SC reins in Customs department yet again; this time in ABG Shipyard CIRP case

The Supreme Court in its order on 26 August 2022 held that the Insolvency and Bankruptcy Code would prevail over the Customs Act, and once moratorium is imposed in terms of sections 14 or 33(5) of the Code, the customs authority only has a limited jurisdiction to assess/determine the quantum of customs duty and other levies. The apex court made this observation while hearing an appeal by Sundaresh Bhatt, Liquidator of ABG Shipyard (vs Customs Department) against an order of NCLAT which directed the liquidator to release or dispose of warehouse goods as per applicable provisions of Customs Act by the Proper Officer.

The Supreme Court in its order said that the Customs Act and the IBC act in their own spheres, and in case of any conflict, the IBC overrides the Customs Act.

It said that the authorities can only take steps to determine the tax, interest, fines or any penalty which is due. However, the authority cannot enforce a claim for recovery or levy of interest on the tax due during the period of moratorium.

The court also said that the customs authority could only initiate assessment or re-assessment of the duties and other levies, but they cannot transgress such boundary and proceed to initiate recovery in violation of sections 14 or 33(5) of the IBC.

The court further said the customs authority does not have the power to initiate recovery of dues by means of sale/confiscation, as provided under the Customs Act. After such assessment, the customs authority has to submit its claims (concerning customs dues/operational debt) in terms of the procedure laid down, in strict compliance of the time periods prescribed under the IBC, before the adjudicating authority.

The apex court reiterated that the interim resolution professional, resolution professional or the liquidator, as the case may be, has an obligation to ensure that assessment is legal, and he has been provided with sufficient power to question any assessment, if he finds the same to be excessive.

Details of the case

ABG Shipyard was in the business of shipbuilding prior to the initiation of corporate insolvency   proceedings   against   it.   As   a   part   of   its   business enterprise, it used to regularly import various materials for the purpose   of   constructing   ships   which   were   to   be   exported   on completion. Some of these goods were stored by the Corporate Debtor in Custom Bonded Warehouses in Gujarat and Container Freight Stations in Maharashtra. Bills of entry for warehousing were submitted at the relevant time.

ABG Shipyard also took the benefit of an Export Promotion Capital Goods Scheme (EPCG Scheme) and   was   granted   a   license   under   the   said scheme (EPCG License) with respect to the said warehoused goods. 

On 01 August 2017, the National Company Law Tribunal, Ahmedabad passed an order commencing the Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor, and the   Bhatt was   appointed   as   the   Interim   Resolution Professional.  

In   the   same order, the   NCLT   also   declared   a moratorium under Section 13(1)(a) of the IBC.  On 21 August 2017, the IRP informed the Customs department of the initiation of CIRP and sought custody of the warehoused goods and requested the respondent not to dispose of or auction the same.

On 29 March 2019, for the first time, issued a notice to the Corporate Debtor regarding non-fulfilment of export obligations in terms of the EPCG license demanding customs duty   of   Rs.   17,13,989 with   interest.  

From   02 April 2019   to 07 April 2019, the Customs department issued five different demand notices to   the   Corporate   Debtor   regarding   non¬fulfillment   of   export obligations under different EPCG licenses for various amounts.

Also Read: Here are some fraudulent transactions by ABG Shipyard uncovered during insolvency process