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Case Name: M/s Embio Limited vs. Director General of Foreign Trade & Ors.

Case Number: Civil Appeal No. 6394 of 2024 (Arising out of Special Leave Petition (C) No. 4974 of 2021)

Date: May 13, 2024

Quorum: Justice Abhay S. Oka, Justice Ujjal Bhuyan

FACTS OF THE CASE

M/s Embio Limited, formerly known as Emmellen Biotech Pharmaceuticals Limited, amalgamated with Karnataka Malladi Biotics Limited (Karnataka Biotics) under a Bombay High Court order dated March 24, 2009. Karnataka Biotics had obtained an Export Promotion Capital Goods Licence, which allowed it to import capital equipment at a reduced customs duty rate in exchange for exporting finished goods worth USD 2,59,948 within five years. Karnataka Biotics imported goods and commenced production but was declared a sick unit by the Board for Industrial Finance and Reconstruction (BIFR) on August 11, 1999. A rehabilitation scheme for Karnataka Biotics was sanctioned by BIFR on June 3, 2003.

On April 3, 2002, the Commissioner of Customs issued a demand notice to Karnataka Biotics for Rs. 5,38,525/- due to non-fulfillment of the export obligation. This amount was partially recovered by enforcing a bank guarantee. On July 16, 2004, a penalty of Rs. 23,38,882/- was imposed on Karnataka Biotics for non-fulfillment of the export obligation. Appeals against this penalty were dismissed. Karnataka Biotics filed a Writ Petition in 2007 challenging the penalty. After amalgamation, the petition was pursued by the new entity but was withdrawn with liberty to file a fresh petition. M/s Embio Limited then filed a fresh Writ Petition, which was dismissed on November 14, 2017, on the grounds that the earlier petition was withdrawn without reserving any liberty. A subsequent Writ Appeal was also dismissed.

ISSUES

• Whether the penalty of Rs. 23,38,882/- imposed under Section 11(2) of the Foreign Trade (Development and Regulation) Act, 1992 (FT Act) for non-fulfillment of export obligations was valid.
• Whether the rehabilitation scheme sanctioned by the BIFR, which included a waiver of customs duty, also implied a waiver of penalties for non-fulfillment of export obligations.
• Whether the dismissal of the appellant’s fresh Writ Petition by the Karnataka High Court was justified, considering that the original Writ Petition filed by Karnataka Biotics was withdrawn with explicit liberty to file a fresh petition on the same cause of action.
• Whether the non-fulfillment of export obligations constituted a contravention under Section 11(2) of the FT Act, thereby justifying the imposition of the penalty.

LEGAL PROVISIONS

Article 226 of the Constitution of India:

• This Article empowers High Courts to issue certain writs for the enforcement of any of the rights conferred by Part III (Fundamental Rights) and for any other purpose. The appellant filed a writ petition under this Article to challenge the penalty imposed.

Foreign Trade (Development and Regulation) Act, 1992 (FT Act):

• Section 11(2): This provision allows for penalties when any export or import is made in contravention of the Act, any rules, or orders made thereunder, or the foreign trade policy. The penalty can be not less than ten thousand rupees and not more than five times the value of the goods or services in respect of which any contravention is made or attempted to be made.

Sick Industrial Companies (Special Provisions) Act, 1985 (SICA):

• Section 3(1)(o): Defines a sick industrial company.
• Section 18: Deals with the sanctioning of schemes for the rehabilitation of sick industrial companies by the Board for Industrial and Financial Reconstruction (BIFR).

Export Promotion Capital Goods (EPCG) Scheme:

• This scheme allows import of capital goods at concessional rates of customs duty, subject to an obligation to export finished goods of a certain value within a specified period. Non-fulfillment of this obligation was central to the penalty imposed on Karnataka Biotics.

