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2026 Supreme(Online)(Mad) 40928
IN THE HIGH COURT OF JUDICATURE AT MADRAS
Mohammed Shaffiq, J
M/s. ZF Wind Power Coimbatore Private Limited Aut – Appellant
Versus
The Principal Commissioner of Customs – Respondent
WMP No.17244 of 2026
For the Appellants/Petitioners: Mr.R.Parthasarathy
For the Respondents: Mr.S.M.Deenadayalan
Adjudicating authority must apply its mind to all objections including jurisdiction to invoke marginal penalty; non-application renders the order liable to be set aside.
Headnote:The writ petition challenges an order imposing penalty under Section 114AA of the Customs Act, 1972, on a Special Economic Zone unit, alleging non-application of mind to objections concerning jurisdictional validity of the penalty provision. The petitioner contended that Section 114AA applies to paper exports, not genuine domestic tariff area sales, and that absence of a notification under Section 21 of the SEZ Act prevents penal liability. The Court held that the impugned order failed to address these substantive objections and jurisdictional issues raised. The principal question before the Court was whether the adjudicating authority had jurisdiction to impose penalty under Section 114AA when the SEZ Act does not expressly incorporate the provision and there is no specific notification. Relying on precedents such as Mahindra & Mahindra vs Union of India, the Court emphasised that penal provisions are substantive and require explicit incorporation before being invoked. It further noted that the adjudicating authority is duty-bound to discuss all objections in its order to satisfy the principles of natural justice. The Court set aside the impugned order dated 16.02.2026 and remanded the matter to the Principal Commissioner of Customs for fresh consideration within eight weeks after granting a reasonable opportunity of hearing to the petitioner. No costs were awarded.
| Table of Content |
|---|
| 1. challenging penalty imposition without addressing objections. (Para 1 , 2) |
| 2. exception to alternative remedy when natural justice violated. (Para 3 , 4 , 5) |
| 3. adjudicating authority must consider jurisdictional objections. (Para 6 , 7 , 8) |
| 4. order set aside for fresh consideration. (Para 9) |
ORDER
The present writ petition has been filed challenging impugned order dated
16.02.2026 insofar as the levy of penalty under Section 114AA of the Customs Act, 1972, primarily on the premise that impugned order fails to apply its mind to the objections filed inter alia which includes jurisdictional aspects and thus stands vitiated.
2. Learned counsel for petitioner would submit that petitioner is an authorised SEZ unit for manufacture of gearboxes used in Wind Operated Electrical Generators (WOEG), axles and transmissions for off-highway vehicles. The items so manufactured are exported and also sold in the Domestic Tariff Area (DTA), after complying with the provisions of SEZ Act and Rules by paying appropriate customs duty in respect of sales to DTA buyers.
2.1. During the period 01.04.2020 to 31.03.2020, petitioner had sold gearboxes and oil cooling systems manufactured in SEZ unit to buyers in DTA. He would submit that DTA sales by SEZ are treated as imports and bill of entry came to be filed by petitioner on behalf of DTA buyers which is permissible in terms of SEZ Act and Rules. The bill of entry was filed on behalf of buyers, who paid IGST at 5% or 12 % depending on items and its classification. Apparently, there has been investigation and as a result of such investigation, it was found by Revenue that appropriate duty ought to be 18% inasmuch as DTA buyers were not manufacturers of Wind Operated Electrical Generators but instead were engaged in providing services and thus may not be entitled to concessional rate of 5% or 12%. Show cause notice dated 19.03.2025 came to be issued proposing to recover the differential IGST from DTA buyers and in the said notice, penalty under Section 114AA of the Customs Act was proposed to be imposed on petitioner. Petitioner submitted its objections to the said notice on 28.04.2025 inter alia highlighting the following :
i) That the proposal to levy penalty under Section 114AA of the Customs Act, is not warranted and is without jurisdiction inasmuch as Section 114AA of the Customs Act, introduced with effect from 13.07.2006 was intended to check frauds relating to paper exports in other words, where there was no actual movement of goods but only export on paper.
ii) Reliance was sought to be placed in support of the above contention on the observations of the Ministry in the Twenty Seventh Report of the Standing Committee on Finance (2005-06).
iii) In support of the above submission, reliance was also placed on a judgment of the CESCAT, Chennai in the case of Commissioner of Customs, Sea, Chennai-II vs Sri Krishna Sounds and Lightings reported in 2019 (370) ELT 594, wherein it was held that Section 114AA may not get attracted except in cases of paper transactions.
iv) Reliance was also placed on the judgement of the CESTAT, Bangalore, in the case of Interglobal Aviation Ltd., vs The Principal Commissioner, Custom Bangalore reported in 2022 (379) ELT 235, for the very same proposition.
v) Reliance was also placed on Section 21 of SEZ Act, which provides that Central Government may by notification specify any act of omission made punishable under any Central Act as notified offence for the purposes of SEZ Act.
2.2. He would submit that in the absence of any specific provision incorporating Section 114AA of the Customs Act, it may not be permissible for the authorities to invoke the said provision inasmuch as penal provision are substantive in nature and in the absence of an express provision, it may not be permissible to levy penalty, in this regard he would submit that reliance was sought to be placed on the judgment of the Bombay High Court in the case of Mahindra & Mahindra vs Union of In
