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Duty demand not pursuant to show cause notice and adjudication set aside

Fortis had a hospital at Bangalore and imported a equipment under exemption by producing requisite certificate. Subsquently, on breach of condition in not providing free treatment to 40% of outdoor patients, an order for confiscation of goods, duty and penalty was passed. CESTAT set aside duty demand. High Court set aside CESTAT's order. Supreme Court allowed Fortiss appeal, as order was not pursuant to show cause notice and adjudication.-900320

1 .Appellant had a hospital at Bangalore.

2 .It imported a Cardiac Catherization Laboratory and applied for exemption from payment of import duty.

3 .It was not charged any import duty as it had produced requisite certificate issued by the Director General of Health Services, New Delhi.

4 .Revenue came to know that the Institute was committing breach of conditions, in not providing free diagnostic treatment to at least 40 per cent of all its outdoor patients.

5 .An order for confiscation of gods, and levy of duty and penalty was passed againstthe Institute.

6 .CESTAT set aside the duty demand.

7 .High Court set aside CESTAT's order.

On appeal, the Supreme Court held as under:

8 .The Court dealt with the provisions of Section 125(1) as well as 125(2) and observed that order of payment of duty under Section 125(2) would be an integral part of the proceedings relating to confiscation and consequential orders thereon.

9 .This order, however, must be pursuant to a show cause notice and adjudication.

10 .The court was not dealing with the question as to whether sub-section (2) of Section 125 would be applicable even when option to pay fine in lieu of confiscation is not exercised.

11 .Accordingly, we allow the appeal and set aside the order passed by the High Court.

