearly Rs. 54,000 crores. Out of this the share due to DEPB scheme is Rs. 8500 crores. The exporters based on their product are eligible to get a scrip for a value which is a fixed percentage of export value and the same is notified as DEPB rate for the specified product. Of late this scheme has invited sharp criticism for its being misused and possibly this is the reason for government to abolish the scheme. But on account of pressure from trade the Finance Ministry has decided to extend its life for 9 months from June 2011, date of current expiry, till the takeover by GST (Goods and Service Tax) regime.
It is also true that the DEPB scheme has lent itself to a lot of misuse on account of its utility as a scrip that can be used for payment of import duties. As it is directly linked with duties there is always a tendency among some unscrupulous elements to obtain such DEPB scrips fraudulently or even forge them. In this context many a buyer (the scrip is transferable for a price) have come to grief after finding to their shock, at one point or other that their scrips are invalid.
The pitiable situation is long after they had used it for payment of customs duties for their import, action is initiated against them by issuing demand notice for payment of duty on the already cleared goods. Sometimes certain exporters obtain the DEPB licence from DGFT’s office by producing fraudulent or forged Bank Realisation Certificate or by exporting rags or rubbish or over valuing the goods of inferior quality. Such licences are passed on to the unsuspecting victims or sometimes the transferee may purchase knowingly for a low cost.
The question now is what are the liabilities and consequences of such spurious licences .There is also another issue of forged licences which stand on a different footing in that these licences are non-existent or non est. In the case of forged or fake licences the buyer, whether he buys knowingly or unknowingly, can’t claim the benefits of a bonafide DEPB licence since pleading ignorance or innocence after possessing fake instruments like fake currency does not confer any immunity from punitive action. But in the case of validly issued scrip by the competent authority though based on fraudulent documents the question is whether it is fair and justifiable to demand duty after cancelling the already utilized scrip and declaring them void. In certain cases even penalties are imposed. Hence it is of interest to know the legal position emerging out of judicial pronouncements. Here again, there are conflicting judgments of different benches of Tribunal and different High Courts. Punjab and Haryana High court and Tribunal (Delhi Bench) have held that a DEPB scrip fraudulently obtained is non-existent and no credit is available. Fraud vitiates all transactions and the buyer does not acquire any better title to which the seller is not entitled to. On top of it justifies issuing of demand beyond the normal time limit of 6 months by invoking the suppression clause in the Customs Act. This clause permits the department to issue demand upto 5years from the date of clearance of the consignment in cases of fraud, collusion and suppression of facts. This is all more damaging.
There is a majority judgment by another bench of Tribunal, based on Hon. Gujarat High court’s decision in the case of Binani Cements, which had held that if the scrip is cancelled after its utilization this cannot affect the earlier clearances because at that point of time the scrip were valid. The cancellation of the scrip is only prospective and not retrospective. In fact Supreme Court judgment and other High Court/Tribunal judgments have held that misrepresentation or fraud renders the licences (scrips) only voidable but they are valid till voided. There is no legal basis for the contention that misrepresentation makes the license non est, where the transfer has been effected without notice to the transferee alleged fraud, concept of fraud vitiates everything is not applicable. Another argument is that if fraudulently obtained scrip is non est or non-existent scrip, then how can a non-existent scrip be the cancelled and even if it is cancelled how it can have effect retrospectively affecting the already cleared goods. The latest judgment in the case of Friends Trading Co by Tribunal and Punjab & Haryana High Court lay down that duty is recoverable upto 5 years under the “Fraud” / “Collusion” clause if someone has cleared the goods under non-bonafide DEPB scrip which is cancelled by DGFT’s office. However penalty is not being imposed on the innocent or ignorant transferee. Hence in spite of some favorable judgment the department will always rely on judgments favorable to them and the duty will be recovered sometime with interest! It will take great effort and entail a lot of time and energy to fight the case beyond Tribunal by going to High Courts or sometimes even to Supreme Court. Hence it is in the interest of the buyer of the scrips to be on their guard before purchasing the DEPB scrips because it is the view of the Tribunal that failure to be vigilant and cautious in verifying the genuiness of the scrip does not confer the right to claim bonafides on the part of the buyer (transferee of the scrip).