Calcutta High Court: Bona Fide Purchaser of Transferable DFIA Licence Cannot Be Saddled With Customs Duty for Exporter’s Fraud

Aadrikaa Legal Services (ALS)- Law I Litigation I Arbitration

Date: 22.09.2026

Calcutta High Court: Bona Fide Purchaser of Transferable DFIA Licence Cannot Be Saddled With Customs Duty for Exporter’s Fraud

In a significant ruling concerning Duty Free Import Authorisation (DFIA) licences and the liability of bona fide transferees, the Calcutta High Court has held that a purchaser who acquires a transferable duty-free import licence for value and without notice of any fraud or irregularity committed by the original licence holder cannot be made liable for customs duty, interest and redemption fine when the licence has never been cancelled by the competent authority.

A Division Bench comprising Justice Rajarshi Bharadwaj and Justice Sudip Deb allowed the appeal filed by Comet Overseas Pvt. Ltd. and quashed a customs duty demand of ₹22,87,654.95, the consequential interest and a ₹15 lakh redemption fine that had earlier been sustained by CESTAT.

Comet Overseas Purchased Transferable DFIA Licence for ₹14.51 Lakh

• Comet Overseas Pvt. Ltd., engaged in export-import bulk commodity trading, was a subsequent purchaser and transferee of DFIA Licence No. 0210100847 dated 16 May 2007.
• The licence was one among 23 DFIA licences obtained by Gemini Overseas Ltd. from DGFT during 2007-08 and 2008-09 under Notification No. 40/2006-Cus dated 1 May 2006, permitting duty-free import of specified silk products.
• Three of those licences were subsequently endorsed as transferable by the Regional Authority after certification of fulfilment of export obligation. Comet Overseas purchased the licence in question for ₹14,51,795 through proper banking channels, through Customs House Agent M/s S.K. Saha & Co.
• Acting upon the licence, Comet imported Mulberry Raw Silk Yarn duty-free under Bill of Entry No. 437910 dated 22 October 2008 at Kolkata Port. The assessable value was approximately ₹74.03 lakh, while the customs duty foregone amounted to ₹22,87,654.95.

DRI Investigation Found Fraud by Original Licence Holder

• The controversy arose after intelligence gathered by the Directorate of Revenue Intelligence (DRI) indicated irregularities in the manner in which Gemini Overseas had discharged its export obligation.
• According to the judgment, Gemini Overseas had exported fabric made of Noil Yarn while declaring it as Natural Silk Fabric predominantly made of Mulberry Raw Silk.
• Consignments were intercepted at N.S. Dock, Kolkata and at the factory of Eastern Silk Industries Ltd. in Falta SEZ in November 2008. Testing by the Central Silk Board indicated that the fabric consisted of Noil Yarn mixed with cotton.
• Gemini Overseas subsequently admitted by letter dated 2 January 2009 that the description contained in its export documents was incorrect and that benefits not otherwise due could have been availed. It also expressed willingness to pay the duty foregone in relation to the three transferable licences.

Customs Issued Show Cause Notice to Comet Overseas

• A Show Cause Notice dated 11 May 2012 was issued jointly to Comet Overseas, Gemini Overseas and other persons.
• Customs proposed recovery of ₹22,87,654.95 under the erstwhile proviso to Section 28(1), read with Section 28(4) of the Customs Act, 1962, along with interest. Confiscation was proposed under Section 111(o) and penalty under Section 112.
• Importantly, the High Court noted that the SCN, insofar as Comet Overseas was concerned, did not contain any allegation of collusion, wilful misstatement or suppression of facts on its part.
• The Order-in-Original dated 28 February 2014 nevertheless confirmed the duty demand, imposed a ₹15 lakh redemption fine under Section 125, and imposed a penalty of ₹10 lakh under Section 112.