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Fortis Hospital Ltd vs Commr.Of Customs,Import on 24 March, 2015Supreme Court of IndiaFortis Hospital Ltd vs Commr.Of Customs,Import on 24 March, 2015Bench: A.K. Sikri, Rohinton Fali Nariman'REPORTABLE'IN THE SUPREME COURT OF INDIACIVIL APPELLATE JURISDICTIONCIVIL APPEAL NO. 1049 OF 2008FORTIS HOSPITAL LTD.... AppellantVERSUSCOMMISSIONER OF CUSTOMS,IMPORT... RespondentJ U D G M E N TA. K. SIKRI, J.The appellant herein, which is the successor of M/s.Wockhardt Hospital and Heart Institute(referred to as the 'Institute' hereinafter) had a hospital at Bangalore. Sometime in the year 1990,the said Institute imported a Cardiac Catherization Laboratory (known as Angiography system) withits spares/accessories valued at Rs.1,14,23,471/-. The said Institute applied for exemption frompayment of import duty taking shelter under the Notification No. 64/88-cus dated 01.03.1988. Thisnotification provides for exemption on medical equipment imported against Custom DutyExemption Certificate issued by the Director General of Health Services. Apart from the saidcertificate, there are certain other conditions which are mentioned in the notification that need to besatisfied to avail the exemption. These conditions are as under: -"All such hospitals which may be certified by the said Ministry of Health and Family Welfare, ineach case, to be run for providing medical surgical or diagnostic treatment not, only without anydistinction of caste, creed, race, religion or language but also: -(a) free, on an average, to at least 40 per cent of all their outdoor patients; and(b) free to all indoor patients belonging to families with an income of less than rupees five hundredper month, and keeping for this purpose at least 10 per cent of all the hospital beds reserved for suchpatients; and(c) at reasonable charges, either on the basis of the income of the patients concerned or otherwise topatients other than those specified in clauses (a) and (b)."From a bare reading of the aforesaid stipulations, it is clear that these conditions are to be fulfillednot at the time of the import but in future, by the importer while utilising the imported equipment.Indian Kanoon - http://indiankanoon.org/doc/136543724/1Fortis Hospital Ltd vs Commr.Of Customs,Import on 24 March, 2015Therefore, the conditions are continuing in nature.The Institute was not charged any import duty as it had produced requisite certificate dated11.02.1991 issued by the Director General of Health Services, New Delhi. After sometime, theRevenue authorities/respondent herein came to know that the Institute was committing breach ofthe aforesaid conditions, as it had not been providing free diagnostic treatment to at least 40 percent of all its outdoor patients and it was also not giving free treatment to indoor patients havingincome of less than Rs.500 per month and for this purpose, it had not got 10 per cent hospital bedsreserved for such patients. It resulted in issuance of show cause notice to the Institute. Pertinently,this show cause notice dated 12.01.2000 was issued under Section 124 of the Customs Act, 1962(hereinafter referred to as Act) and after stating that the aforesaid breach was allegedly committedby the appellant, in the show cause notice, it was proposed as under: -"16. Therefore, M/s. Wockhardt Hospital & Heart Institute, Bangalore are called upon to show causeto the Commissioner of Customs, Air Cargo Complex, Sahar, Andheri (E), Mumbai-99 as to why: -(a) the medical equipments/spares and accessories as detailed in Annexure of the Show CauseNotice and valued at Rs.1,14,23,471/- should not be confiscated under Section 111(o) of the CustomsAct, 1962.(b) Penalty should not be imposed under Section 112 of the Customs Act, 1962 for the omission andcommission committed by the Wockhardt Hospital & Heart Institute Bangalore."In para 17 of the Show Cause Notice, the Noticee was also asked to show as to why penalty underSection 112 of the Act should not be imposed. The Institute replied to the said Show Cause Noticeand also desired to be heard in person. Personal hearing was accorded to the Institute. It had filedwritten submissions which were also considered. However, the plea of the Institute in the reply filedto the Show Cause Notice was not accepted. Orders dated 11.07.2002 were passed by theadjudicating authority holding that the Institute had, in fact, committed the breach of theNotification No. 64/88 dated 01.03.1988. Accordingly, the goods, viz., the aforesaid medicalequipment was confiscated. The operative portion of order of the confiscation and penalty reads asunder:-"a) I order, the confiscation of the goods valued at Rs.1,14,23,471/- mentioned in the show causenotice, under Section 111(o) of the Customs Act, 1962. The importer may redeem them on paymentof a fine of Rs.1,00,000 (Rs. One lakh only), within thirty days of this order.b) I also direct that the importer shall forthwith pay the duty amounting to Rs.1,65,24,050/-(Rs.One crore sixty five lakhs twenty four thousand and fifty only) in view of the failure to discharge thecontinuing obligation under notification No. 64/88 during the material period.Indian Kanoon - http://indiankanoon.org/doc/136543724/2Fortis Hospital Ltd