ABDUL BASIT CHAUDHRY, MEMBER TECHNICAL-I.----By this judgment, we intend to dispose of Customs Appeals Nos.K-374 of 2011 and K-385 of 2011 filed by Appellants, against the Order-in- Appeals Nos.4854 and 4851/2010 dated 11.01.2011 passed by the Collector of Customs (Appeals), Karachi. These appeals have identical issue of laws and facts, therefore, being heard dealt with and disposed of simultaneously though this common order in the light of the judgment of the Honorable High Court of Sindh in Customs Reference No.157 of 2008, S.M. Naqi son of Syed Muhammad Hussain, Karachi v. Collector of Customs (Adj-1) and others.
2. Since these two (02) appeals are based on similar facts and questions of law, therefore, needless to reproduce facts of each case separately, hence for reference the fact of Appeal No. K-374/2011 are taken into consideration for decision, wherein, facts of the case are that the Directorate General, Post Clearance Audit (PCA), conducted audit of the accounts of the appellant for the period from July, 2006 to November, 2009, during 05.11.2009 to 12.11.2009. On scrutiny of record it was revealed that during the period from 2-1-2009 to 4-11-2009, ninety (90) consignments containing one hundred two (102) containers, released by MCC, PaCCS against IB-GDs of the appellant's Bonded Warehouse at Korangi, Karachi filed through M/s. Classic Shipper, CJA; M.O. 2638 had not reached M/s. EDF Bonded Warehouse, Korangi, Karachi in violation of procedures prescribed under Chapter-X of the COO 12/2002 dated 15.06.2002 read with the relevant provisions of Chapter XI of the Customs Act, 1969. The said offence falls in the purview of Sections 32 and 32A of the Customs Act, 1969 punishable under the relevant provisions of Section 156 ibid. On assessment of the GDs, the amount of duty and taxes involved on the above missing/unaccounted consignments was stated to be Rs.384.624 million. The audit of record of the appellant further revealed that duty free Imported goods, which were meant for sale from Sales Outlets in the International Lounges of the Karachi Airport, to bona fide international passengers arriving, departing or in transit and for sale to incoming passengers from bonded sales outlet (City Outlet), were actually sold to the traders. The documents titled as "market customers wise sales details reports", for the period from July 2006 to November 2009, (year wise) were retrieved during audit from the appellant's computer system against a proper acknowledgment in terms of Section 168 of the Customs Act, 1969, which confirmed the unlawful sales to market customers in contravention of the prescribed under Chapter X of the CGO 12/2002 dated 15.06.2002 read with the relevant provisions of Chapter IX of the Customs Act, 1969. Random verification of passport record of the passengers in whose names the goods were sold against prescribed invoices, was got conducted from FIA (Immigration), Karachi which confirmed that the goods had been sold in the name of those passengers who either had not arrived in the country at all or their arrival did not match with the time period permissible for purchase under the prescribed Rules. Further, the above stated unlawful sales were verified through customers/parties cheques and bank deposit slips of the appellant record during the audit, party ledgers of the market customers and bank ledgers retrieved from the appellant's computer system during audit as well as from his bank statements against account No.118038 maintained with the Habib Metropolitan Bank, Business Avenue Branch, Shahrh-e-Faisal, Karachi.
The above said market sales had also been established through random verification of the customers of EDF, who made payments to EDF against cheques, on the basis of information obtained from banks. The said offence falls in the purview of Sections 32 and 32A of the Customs Act, 1969 punishable under the relevant provisions of Section 156 ibid. Moreover, a consignment of cigarette was returned on 13.11.2009, containing 360 boxes of cigarettes of foreign origin each containing 50 cartons were brought to the appellant's Warehouse at Korangi without any documents and off-loaded in the premises. The said consignment was, therefore, seized by the staff of the Preventive Collectorate. The goods as per consignment CRN No. 118877231SCZU 7963072 dated 27.10.2009 imported by the appellant. All concerned were charged accordingly for misappropriating and unlawfully disposing the goods and adjudicating officer held vide the impugned order that the charges against the appellant had been established.