CESTAT Removed Penalty but Sustained Duty and Redemption Fine

• On appeal, CESTAT partly granted relief to Comet Overseas.
• The Tribunal set aside the ₹10 lakh penalty after finding that Comet had no knowledge of the nature of the goods used and exported by Gemini Overseas/Eastern Silk Industries. However, CESTAT sustained the customs duty demand, interest and ₹15 lakh redemption fine.
• Comet Overseas therefore approached the Calcutta High Court.

Core Question: Can an Innocent Transferee Be Liable for Original Exporter’s Fraud?

The High Court had admitted the appeal on the following substantial question of law:

“Whether a bona fide purchaser of duty-free import licence for value can be required to pay duty, interest and redemption fine in respect of his import, when he has no notice of any irregularity on the part of the exporter who had obtained such licence and the licence is not cancelled by the authorities?”

This placed the legal status of a bona fide transferee for value without notice at the centre of the dispute.

Comet Overseas: Fraud Makes Licence Voidable, Not Automatically Void

• The appellant argued that the DFIA licence had been genuinely issued by DGFT and the alleged fraud occurred later, at the stage of certification of fulfilment of export obligation by Gemini Overseas.
• Relying on the Supreme Court judgments in East India Commercial Co. Ltd., Calcutta v. Collector of Customs, Calcutta and Collector of Customs, Bombay v. Sneha Sales Corporation, Comet argued that even a licence obtained through fraud is voidable rather than automatically void, and continues to operate until cancelled in accordance with law.
• The appellant also relied upon Taparia Overseas (P) Ltd. v. Union of India to contend that a transferee who purchases a duty-free licence for valuable consideration through legitimate banking channels and without notice of the original holder’s fraud should not be saddled with duty, interest and redemption fine.

Revenue: Fraud Went to Foundation of DFIA Benefit

• Customs argued that Gemini Overseas’ fraud went to the foundation of the licence because the exporter had falsely declared the nature of goods exported for fulfilling its export obligation.
• Revenue relied upon ICI India Ltd. v. Commissioner of Customs (Port), Calcutta and Munjal Showa Ltd. v. Commissioner of Customs & Central Excise (Delhi-IV) to contend that an instrument tainted by fraud could not confer exemption upon a subsequent holder merely because that holder was personally innocent.
• Revenue also relied upon Tata Iron and Steel Co. Ltd. v. Commissioner of Customs, Mumbai on the extended period of limitation and Commissioner of Customs, Hyderabad v. Pennar Industries Ltd. on compliance with conditions of exemption notifications.

Genuine Licence Different From Forged or Non-Existent Scrip: High Court

• A crucial distinction drawn by the High Court was between a genuinely issued licence subsequently affected by fraud and an instrument that was forged and never issued by the competent authority at all.
• The Court observed that ICI India and Munjal Showa involved forged instruments—DEPB scrips and Transfer Release Advices—which were never validly issued by the competent authority.
• Comet Overseas’ case was materially different. The DFIA licence had been genuinely issued by DGFT and validly endorsed as transferable by the Regional Authority. The alleged fraud occurred in relation to the certification of export obligation by the original licence holder.
• The High Court therefore declined to mechanically apply the proposition that “fraud vitiates everything” to an innocent subsequent purchaser.

Fraudulent Licence Remains Effective Until Cancelled

• The Court relied significantly upon the principles laid down in East India Commercial and Sneha Sales Corporation.
• It held that a licence affected by fraud or misrepresentation is not automatically rendered non-est. Rather, such a licence remains effective in law until it is avoided or cancelled in the manner prescribed by law.
• A decisive fact in Comet Overseas’ favour was that DFIA Licence No. 0210100847 had never been cancelled by DGFT or the Regional Authority.
• The Court regarded this as a material and unrebutted circumstance demonstrating that the licence remained a valid and subsisting instrument when Comet made its import.