vs Commr.Of Customs,Import on 24 March, 2015c) I impose a penalty of Rs.25,000 (Rs. Twenty five thousand only) on the importer under Section112(a) of the Customs Act, 1962.d) The proceedings in respect of DGHS are dropped."As is clear from this order, after confiscation of the goods, option was given to the Institute toredeem the said goods on payment of fine of Rs.1 lakhs. In addition, the Institute was also directedto pay the duty amounting to Rs. 1,65,24,050/- "in view of the failure to discharge the continuingobligation under notification No. 64/88 during the material period". Penalty of Rs. 25,000/- underSection 112(a) of the Act was also levied. The Institute challenged the aforesaid order by filing appealbefore the Customs, Excise & Service Tax Appellate Tribunal (hereinafter referred to as 'CESTAT').Since we are concerned with that part of the order vide which the duty was imposed, henceforth wewill confine our discussion to this aspect alone.Before the CESTAT, submission of the Institute was that in the Show Cause Notice nothing wasstated about the payment of duty and as the Show Cause Notice was conspicuously absent in thisbehalf, in the final order, the duty could not have been demanded. It was argued that such an orderwould be violative of the principle of nature justice. The Institute also referred to the provisions ofSection 125 of the Act which gives an option to pay fine in lieu of confiscation. It was argued that asper this provision, option is to be given to the importer and it is left to the importer who has toexercise the same. It would imply that if no such option is exercised, the goods are not to beredeemed and they would remain the property of the Government. In that case, when such anoption is not exercised, no fine is payable and when no such fine is payable, duty could not bedemanded by relying on the provisions of Sub-section (2) of Section 125 of the Act, as such aneventuality has not arisen in the present case because of the reason that the Institute had notexercised the option and had not paid the fine. This contention found favour with the CESTAT andwhile accepting the same, CESTAT discussed the legal position in the following words:"We have carefully considered the rival submissions. We have also perused the case law cited beforeus as well as the judgment of the Hon'ble Supreme Court in the case of CC, Mumbai v. JagdishCancer & Research Centre 2001(132)ELT 257 (SC). It is no doubt true that under Section 125(2) ofthe Customs Act, 1962 when goods are redeemed, duty will have to be paid in addition to the fineimposed in view of confiscation. However, the argument before us is not that only fine is required tobe paid for redemption of the imported goods. The question before us is whether duty is payableeven in the event of the option not being exercised. The decision of the Supreme Court in JagdishCancer & Research Centre cited supra does not address itself to this issue. No such argument wasever raised before the Apex Court. The contention of the learned DR that the conduct of theappellants in use of the imported equipment after import is tantamount to their having exercised theoption of redemption and, therefore, they are liable to pay duty, is not tenable as it is only onadjudication that the option is extended by the adjudicating authority and the option could not havebeen exercised prior to the passing of the impugned order and, therefore, the use of the importedequipment by the appellants; in their Institute cannot amount to their having exercised the option toredeem the goods, which comes at a subsequent stage namely when the impugned order ofadjudication is passed. We therefore hold that the duty demand is not sustainable and accordingly,Indian Kanoon - http://indiankanoon.org/doc/136543724/3Fortis Hospital Ltd vs Commr.Of Customs,Import on 24 March, 2015set aside the same, however, if the absence of any challenge to the confiscation and to the impositionpenalty, both are sustained."In this manner, appeal was allowed holding that demand of duty was not legally sustainable and thatpart of the Order-in-Original passed by the adjudicating authority was set aside.Not satisfied with the aforesaid outcome, the respondent- Revenue challenged the order by filingappeal before the High Court of Bombay. It was argued by the Department that the moment order ofconfiscation is passed with option given to the Institute to redeem the goods on payment of fine, theeventuality comtemplated under Section 125(2) of the Act comes into operation and therefore, in thescheme of things, it was permissible for the Department to charge duty as well. It was also arguedthat when it is found that the Institute had violated the conditions stipulated in Notification No.64/83 dated 01.03.1988, the only conclusion would be that duty was payable by the Institute andtherefore, the Department was well within its right to demand the duty.The High Court, after discussing the respective contentions in detail, accepted the submissions ofthe Department and set aside the order of the CESTAT. The rational given by the High Court iscontained in Para 41 of the impugned judgment which interprets the provisions of Sub-section (2) ofSection 125 of the Act as well reflects the reasoning