3. Being aggrieved and dis-satisfied with the Order-in-Original No. 122/2020, the appellant filed appeal before Collector of Customs (Appeals), Karachi vide impugned Order-in-Appeal No.4854/2010 dated 1I.01.2011 rejected the same. Operative part of the impugned Order-in-Appeal is reproduced as under; "I have examined the entire case record and given very careful consideration to the arguments advanced before me. In terms of the provisions of law contained in section 195-B of the Customs Act, 1969 an appeal filed with Collector (Appeals) cannot be entertained unless the appellant deposits the adjudged amount of duty/ taxes and/or penalty. The aforesaid provisions of law are reproduced as under for ready reference:- "195-B. Deposit, pending appeal, of duty demanded or penalty levied. Where, in any appeal under this Chapter the decision or order appealed against relates to any duty demanded in respect of goods which are not under the control of the customs authorities or any penalty levied under this Act, the person desirous of appealing against such decision or order shall, pending the appeal, deposit with the proper officer the duty demanded or the penalty levied Provided that where in any particular case the Collector (Appeals) or the Appellate Tribunal is of the opinion that he deposit of duty demanded or penalty levied would cause undue hardship to such person, the Collector (Appeals) or as the case may be, the Appellate Tribunal may dispense with such deposit subject to such conditions as he, or it, may deem fit to impose so as to safeguard the interest of revenue.
Provided further that an order dispensing with such deposit shall, without effecting the appeal, cease to have effect on the expiration of a period of six months following the day on which it is made unless the appeal is finally decided earlier and nothing in the order dispensing with such deposit which as ceased to have effect shall debar the appropriate officer to recover the amount of the duty demanded or penalty levied It is thus clear that deposit of the adjudged amount of duty/taxes as well as penalty is a mandatory condition for proceeding ahead with an appeal unless the deposit of duty/taxes and/or penalty is dispensed with by the Collector (Appeals) in terms of the first proviso to section 195-B of the Act. Since no reason for dispensing with deposit of the adjudged amount of duty/ taxes of Rs.751.95 million exists in this case and, in fact the appellant's consultant has not pleaded for any such dispensation. I rule that any such order would cause hardship to the Exchequer. Since the appellant has not deposit the aforesaid adjudged amount, 1 have been left with no option except for rejecting the appeal for non compliance of the provisions of Section 195-B of the Customs Act, 1969. Ordered accordingly."
4. Being aggrieved with this order, these appeals have been filed, inter alia, on the grounds given in the memos. of appeals as well as additional submissions and placed on record. Respondents also submitted the parawise comments, which are taken on record.
5. Heard both the sides and examined the case record. Brief fact of the case are that a Duty Free Shop licenses were granted to M/s. EDF Services (Pvt.) Limited, purportedly, a company operating Duty Free Shop in several countries. Three licenses were granted with the Face Values of Rs. 57.45 million, Rs.61 million and Rs.61.0 million meaning thereby the goods involving duty/taxes more than Rs.179.45 million could not be allowed inbonding under the said licenses at any point of time.
However, the total evasion has been calculated to be Rs. 750.95 million which is much higher than the Face Value of these licenses. It simply means that in-bonding was being allowed without ensuring that already inbonded goods have been ex-bonded and accounted for, as per laid down procedure and law. It has been observed by the Bench that the operations of the licensee continued unchecked for several years without safe guarding the revenue involved. Most importantly, no encashable guarantees as prescribed under the relevant law, rules and procedures were obtained by the department.
6. The appellant EDF Services (Pvt.) Limited pleaded that the company after obtaining licenses, hired the services of one Sher Afghan as Managing Director, who was incharge of all affairs of the company and the Service Agreement dated 01.06.2006 was placed on record of this Bench. The said agreement has been found to be a comprehensive document including, (1) Financial matters,
(2) Staff Matters, (3) Other Matters, (4) Entitlements (5) Termination. The Financial matters and Termination clauses are reproduced as under; 1) Financial Matters; A. EDFPK will duly settle all invoices for the supply of goods on due dates and in proper order.
B. Cash flow is controlled by sound management of purchasing and Inventory so that total value of credit received from suppliers of goods for resale is reduced from its present level of US$1.937 Million (this is the amount due in the books of EDFPK on 31 May 2006) to not more than $1,500,000 or to a level equivalent to 5 months sales.
C. SAM will take full responsibility for the re-organization and application of proper stock and inventory control and documentation (by way of a procedures manual) of an efficient operating system based primarily on supplier's unique bar codes or similar markings as used in retail stores of international standard (goods purchased must have original manufacturers' bar codes) and on no account must shipments and containers sent to EDFPK be permitted to include-or-contain any goods not ordered by and invoiced to EDFPK. Merchandise received from Dubai could be an exception to the above required original barcode as a portion of shipments from Dubai are not bar coded in which case special care must be taken immediately on arrival in Pakistan to attach local (EDFPK) bar codes to any such goods, so that they can be processed through the inventory and sales systems).