Bona Fide Purchaser for Value Stands on Different Footing

• The High Court also gave substantial weight to Comet Overseas’ status as a bona fide purchaser for value without notice.
• The company had paid ₹14,51,795 for the licence through banking channels. More importantly, CESTAT itself had already found that Comet had no knowledge of the irregularities committed by Gemini Overseas or Eastern Silk Industries. Revenue had not challenged that finding.
• Applying Taparia Overseas, the High Court held that an innocent transferee stands on a different footing from the person who committed or participated in the fraud.
• The Court observed that the maxim “fraud vitiates everything” does not, without more, extend to defeat the rights of such a transferee.

Pennar Industries Distinguished

• The High Court also rejected Revenue’s reliance upon Commissioner of Customs, Hyderabad v. Pennar Industries Ltd., (2015) 10 SCC 581 / 2015 (322) E.L.T. 402 (S.C.).
• It explained that Pennar Industries concerned the original importer’s own failure to fulfil the conditions of an exemption notification.
• It did not deal with the distinct question of whether liability arising from the default of a third party could subsequently be imposed upon an innocent transferee who purchased the licence for value without knowledge of that default.

Tata Iron & Steel Decision Did Not Alter the Result

• The Court similarly declined to treat Tata Iron and Steel Co. Ltd. v. Commissioner of Customs, Mumbai, 2015 (319) E.L.T. 546 (S.C.) as controlling.
• It observed that the reported decision was a brief order and did not clearly disclose whether the transferee in that case occupied the same position as Comet Overseas—namely, a bona fide purchaser for value without notice.
• The Court therefore regarded its precedential weight on the facts before it as limited and preferred the reasoning in East India Commercial, Sneha Sales Corporation and Taparia Overseas.

Limitation Argument Not Independently Decided

• Comet Overseas had also argued that the extended limitation period under Section 28 could not have been invoked because the SCN contained no allegation of collusion, wilful misstatement or suppression against it.
• The High Court, however, noted that no substantial question of law concerning limitation had been framed when the appeal was admitted. It therefore declined to decide limitation as an independent ground at the final hearing.
• Nevertheless, the Court expressly recorded that the SCN contained no allegation of collusion, wilful misstatement or suppression against Comet Overseas and treated that fact as relevant to its overall assessment, without independently adjudicating the limitation issue.

Calcutta High Court Rules in Favour of Comet Overseas

• The High Court ultimately held that because the DFIA licence had never been cancelled, and because the fraud attributable to Gemini Overseas arose at the export-obligation certification stage rather than at the original issuance of the licence, the licence had to be treated as voidable rather than void on the record before it.
• Since Comet Overseas was an unimpeached bona fide purchaser for value without notice, the Court held that it could not be fastened with customs duty, interest and redemption fine arising from a third party’s fraud of which it had no knowledge.
• The substantial question of law was accordingly answered in favour of Comet Overseas and against the Revenue.

₹22.87 Lakh Duty Demand and ₹15 Lakh Redemption Fine Quashed

The High Court allowed Comet Overseas’ appeal and set aside CESTAT’s order dated 22 December 2015 to the extent that it had sustained:

• Customs duty: ₹22,87,654.95
  Interest: Consequential interest on the duty demand
  Redemption fine: ₹15,00,000
• All three were quashed.
• CESTAT’s earlier decision setting aside the ₹10 lakh penalty under Section 112 of the Customs Act remained undisturbed because Revenue had not challenged that part of the Tribunal’s order.

Key Takeaway

The ruling provides important protection to bona fide purchasers of transferable DFIA licences. On the facts before it, the Calcutta High Court drew a clear distinction between a forged/non-existent instrument and a licence genuinely issued by DGFT and validly endorsed as transferable but subsequently affected by fraud attributable to the original exporter. Where the transferee purchased such a licence for value without notice of the irregularity, and the competent authority never cancelled the licence, the Court held that the transferee could not be saddled with the duty, interest and redemption fine arising from the original licence holder’s fraud.

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Source: Calcutta High Court

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Ravi Shekhar Jha – Advocate, Bar Council of Delhi