adopted by the High Court in support of its view.We deem it appropriate to reproduce the same hereinbelow:-"41. We find it difficult to accept the above interpretation of Section 125 (2). It is well established inlaw that the taxing statutes have to be construed strictly and unless the literal meaning leads toanomaly or absurdity, the golden rule of literal interpretation should be adhered to. Literal meaningof Section 125(2) is that, whenever the goods liable to be confiscated under the Customs Act areallowed to be redeemed by giving an option to pay fine in lieu of confiscation imposed under Section125(1), the owner of such goods or the person referred to in section 125(1) shall, in addition to thefine be liable to any duty and charges payable in respect of such goods. In other words, underSection 125(2), the duty payable on the confiscated goods has to be paid on imposition of fine in lieuof confiscation and it is immaterial whether such option is exercised or not."As is clear from the above, according to the High Court, whether option under Section 125(2) of theAct is exercised or not, is immaterial.In order to find out as to whether the High Court is right or CESTAT's interpretation of theprovisions of Section 125(2) of the Act is correct, it would be necessary to peep into the saidprovision along with Section 124 of the Act. These two Sections are worded as follows: "Section 124.Issue of show cause notice before confiscation of goods, etc.- No order confiscating any goods or imposing any penalty on any person shall be made under thisChapter unless the owner of the goods or such person-(a) is given a notice in writing with the prior approval of the officer of customs not below the rank ofan Assistant Commissioner of Customs, informing him of the grounds on which it is proposed toIndian Kanoon - http://indiankanoon.org/doc/136543724/4Fortis Hospital Ltd vs Commr.Of Customs,Import on 24 March, 2015confiscate the goods or to impose a penalty;(b) is given an opportunity of making a representation in writing within such reasonable time asmay be specified in the notice against the grounds of confiscation or imposition of penaltymentioned therein; and(c) is given a reasonable opportunity of being heard in the matter:Provided that the notice referred to in clause (a) and the representation referred to in clause (b) mayat the request of the person concerned be oral.""Section 125. Option to pay fine in lieu of confiscation.- (1) Whenever confiscation of any goods isauthorised by this Act, the officer adjudging it may, in the case of any goods, the importation orexportation whereof is prohibited under this Act or under any other law for the time being in force,and shall, in the case of any other goods, give to the owner of the goods or, where such owner is notknown, the person from whose possession or custody such goods have been seized, an option to payin lieu of confiscation such fine as the said officer thinks fit :Provided that, without prejudice to the provisions of the proviso to sub-section (2) of section 115,such fine shall not exceed the market price of the goods confiscated, less in the case of importedgoods the duty chargeable thereon.(2)Where any fine in lieu of confiscation of goods is imposed under sub- section (1) the owner ofsuch goods or the person referred to in sub- section (1) shall, in addition, be liable to any duty andcharges payable in respect of such goods."It may be seen from the bare reading of the aforesaid Section that under Section 125(1) of the Act,option is given to the importer whose goods are confiscated, to pay the fine in lieu of confiscationand redeem the confiscated goods. Before this action is taken, Show Cause Notice is to be issuedunder the provision of Section 124 of the said Act. This provision pertains to confiscation of goodsand provides procedural safeguards inasmuch as there cannot be any order of confiscating anygoods or imposing any penalty on any person without complying with the procedure contained inSection 124. Section 124 mandates issuance of the Show Cause Notice before passing any such orderand contemplates two actions: first, relating to confiscating of the goods and second, pertaining toimposition of penalty. Pertinently, this action does not deal with payment of import duty at all.It is not in dispute that Show Cause Notice in the instant case was issued under Section 124 of theAct. Once such a Show Cause Notice was issued and as can be seen from the proposed action whichwas contemplated in this provision (as has been taken note of above), it was also confined toconfiscation of the imported machinery and imposition of penalty. Nothing was stated about thepayment of duty. However, in spite of the fact that Show Cause Notice was limited to confiscation ofthe goods and imposition of penalty, the final order which was passed included the direction to paythe customs duty as well. It is clear that when such an action was not contemplated, which evenotherwise could not be done while exercising the powers under Section 124 of the Act, in the finalIndian Kanoon - http://indiankanoon.org/doc/136543724/5Fortis Hospital Ltd vs Commr.Of Customs,Import on 24 March, 2015order there could not have been direction to pay the duty.Notwithstanding