Holding

The compounding amount is the higher of 20 % of the market value of the goods or Rs 10 lakh, as the phrase ‘whichever is higher’ must be read together with ‘up to’.

Summary

The petitioner, Rajesh Kumar Sharma, sought to compound an offence under Section 135(1)(a) of the Customs Act, 1962. The Compounding Authority fixed the compounding amount at Rs 10 lakh, which the petitioner challenged as exceeding the permissible limit, arguing that the amount should be limited to 20 % of the market value of the goods (Rs 8,45,176) i.e., about Rs 1.69 lakh. The issue before the Supreme Court was the correct interpretation of Rule 5 of the Customs (Compounding of Offences) Rules, 2005, which states that the amount is “up to twenty per cent of market value of the goods or Rs 10 lakh whichever is higher.” The Court held that the phrase “whichever is higher” must be read together with “up to,” meaning the compounding amount is the higher of the two figures, i.e., Rs 10 lakh. It emphasized that the purpose of compounding is to avoid litigation and facilitate early settlement. Consequently, the petition was dismissed and the appeal was rejected.

Issues considered

What is the correct interpretation of Rule 5 of the Customs (Compounding of Offences) Rules, 2005 regarding the phrase ‘up to twenty per cent of market value of the goods or Rs 10 lakh whichever is higher’?

Legislation cited

Customs Act, 1962s. 135(1)(a)

Subjects

compounding of offencesCustoms ActRule constructionstatutory interpretationSection 135customs lawlitigation avoidance

Judgment

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RAJESH KUMAR SHARMA A
11.
UNION OF INDIA AND ORS.

FEBRUARY 2, 2007

[DR. ARIJIT PASA YAT AND S.H. KAPADIA, JJ.) B

Customs Act, 1962; s. 35(1)(a)!Customs (Compounding of offences)
Rules, 2005; Rule 5/Circular No.5412005-Cus dated December 30, 2005
issued thereunder:
c
Compounding of an offence committed in terms of provisions under
Customs Act-Fixation of compounding amount in terms of Rule 5-
Permissible limit-Interpretation of-Held: Purpose ofcompounding of offence
is to prevent litigation and encourage early settlement of disputes-Jn fixation
of compounding amount in terms of Rule 5 'Upto' not applies to both 20%
of market value of goods or Rupees ten lakhs but has to be read along with D
the phrase 'whichever is higher'-Petition lacks merit, hence dismissed-
lnterpretation of statutes.

Petitioner had applied for compounding of an offence committed by him
under Section 135(1)(a) of the Customs Act, 1962. The Compounding
Authority imposed a sum of Rupees Ten lakhs as compounding amount. The E
order of the authority was challenged by the petitioner on the ground that the
compounding amount so fixed is beyond the permissible limit. The petition
was rejected by the High Court. Hence the present special leave petition.

Petitioner contended that the extent of compounding amount as fixed by
the Compounding Authority was beyond the permissible limit and it should F
have been 20% of the market value as declared; and that since the purpose
of compounding is to prevent unnecessary litigation, ifthe interpretation given
by the High Court that the quantum has to be upto 20% of the market value
of the goods or upto Rs.10,00,000/- whichever is higher is accepted same
would be counter productive. G
Dismissing the appeal, the Court

HELD:l.l. Purpose of compounding of offence against payment of
compounding amount is to prevent litigation and encourage early settlement

245 H
246 SUPREME COURT REPORTS [2007] 2 S.C.R.

A of disputes. !Para - 611247-CI
1.2. The crucial words in Rule 5 of the Customs Rules are "whichever
is higher". According to the petitioner, the word "up to" applies to both 20%
of the market value of the goods or Rupees Ten Lakhs. This interpretation
as suggested is clearly unacceptable. If the interpretation suggested is
B accepted, it would render expression "whichever is higher" redundant.
!Para 7] (247-G]

CIVIL APPELLATE JURISDICTION : Special Leave Petition (C) No.
21435 of2006.

C From the Judgment and final Order dated 15.9.2006 of the High Court
of Delhi at New Delhi in C.W.P. No. 14639/2006.

Rajeev Kr. Tiwari, Kumar Parimal and P.V. Yogeswaran for the Appellant.
The Judgment of the court was delivered by
Dr. ARIJIT PASAYA T, J. 1. Though we are not granting leave, in view
D
of re-iteration of plea taken in this special leave petition in several cases, the
petition is being disposed of by a detailed order.
2. Challenge is to the order passed by a Division Bench of the Delhi
High Court dismissing the writ petition filed by the petitioner. Challenge in
E the writ petition was to the order dated 28th July, 2006 passed by the Chief
Commissioner of Customs, Gujarat Zone, Ahmedabad.

3. Background facts in a nutshell are as follows:
Petitioner had applied for compounding of an offence committed by him
under Section 135(l)(a) of the Customs Act, 1962 (in short the 'Act'). After
F considering the application filed by the petitioner, the Compounding Authority
allowed the application and imposed compounding amount of
Rs. 10,00,000/-. In the writ petition stand taken by the petitioner was that the
compounding amount as fixed is beyond the permissible limit. This plea was
rejected by the High Court.
G 4. Jn support of the petition, it has been stated that the extent of
compounding amount as fixed by the Compounding Authority was beyond
the permissible limit. It is submitted that market value of the goods which
had not been declared was Rs. 8,45, 176/- and therefore it should have been
20% of the said market value.
H
)
--)..

RAJESHKUMARSHARMAv. U.O.L [PASAYAT,J.] 247
5. It is stated that since the purpose of compounding is to prevent A
unnecessary litigation, if the interpretation given by the High Court that the
quantum has to be upto 20% of the market value of the goods or upto
Rs. I 0,00,000/- whichever is higher is accepted same would be cnunter
productive.

6. The guidelines for compounding are contained in the Circular No.54/ B
2005-Cus dated 30th December, 2005. Central Government had brought into
force the Customs (Compounding of Offences) Rules 2005 (in short the
) 'Customs Rules') and Central Excise (Compounding of Offences) Rules, 2005)
(in short the 'Central Excise Rules') with effect from 30th December, 2005. The
purpose of compounding of offence against payment of compounding amount C
is to prevent litigation and encourage early settlement of disputes. The cases
•
where compounding would be rejected are also spelt out in the said circular.
The relevant Rule is Rule 5 of the Customs Rules which so far as relevant
reads as follow:

Fixation of the Compounding Amount- For the purpose of D
compounding of offences under the various provisions of the Act, the
compounding amount shall be as provided hereinbelow:-

(1)(3)xxx xxx
(4) Offence specified under Upto twenty per-
Section 135(1) (a) of the cent of market E
Act. value of the goods
or Rupees ten lakhs
whichever is higher.
(5) (7) xxx xxx JOO(

(Underlined for emphasis) F

7. The crucial words in the Rule are "whichever is higher". According
to teamed counsel for the petitioner, the word "up to" applies to both 20%
of the market value of the goods or Rupees Ten Lakhs. This interpretation
as suggested is clearly unacceptable. If the interpretation suggested is
accepted, it would render expression "whichever is higher" redundant. The G
inevitable conclusion is that the petition lacks merit, deserves dismissal,
which we direct.

S.K.S. Appeal dismissed.