Facts of the Case

M/s ib Track Solutions Pvt. Ltd., the first petitioner, was a company engaged in procuring and supplying electronic seals using Radio Frequency Identification (RFID) technology for exporters from India. The second petitioner, Shri Sudhendra Dhakanikote, was a Director of the company.

According to the judgment, the company claimed to have procured technology for tamperproof sealing of export cargo containers. The RFID e-seals were manufactured by M/s Leghorn Group SRL, Italy, and the petitioner company acted as an authorised distributor. The seals were stated to be certified under applicable international standards and were intended to permit Customs officers to verify the identity and integrity of export containers through RFID readers.

The Union Government introduced electronic sealing of export cargo under the self-sealing procedure. Under the prescribed mechanism, exporters were required to place goods in containers, lock them with approved RFID e-seals, and upload relevant shipping particulars through the authorised vendor’s web or mobile application. At the port gate, Customs officers were expected to verify the serial number and examine whether the e-seal had been tampered with.

The petitioner company claimed that it had followed the prescribed procedure. However, concerns subsequently arose regarding the functioning and integrity of the seals. On 23 October 2018, the Directorate General of Analytics and Risk Management under the Central Board of Indirect Taxes and Customs directed the company not to sell RFID e-seals manufactured by Leghorn Group, Italy, until further orders. The company’s empanelment was thereafter temporarily suspended and subsequently terminated.

An FIR in Crime No. 172 of 2019 dated 16 July 2019 was registered for offences punishable under Sections 66C and 72A of the Information Technology Act, 2000 and Sections 406, 420 and 34 of the Indian Penal Code. The company and its Director were arrayed as accused Nos. 1 and 2.

The principal allegations were that:

  • e-seals supplied by the company could pass Customs clearance even when not properly locked;
  • seals were allegedly being read from a distance without being in a locked condition;
  • e-seals were allegedly tampered with regularly;
  • internal e-mails allegedly indicated that the company had switched off tampering alerts; and
  • containers carrying tampered seals could consequently be shown as non-tampered and exported.

The complaint alleged that intentional submission of such reports had serious implications for the economy and security of the nation.

Issues Involved

The principal issues before the High Court were:

  1. Whether the FIR and investigation against the petitioner company and its Director deserved to be quashed under Section 482 CrPC.
  2. Whether the earlier order of a Coordinate Bench quashing proceedings against the Managing Director/accused No. 3 entitled the present petitioners to similar relief.
  3. Whether the second petitioner could avoid criminal proceedings by contending that responsibility, if any, rested only with the company.
  4. Whether material collected during investigation, including the second petitioner’s recorded statement concerning the switching-off of tamper alerts, disclosed serious triable issues requiring a full proceeding.
  5. Whether the High Court, at the stage of a Section 482 CrPC petition, could assess disputed evidence and interdict an investigation involving alleged risks to national economic, defence and narcotics security.

Petitioners’ Arguments

The petitioners primarily contended that the criminal proceedings deserved to be quashed because a Coordinate Bench of the High Court had already quashed the FIR insofar as the Managing Director, arrayed as accused No. 3, was concerned.

The petitioners argued that:

  • the second petitioner was merely a Director;
  • no specific role sufficient to sustain criminal proceedings had been attributed to him;
  • responsibility, if any, was that of the company;
  • since proceedings against the Managing Director had already been quashed, the present case was covered by the earlier decision; and
  • continuation of proceedings against the petitioners was therefore unwarranted.

The petitioners’ counsel, while acknowledging that the allegations concerned the economy and security of the nation, maintained that the Director should not personally face proceedings in the absence of an attributable individual role.

Respondents’ Arguments

The Directorate of Revenue Intelligence strongly opposed the petition.

It was argued that the earlier Coordinate Bench decision had been rendered without hearing the DRI, and that the DRI had not been represented to place the complete facts before the Court.

The respondents submitted that:

  • the allegations were exceptionally serious and concerned the economy and security of the nation;
  • the company and the present Director were involved in the decision-making process relating to switching off radio tampering alerts;
  • investigation allegedly revealed that the seals supplied by the company were not tamperproof;
  • the tampering rate was allegedly as high as 10% in a single day;
  • the company had allegedly consciously taken a decision to switch off the feature detecting tampered e-seals at various ports;
  • false or incorrect data concerning the reading of e-seals was allegedly furnished despite knowledge of the underlying defects;
  • revenue loss was only one possible consequence, while the larger concern was national security;
  • compromised maritime container seals could create risks involving contraband, arms, ammunition and narcotic drugs; and
  • the matter required investigation and could not appropriately be terminated at the threshold.

Court’s Findings and Order

1. Government Circulars Established the Critical Security Role of RFID E-Seals

The High Court examined the relevant Government circulars governing the electronic sealing of containerised export cargo. The framework required tamperproof electronic seals, unique identification, data integrity, verification by Customs officers and checking of seal integrity for possible tampering.

The Court noted that the regulatory procedure was designed to ensure that the integrity of electronic seals could be verified by Customs authorities at ports and Inland Container Depots.