the aforesaid position, as pointed out above, the Department is taking shelterunder the provisions of sub-section (2) of Section 125 of the Act. However, on a plain reading of thesaid provision, we are of the view that such a provision would not apply in case where option to payfine in lieu of confiscation is not exercised by the importer. Trigger point is the exercise of a positiveoption to pay the fine and redeem the confiscated goods. Only when this contingency is met, theduty becomes payable. In the present case, admittedly, such an option was not exercised and theconfiscated machinery was not redeemed by the Institute. As a matter of fact, thus, no fine has beenpaid.Mr. K. Radhakrishnan, learned senior counsel appearing for the Department, argued that even if anoption was not exercised, the moment it was stated in the order of the Commissioner that fine isbeing "imposed", sub-section (2) would get attracted. We do not agree with the aforesaid submissionof Mr. Radhakrishnan. The order confiscating the goods has already been reproduced above. Insofaras the payment of fine is concerned, only option was given (and that was only course of action whichcould be visualised under section 125). The order categorically states that "the importer "may"redeem the confiscated goods on payment of fine of Rs.1,00,000 (Rs. One lakh only)"Indubitably, unless an option is exercised, fine does not become payable. Sub-section (2) of Section125 uses the expression "imposed" by stating "where any fine in lieu of confiscation of goods isimposed". In Black law dictionary (Tenth edition), the word 'impose' is defined as "To levy or exact(a tax or duty)". Thus, it has to be a levy or exact which is become payable and has to be paid.Likewise, the word 'impose' is defined by Oxford English Dictionary, as relevant for the purpose ofthe present case, as "Lay or inflict (a tax, duty, charge, obligation, etc.) (on or upon), esp. forcibly;compel compliance with; force (oneself) on or upon the attention etc. of."In view of the above, we cannot agree with the submission of Mr. Radhakrishnan that fine been"imposed" in the present case. The stipulation contained in the adjudicating order was onlycontingent in nature which contingency would have arisen only on exercising the option by theimporter to pay fine in lieu of confiscation and to redeem the goods.As already mentioned above, Section 124 deals with confiscation of goods and penalty and does notdeal with payment of import duty. No doubt, such a payment of import duty becomes payable byvirtue of sub- section (2) of Section 125 but only when condition stipulated in the said provision isfulfilled, namely, fine is paid in lieu of confiscation of goods. When the Department chose to takeaction under Section 124 of the Act, it should have been alive of the situation that the Noticee maynot exercise the option and in such case, duty would not be payable automatically.It is not that the Department is without any remedy. We have gone through the provisions ofnotification No. 64/88 dated 01.03.1988. As pointed out above, importer would be exempted frompayment of import duty on hospital equipment only when the conditions contained in the saidnotification are satisfied. Some of the conditions, as pointed out above, are to be fulfilled in future. Ifthat is not done and the importer is found to have violated those conditions, Show Cause NoticeIndian Kanoon - http://indiankanoon.org/doc/136543724/6Fortis Hospital Ltd vs Commr.Of Customs,Import on 24 March, 2015could always be given under the said notification on payment of duty, independent of the actionwhich is permissible under Section 124 and Section 125 of the Act. It is also important to mentionthat under certain circumstances mentioned in the notification, the importer can be asked toexecute a bond as well. In those cases, action can be taken under the said bond when the conditionscontained therein are violated. Therefore, if the Department wanted the Institute to pay the duty,which may have become payable, it could have taken independent action; de hors Section 124 of theAct, for payment of duty, simultaneously with the notice under Section 124 of the Act or by issuingcomposite notice for such an action. No doubt, it could have waited for option to be exercised by theInstitute under Section 125(1) of the Act as well and in that eventuality, duty would haveautomatically become payable under Section 125(2) of the Act. But when such an option was notexercised, it could have taken separate and independent action by issuing Show Cause Notice to theeffect that the Institute had violated the terms of exemption notification and therefore, was liable topay duty.What is emphasised is that when in the Show Cause Notice issued under Section 124, nothing wasstated about the payment of import duty, there could not have been direction to that effect in thefinal order Further, insofar as Section 125(2) is concerned, the contingency contained therein didnot occur in the present procedure for want of exercise of option to pay fine. We, thus, are of theopinion that the view taken by the CESTAT is correct and the contrary view taken by the High Courtin the impugned judgment is not warranted on the interpretation of Section 