CESTAT: No Evidence Of Mala Fide Misclassification; Penalties On Company Officials Set Aside Despite Law Allowing Action Against Both Firm & Employees
Pranav B Prem
The Chennai Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), comprising P. Dinesha (Judicial Member) and M. Ajit Kumar (Technical Member), has ruled that while the law permits imposition of penalties on both a company and its employees for the same act of misdeclaration, such liability requires clear evidence of an individual’s active role with criminal intent. In the absence of such evidence, the Tribunal set aside penalties imposed on the Managing Director and Deputy General Manager of M/s Neoteric Informatique Ltd.
Background of the Case
The appellants, Paras H. Shah (Managing Director) and Balraj Virdi (Deputy General Manager), faced penalties of ₹5,00,000 each under Section 112(a) of the Customs Act, 1962. The case arose from imports of “External and Internal TV Tuners” from China. These were declared as “accessories of computers” under CTH 8473 3099 at nil rate of Basic Customs Duty (BCD) by claiming exemption under Notification No. 24/2005-Cus dated 01.03.2005.
Customs authorities alleged that the goods were in fact “Set-top boxes which have a communication function” falling under CTH 8528 7100, attracting 10% BCD. It was alleged that the classification was deliberately misdeclared to evade payment of customs duty.
After investigation, a Show Cause Notice was issued proposing reclassification and demanding differential duty, along with penalties on the company and its officers. The Adjudicating Authority reclassified the goods under CTH 8528 7100 and imposed the impugned penalties. While the company’s appeal stood abated due to liquidation and approval of a resolution plan by the NCLT, the personal appeals of Shah and Virdi continued.
Appellants’ Arguments
The appellants contended that:
A penalty cannot be simultaneously imposed on both the company and its employees for the same act unless there is evidence of personal culpability.
There was no evidence that either of them was involved in misdeclaration or suppression.
The classification under CTH 8473 3099 was based on a bona fide belief, supported by technical understanding of the product.
Merely having a difference of opinion on classification cannot be equated to misdeclaration with intent to evade duty.
They relied on a prior decision of the Mumbai Bench in Neoteric Informatique Ltd. v. Commr. of Customs (Import), Nhava Sheva, where similar goods were accepted under CTH 8473.
Department’s Stand
The Revenue maintained that as key managerial personnel, both appellants were responsible for the operations and decision-making of the company, including classification of imported goods. Their active role justified penalties under Section 112(a).
Tribunal’s Observations
The Bench first examined the legal principle—citing Section 140 of the Customs Act (akin to Section 9AA of the Central Excise and Salt Act, 1944)—that offences committed by a company can also attract liability for individuals responsible for its conduct, provided there is evidence of their involvement. It referred to judicial precedents including Prakash Metal Works v. CCE and the Supreme Court’s ruling in Ravindranatha Bajpe v. Mangalore SEZ Ltd. to note that such liability is not automatic and must be based on proof of guilty intent.
Turning to the facts, the Tribunal observed:
The Show Cause Notice did not allege that the appellants knew the goods were classifiable under CTH 8528 7100 and still misdeclared them under CTH 8473 3099.
The only evidence cited was statements recorded under Section 108 of the Customs Act, where Shah admitted he was aware of the classification process but not technically conversant, while Virdi explained the technical grounds for treating the TV Tuners as computer accessories.
No documentary evidence showed mala fide intent or that the appellants acted with a “negative mental element” to misclassify the goods.
The Bench criticised the department’s approach, remarking that classification is not a “guessing game” where the importer must match the eventual classification of the assessing officer or face penalties. Citing the Supreme Court’s decision in Aban Loyd Chiles Offshore Ltd. v. CCE (2006), it reiterated that “willful” misstatement requires a conscious and deliberate intent to evade duty, which was absent in this case. The Tribunal further noted that in interpretative disputes, especially where there is a plausible classification claim, penalties under Section 112(a) cannot be sustained unless mala fides are proven.
Holding that there was no evidence of deliberate misclassification by either appellant, the CESTAT set aside the penalties imposed and allowed the appeals with consequential relief. It clarified that while both a company and its employees can be penalised for the same act under the law, such action must be backed by cogent proof of personal involvement and intent.
Appearance
Counsel For Appellant: Madan G, Advocate
Counsel For Respondent: Anandalakshmi Ganeshram
Cause Title: Paras H Shah V. Commissioner of Customs
Case No: Customs Appeal No. 40237 of 2015
Coram: P. Dinesha [Judicial Member], M. Ajit Kumar [Technical Member]