2. Serious Concerns Were Raised Regarding Seals Supplied by Leghorn Group

The Court referred to the communication dated 23 October 2018, recording that examination had allegedly revealed that RFID readers could read e-seal data without locking the male and female components of the seal.

The competent authority treated the matter as a serious security issue, prohibited use of RFID e-seals procured from Leghorn Group, Italy, until further orders, directed that further sales be stopped and called for recall of sold but unused seals.

3. Investigation Allegedly Revealed Faulty Seals and Suppression of Tamper Status

The judgment records that, after registration of the crime and search of the company’s office, seals were seized and examined. According to the Court’s narration of the investigation material, approximately 832 seals were found faulty, and the tamper status was allegedly covered up because the tamper alarm had been switched off.

4. Statement of the Director Was Crucial

A major factor in the Court’s decision was the statement attributed to the second petitioner during investigation.

The judgment records answers indicating, among other things, that:

  • tamper alert notifications had been switched off by changes in the backend software;
  • the company was aware of issues with the e-seals;
  • Customs authorities could not identify tampered e-seals when tamper notifications were switched off;
  • Customs and Government authorities had allegedly not been informed about switching off the alerts;
  • e-seals shown as non-tampered in Customs records were allegedly recorded as tampered in the company’s own records;
  • the entire Board of Directors was stated to be aware of the decision;
  • manipulation of the reader or software could allegedly show tampered e-seals as non-tampered; and
  • the company was stated to have intentionally turned off tamper notifications in view of technical issues with the seals and in consideration of its business interest.

5. Company Alone Could Not Be Treated as Responsible at the Quashing Stage

The Court rejected the contention that only the company could be responsible.

It held, in substance, that if the members of the Board, Directors and Managing Director were aware of the deliberate switching-off of tampering signals, it could not be said at the threshold that the company alone bore responsibility. The Court found that the investigation material concerning Board-level awareness required adjudication in a full proceeding.

6. National Security Takes Precedence Over Business Interest

The Court made strong observations concerning the possible consequences of compromised container security. It noted that containers passing without proper scanning could have catastrophic consequences for national security, whether in the economic, defence or narcotics sphere.

The Court emphasised that the security and interest of the nation are paramount compared with the vested interest of any business house and that national security cannot be permitted to be compromised.

7. Disputed Questions of Fact Required a Full Proceeding

The High Court found that the case involved admissions and seriously disputed questions of fact. Such matters could not appropriately be resolved by terminating the investigation through inherent jurisdiction under Section 482 CrPC.

The Court also observed that the DRI should conclude the investigation, if not already concluded, and take the proceedings to their logical end.

8. Reliance on Kaptan Singh vs State of Uttar Pradesh

The High Court relied upon the Supreme Court judgment in Kaptan Singh vs State of Uttar Pradesh, (2021) 9 SCC 35.

The principle applied was that:

  • exercise of jurisdiction under Section 482 CrPC to quash criminal proceedings is exceptional;
  • the High Court cannot act as an investigating agency or appellate court at the quashing stage;
  • where statements have been recorded and evidence collected, the Court must consider the existence of such investigative material without conducting a trial itself;
  • appreciation of disputed evidence is impermissible in quashing proceedings; and
  • serious triable issues must ordinarily be adjudicated in trial or appropriate full proceedings.

9. Final Order

The High Court held that it found no merit in interfering with or interdicting the investigation against the petitioners. The Court observed that interference in the circumstances would effectively place a premium on alleged acts compromising national security.

Accordingly:

The Criminal Petition was dismissed. Consequently, I.A. No. 1 of 2022 was also dismissed.

Important Clarification

This judgment does not amount to a final determination of criminal guilt of the petitioners. The High Court was deciding whether the FIR/investigation should be quashed under Section 482 CrPC.

The Court’s refusal to quash was based on the existence of serious allegations, investigation material, recorded statements and disputed factual questions that required fuller adjudication. Therefore, the decision must be understood as a ruling against premature termination of the criminal process, not as a final conviction.

A further important clarification is that the earlier quashing of proceedings against the Managing Director by a Coordinate Bench did not automatically entitle the company and Director to identical relief, particularly where the present record contained material specifically considered by the Court regarding alleged Board awareness and the second petitioner’s own recorded answers.

Sections Involved

·         Section 482, Code of Criminal Procedure, 1973 — Inherent powers of the High Court; invoked for quashing the FIR and criminal proceedings.

·         Section 66C, Information Technology Act, 2000 — Punishment for identity theft.

·         Section 72A, Information Technology Act, 2000 — Punishment for disclosure of information in breach of lawful contract.

·         Section 406, Indian Penal Code, 1860 — Punishment for criminal breach of trust.

·         Section 420, Indian Penal Code, 1860 — Cheating and dishonestly inducing delivery of property.

·         Section 34, Indian Penal Code, 1860 — Acts done by several persons in furtherance of common intention.

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https://www.mytaxexpert.co.in/uploads/1783420778_1456compressed.pdf

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