D. Proceeds from the sales of inventory shall be first and specifically applied for payment to suppliers or providers of inventory finance.
E. All loans made by EDFHK to EDFPK will be repaid out of cash flow in priority to purchasing of goods for inventory if the inventory would thereby be increased in excess of the levels shown in clause B above but subject to the necessity to replace slow moving and dead stock with readily saleable items.
F. Acceptable cost level and the quantity for purchase of every purchase order shall be jointly agreed by SAM and EDFHK after SAM has sought the best cost prices and terms available for any required product. Merchandise will only be purchased from the best priced supply source which shall be determined by taking into account the supplier's marketing support, free product, advertising allowances and credit terms. EDFHK's approval shall not be required for purchases not exceeding US$50,000.
G. Controls are to be established and implemented to ensure adherence to the maximum possible price margin.
H. SAM will exert full efforts for the collection of credit sales proceeds and the turnaround of JIAP existing Duty Free Shops operations and be responsible for alt credit sales not previously approved in writing by the Chairman.
I. A secure system for the disbursement of expenses and signing of cheques is established. No cheque signatory shall pre-sign or leave blank signed cheques with any other person. No cheque shall be signed unless a proper voucher prepared by the accounts department and signed by the relevant department head and or financial controller shall have been entered, in the accounting system and a voucher printed and presented for final signature with the cheque.
J. Applications for Capital Expenditure plans in excess of US$5,000 are to be submitted to the Board of Directors for approval. Such plans should be accompanied by both financial and narrative justifications for the planned expenditure prior to EDFPK becoming contractually committed.
K. An annual budget is to be prepared by the end of November each year and submitted to the Board of Directors for review and approval. Such budget is to be set out in the formats provided by the EDF Group and shall include details of income, expenditure, capital Expenditure required to achieve the budget and details of staff levels for each department. SAM is responsible for ensuring that the budgeted income is achieved and expenditure controlled so that the budgeted net profit is realised. As no budget was prepared for 2006, an interim report for this year should be completed by December 25, 2006 for review and discussion by the Board of Directors.
L. Monthly Management accounts are prepared and submitted to Hong Kong by the third Monday of the month immediately following the reporting month.
M. Cash management report is prepared and submitted to Hong Kong every Monday.
5) Termination A. This contract may be terminated by either party giving to the other party six months' notice in writing of the intention to terminate.
B. EDFPK warrants that provided that the business prospers as being projected and budgeted in writing, it will not remove SAM from management or attempt to dismiss SAM. without proper cause. Any approvals required by this contract may be given by letter, email or facsimile. This contract shall continue in force until either party serves a notice of termination. Ratification of the appointment and retirement of Directors in accordance with the Laws of Pakistan shall be complied with. This contract shall be governed by the Laws of Pakistan.
7. He further pleaded that any wrong doing, if committed by the Minaging Director, the company can not be held responsible. We do not agree with this contention and hold that M/s. EDF Services (Pvt.) Ltd. as a company/licensee and Sher Afghan as its Managing Director were fully responsible for the illegalities committed leading to massive loss to the exchequer. The respondent pleaded that during course of investigations, it was found that 102 containers involving a revenue of Rs.384.64 million never reached the bonded warehouse/outlets and were sold in the open market.
To utter surprise of the Bench, the department further stated that these containers were sold in the open market and the payments were received through cheques in the bank accounts of the licensee M/s. EDF Services (Pvt.) Limited duly operated by Sher Afghan. We are constrained to observe that passengers make payments through Cash or Credit Cards at Duty Free Shop and not through cheques. It is also observed that either the invoices of sales were never issued to the passengers or fake/bogus invoices were issued to give cover to sales made in the open market. It leaves no doubt in our minds that the Customs Controls were totally and conspicuously non- existent regarding operations and supervision of this Duty Free Shop and its bonded warehouses.
8. During the course of hearings certain specific questions were raised by the Bench and the Collector (Enforcement) and Additional Collector (Enforcement) were called upon in person to explain the departmental point of view to the Bench. They could not produce any document to prove as to under what authority the clearances of bonded warehouse of M/s. EDF Services (Pvt.)