CONTENTIONS OF THE APPELLANT

The appellant argued that the rehabilitation scheme sanctioned by the BIFR included a waiver of customs duty of Rs. 33.30 lakhs due to non-fulfillment of export obligations. They contended that this waiver implied there should be no penalty imposed for the same reason. The appellant contended that the Karnataka High Court, in its order dated December 13, 2013, had expressly granted Karnataka Biotics liberty to withdraw the initial Writ Petition and file a fresh petition on the same cause of action. This liberty was ignored by the Single Judge and the Division Bench when they dismissed the fresh Writ Petition and the subsequent appeal. The appellant argued that the penalty imposed under Section 11(2) of the FT Act was invalid because this section applies to contraventions involving the making or attempting to make exports or imports in violation of the Act, rules, or orders. The non-fulfillment of export obligations under the licence did not fall under the contraventions specified in Section 11(2), as there was no allegation of making or attempting to make any export or import in contravention of the FT Act. The appellant asserted that the Order-in-Original imposing the penalty was illegal because the non-fulfillment of the export obligation did not constitute a contravention that warranted a penalty under the FT Act. They claimed that the penalty was imposed without proper legal basis. The appellant referred to various decisions from the High Courts of Gujarat and Delhi, which supported their contention that non-fulfillment of export obligations should not lead to penalties under Section 11(2) of the FT Act. These contentions formed the basis of the appellant’s argument that the penalty imposed was unjust and that the orders of the learned Single Judge and Division Bench dismissing their petitions were incorrect.

CONTENTIONS OF THE RESPONDENT

The respondents argued that while the rehabilitation scheme sanctioned by the BIFR included a waiver of customs duty, it did not provide for a waiver of penalties that could be imposed for non-fulfillment of export obligations. The respondents emphasised that the waiver in the rehabilitation scheme specifically pertained to customs duty and interest, not penalties under the FT Act. The respondents contended that Karnataka Biotics had contravened the terms of the Export Promotion Capital Goods (EPCG) Licence by failing to fulfil the export obligation. As a result, the imposition of the penalty was justified under the FT Act for this breach of the licence terms. The respondents maintained that the penalty imposed under Section 11(2) of the FT Act was valid. They argued that the non-fulfillment of the export obligation constituted a contravention under the FT Act, rules, or orders made thereunder, or the foreign trade policy, thereby justifying the penalty. The respondents submitted that all procedural requirements had been followed before imposing the penalty. A show-cause notice had been issued, and Karnataka Biotics had been given the opportunity to present their case, fulfilling the due process. The respondents pointed out that the initial Writ Petition filed by Karnataka Biotics was withdrawn without explicitly reserving any liberty to file a fresh petition. They argued that this procedural lapse meant that the subsequent Writ Petition filed by the appellant was not maintainable, as it re-agitated issues that had already been withdrawn. The respondents also highlighted that despite the amalgamation of Karnataka Biotics with Emmellen Biotech Pharmaceuticals Limited, the obligations under the original EPCG licence and the associated penalties for non-compliance remained valid and enforceable against the amalgamated entity, M/s Embio Limited. These contentions formed the basis of the respondents’ argument that the penalty imposed was legally sound and that the decisions of the learned Single Judge and Division Bench to dismiss the appellant’s petitions were correct and should be upheld.

COURT’S ANALYSIS AND JUDGEMENT

The Supreme Court noted that the first error committed by both the learned Single Judge and the Division Bench was the finding that the initial Writ Petition filed by Karnataka Biotics was withdrawn without seeking liberty to file a fresh petition. The court clarified that the Division Bench of the Karnataka High Court had, in its order dated December 13, 2013, expressly granted permission to withdraw the Writ Petition with liberty to file a fresh petition on the same cause of action. This explicit liberty was recorded in paragraph 4 of the order, which both lower courts overlooked.

The court carefully examined the rehabilitation scheme sanctioned by BIFR, which provided for a waiver of customs duty of Rs. 33.30 lakhs due to non-fulfillment of export obligations. However, the waiver pertains only to customs duty and interest accrued, not to any penalties imposed under the FT Act. Therefore, the waiver in the rehabilitation scheme did not extend to the penalty imposed by the third respondent.

The Supreme Court scrutinised Section 11(2) of the FT Act, which pertains to penalties for making or attempting to make exports or imports in contravention of the Act, rules, orders, or foreign trade policy. The court noted that there was no allegation against Karnataka Biotics of making or attempting to make any export or import in contravention of these provisions. The issue was the failure to fulfil the export obligation under the licence, which did not constitute a contravention covered by Section 11(2). Since Section 11(2) is a penal provision, it must be strictly construed. The court found that the penalty imposed under this section was not justified as the alleged contravention did not fall within its scope.

Based on the analysis, the Supreme Court concluded that the penalty imposed was not legally sustainable. The court set aside the impugned judgments and orders of the learned Single Judge and the Division Bench of the Karnataka High Court. Additionally, the court quashed the Order-in-Original dated July 16, 2004, by which the impugned penalty was imposed. The appeal was allowed, and the penalty of Rs. 23,38,882/- was annulled. The judgement was delivered by Justices Abhay S. Oka and Ujjal Bhuyan, allowing the appeal with no orders as to costs.

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Judgement Reviewed by- Shruti Gattani

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