125(2) of the Act.High Court is not correct in observing that it is immaterial whether option under Section 125(2) isexercised or not. We would like to point out that the High Court has referred to the judgment in thecase of 'Commissioner of Customs(Import), Mumbai v. Jagdish Cancer & Research Centre' [2001 (6)SCC 483] in support of its conclusion. However, on going through the said judgment, we find thatthe issue with which we are concerned in the present case did not occur for consideration before thecourt in that case at all, as is clear from para 12 of the said judgment, which is reproduced below: -"12. Whenever an order confiscating the imported goods is passed, an option, as provided undersub-section (1) of Section 125 of the Customs Act, is to be given to the person to pay fine in lieu ofthe confiscation and on such an order being passed according to sub-section (2) of Section 125, theperson "shall in addition be liable to any duty and charges payable in respect of such goods". Areading of sub-sections (1) and (2) of Section 125 together makes it clear that liability to pay dutyarises under sub-section (2) in addition to the fine under sub-section (1). Therefore, where an orderis passed for payment of customs duty along with an order of imposition of fine in lieu ofconfiscation of goods, it shall only be referable to sub-section (2) to Section 125 of the Customs Act.It would not attract Section 28(1) of the Customs Act which covers the cases of duty not levied,short-levied or erroneously refunded, etc. The order for payment of duty under Section 125(2) wouldbe an integral part of proceedings relating to confiscation and consequential orders thereon, on theground as in this case that the importer had violated the conditions of notification subject to whichexemption of goods was granted, without attracting the provisions of Section 28(1) of the CustomsAct. A reference may beneficially be made to a decision of this Court reported in Mohan MeakinsLtd. v. CCE wherein it has been observed in para 6: (SCC p.465) "Therefore, there is a mandatoryrequirement on the adjudicating officer before permitting the redemption of goods, firstly, to assessIndian Kanoon - http://indiankanoon.org/doc/136543724/7Fortis Hospital Ltd vs Commr.Of Customs,Import on 24 March, 2015the market value of the goods and then to levy any duty or charge payable on such goods apart fromthe redemption fine that he intends to levy under sub-section (1) of that section."In this view of the matter the objection raised by the Centre that Section 28 of the Customs Actwould be attracted is not sustainable."Obviously, the argument raised in that case predicated on Section 28(1) of the Customs Act and pleawas that notice was not issued by the "competent officer" and was also beyond the time prescribedunder Section 28(1). In that context, the Court dealt with the provisions of Section 125(1) as well as125(2) and observed that order of payment of duty under Section 125(2) would be an integral part ofthe proceedings relating to confiscation and consequential orders thereon. This order, however,must be pursuant to a show cause notice and adjudication. The court was not dealing with thequestion as to whether sub-section (2) of Section 125 would be applicable even when option to payfine in lieu of confiscation is not exercised.Accordingly, we allow the appeal and set aside the order passed by the High Court. We make it clearthat it would still be open to the Department to take appropriate independent action against theappellant for payment of import duty, in case it is still within period of limitation............................, J.[ A.K. SIKRI ] ..........................., J.[ ROHINTON FALI NARIMAN ] New Delhi;March 24, 2015.Indian Kanoon - http://indiankanoon.org/doc/136543724/8

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1 .Appellant had a hospital at Bangalore. 2 .It imported a Cardiac Catherization Laboratory and applied for exemption from payment of import duty. 3 .It was not charged any import duty as it had produced requisite certificate issued by the Director General of Health Services, New Delhi. 4 .Revenue came to know that the Institute was committing breach of conditions, in not providing free diagnostic treatment to at least 40 per cent of all its outdoor patients. 5 .An order for confiscation of gods, and levy of duty and penalty was passed againstthe Institute. 6 .CESTAT set aside the duty demand. 7 .High Court set aside CESTAT's order.On appeal, the Supreme Court held as under: 8 .The Court dealt with the provisions of Section 125(1) as well as 125(2) and observed that order of payment of duty under Section 125(2) would be an integral part of the proceedings relating to confiscation and consequential orders thereon. 9 .This order, however, must be pursuant to a show cause notice and adjudication. 10 .The court was not dealing with the question as to whether sub-section (2) of Section 125 would be applicable even when option to pay fine in lieu of confiscation is not exercised. 11 .Accordingly, we allow the appeal and set aside the order passed by the High Court.

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Duty demand not pursuant to show cause notice and adjudication set aside