Limited were shifted to MCC PaCCS for automated clearance of goods. They also failed to produce any legal authority under which the escort of the bonded goods for shifting from the port area designated for MCC PaCCS to the bonded warehouse was done away with. An Office Order issued by MCC Appraisement was, however, produced which was found to be irrelevant for MCC PaCCS.
The department also miserably failed to explain as to why the essentially required and legally prescribed encashable securities like Indemnity Bonds .and Post Dated Cheques were not obtained by the clearance Collectorate i.e. MCC PaCCS before clearance of goods for in-bonding. The departmental reply that clearances were made from MCC PaCCS and it did not have a module for in-bonding of goods after obtaining the prescribed securities is totally unacceptable to the Bench.
This contention raises a very serious question in our minds that if such a module was not available in MCC PaCCS, then why the clearances of this bonded warehouse were being allowed from MCC PaCCS. We believe that Project Director PaCCS/Collector MCC-PaCCS was duty bound and responsible to ensure that only such consignments shall be allowed automated clearance from PaCCS for which specific module was available and operational. It is worth mentioning here that clearance of scrap or vehicles was never allowed from MCC PaCCS till such module was made available and operationalized. The department also failed to explain as to why annual audit was not conducted at the time of renewal of licences each year as prescribed under the law.
9. The counsel for M/s. EDF Service Limited vehemently denied that the management of EDF Services (Chief Executive Mr. Henrique F. Weil) was in any way in league with the illegalities committed by Sher Afghan, the Managing Director. He pleaded that the short recoveries as alleged in the Order-in-Original may be recovered from the persons who signed the documents and shifted the goods to an authorized destination and the recovery may not be made from the Chief Executive EDF Services (Pvt.) Ltd. who was based in Hong Kong and was totally unaware of the scam.
10. The counsel for Sher Afghan, however, pleaded that Henrique F. Veil, the Chief Executive of the Company wag regularly sent the statement of accounts and balance sheet at Headquarter of EDF Hong Kong by Finance Manager Mr. Zakria Memon, EDF, Karachi. As such, he was aware of each and every action of the company and he knew that payments in the company accounts were received through traders' cheques. He further stated that in the end of the year 2009, Henrique F.
Veil visited Pakistan, when the investigation of this case was in initial stages. He appeared before the senior officers of the department and was shown a list of 102 missing containers imported by M/s. EDF Services (Pvt.) Ltd. He categorically owned the same but desisted from his statement later through a rejoinder. However, it has also been confirmed by the department, during hearings that four (04) cheques of Rs.2.5 million each signed by Sher Afghan were submitted to the department on 14.11.2009 as a result of recovery proceedings against EDF Services Ltd. Therefore, we agree with the contention of the department that Sher Afghan continued till 4th July, 2010 when his contract was terminated by the EDF Services (Pvt.) Limited. The learned counsel for both the appellants, M/s. EDF Services (Pvt.) Limited and Sher Afghan have tried to shift the burden on each other in their arguments but have not denied any of the illegalities committed by the licensee.
11. Hence, in view of the above findings, we are constrained to conclude that M/s. EDF Services (Pvt.)
Limited, the licensee, and its Managing Director for Pakistan, Sher Afghan with the blessings of all the ranks of the department, in total and blatant violation of all the relevant rules, procedures and the provisions of the Customs Act, 1969 caused a huge loss of Rs.751.97 million to the exchequer out of which Rs.641.673 million is still recoverable. Mr. Faizan Arif, Assistant Collector representing the department stated that no departmental proceedings have been held to determine the role of staff posted at the warehouse and the outlets of the said Duty Free Shops and the officials responsible for obtaining encashable securities. Absence of prescribed encashable securities and lapses of the department have seriously jeopardized the recovery of the legitimate revenue of the state. It is also observed with great concern that since the detection of this scam in 2009 and lodging of an FIR on 12.11.2009 by the Investigation and Prosecution Branch of Collectorate of Customs (Preventive), no meaningful efforts have been made by successive supervisory officers of the investigating Collectorate to ensure recovery of this colossal loss to the exchequer.
12. A copy of this order is also being endorsed to the Chairman FBR so that he may like to look into the role of officers/officials of the department who remained instrumental by omission or commission in causing this colossal loss to the exchequer. The Register Bench-I is accordingly directed to send a copy of this order to the Chairman FBR, Islamabad.
13. In view of the above findings, the appeals by M/s. EDF Services ID (Pvt.) Limited and Sher Afghan Malik are hereby dismissed.
14. Judgment passed and announced accordingly.