Introduction:
In today’s global trade environment, a single wrong invoice can cost far more than money, it can jeopardize your business, your reputation, and even your personal liberty. Many Indian companies, particularly small and mid-sized exporters and importers, unknowingly enter into vendor agreements without protective clauses or adequate due diligence, leaving themselves exposed when vendors engage in fraudulent practices.
When a vendor issues bogus invoices, whether to inflate values, evade customs duties, or unlawfully claim export incentives, it is not only the fraudster who comes under scrutiny. In many cases, entirely innocent businesses find themselves facing criminal proceedings under customs, GST, or revenue laws simply because their name appears on a shipment or transaction record. The absence of robust contractual safeguards and contemporaneous evidence often makes it significantly harder to prove non-involvement, and revenue authorities rarely pause for explanations before initiating action
This blog aims to equip businesses with practical legal tools to reduce such risks. We will examine:
• How targeted contractual clauses can shift liability back to fraudulent vendors,
• The critical role of preserving documentary evidence to demonstrate good faith, and
• Key legal provisions within India’s revenue and customs framework that every trader should know.
By the end, you will see how a few well-drafted contractual terms and disciplined record-keeping can make the difference between a swift clearance and a prolonged criminal trial.
Understanding Vendor Fraud in Import/Export
Definition:
What is “Bogus Invoicing” in Cross-Border Trade?
Bogus invoicing refers to the deliberate creation or use of false, inflated, or manipulated invoices in international trade transactions. Such invoices misrepresent the value, quantity, or description of goods being imported or exported. The objectives often include:
• Laundering illicit funds through over-invoicing,
• Inflating export values to claim higher duty drawbacks or GST refunds, or
- Understating imports to evade customs duty.
Under Indian law, these activities attract scrutiny under the Customs Act, 1962, the Foreign Exchange Management Act (FEMA), and the Prevention of Money Laundering Act (PMLA), among others. A critical concern is that these statutes often operate on a reverse burden of proof, where the presumption of involvement exists until innocence is demonstrated, placing the onus squarely on the accused to prove non-participation.
Common Fraud Patterns:
How It Works: A Common Fraud Pattern
Consider this scenario: A vendor agrees to handle your export order, including all shipping and customs documentation. Without your knowledge, they inflate the declared value of goods by 50% to claim a higher government incentive under a duty drawback scheme.
The goods are shipped, the fraudulent claim is processed, and months later, the Directorate of Revenue Intelligence (DRI) or Customs Enforcement uncovers the discrepancy. Because your company’s name appears on the invoice, you receive a summons for alleged fraud, even though you had no awareness of the vendor’s manipulation.
Why Innocent Companies Get Dragged into Proceedings?
Businesses often face prosecution not because of direct wrongdoing, but due to:
• Their name and authorised signatory details appearing on trade documents,
• Absence of contractual clauses clearly shifting liability to the vendor,
• Lack of preserved evidence demonstrating vendor independence,
- Failure to promptly report suspicious activity.
Authorities frequently infer “knowledge and consent” from the mere presence of your company’s name in shipment records. Without robust documentation and protective agreements, disproving such assumptions can become an uphill legal battle.
💡 Why these matters:
This isn’t just a compliance theory; it’s a real-world risk that can dismantle a legitimate business overnight. Understanding how bogus invoicing works, and how liability can extend to innocent parties, empowers companies to:
• Draft protective contract clauses,
• Conduct rigorous due diligence on vendors, and
• Maintain evidence trails that can decisively establish non-involvement.
The Risk for Innocent Businesses
1. Presumption of Involvement Unless Evidence Shows Otherwise
Under provisions of the Customs Act, 1962 and Prevention of Money Laundering Act, 2002 (PMLA), businesses linked even indirectly to fraudulent import/export documentation can face a presumption of complicity. Unless the concerned entity can produce credible evidence disproving its involvement, it may be treated as an accused in ongoing investigations.
2. Frozen Bank Accounts and Blacklisting
As part of provisional attachment under Section 110A of the Customs Act, 1962 and parallel proceedings by the Enforcement Directorate, authorities may freeze business bank accounts to prevent further transactions. Additionally, importers/exporters may be blacklisted on the Directorate General of Foreign Trade (DGFT) portal, halting legitimate trade.
3. Criminal Summons from Customs or Enforcement Directorate
Summons issued under Section 108 of the Customs Act, 1962 or Section 50 of the PMLA, 2002 require personal appearance and production of documents. Non-compliance can escalate to bailable or even non-bailable warrants, severely impacting business operations and reputation.
Relevant Legal Framework in India (Case Reference: Delhi High Court (2022))
| Law / Act | Relevant Sections /
Provisions |
Key Points | Authority |
| Customs Act, 1962 | – Sec. 111 & 113 –
Confiscation of improperly imported/exported goods. – Sec. 114 – Penalty for aiding improper exports. – Sec. 135 – Criminal prosecution for false declarations, misrepresentation, or fraudulent invoices. |
Regulates imports/ exports, penalizes fraudulent documentation and misdeclaration. | Directorate of
Revenue Intelligence (DRI) & Customs Department |
| Foreign
Exchange Management Act (FEMA), 1999 |
Provisions on mispricing, under/over-invoicing affecting foreign exchange. | Governs foreign exchange compliance in cross border trade. | Enforcement
Directorate (ED) |
| Prevention of
Money Laundering Act (PMLA), 2002 |
Linked offences if bogus invoicing involves proceeds of crime or laundering. | Targets financial crimes linked to trade-based money laundering. | Enforcement
Directorate (ED) |
| GST Laws
(CGST Act, 2017 & SGST Acts) |
Provisions against fake invoices used to claim ITC or evade GST. | Addresses GST evasion in import/export transactions. | GST Intelligence (DGGI) |
| Indian Penal Code (IPC) | – Sec. 420 – Cheating. – Sec. 468 – Forgery for cheating.
– Sec. 471 – Using forged documents. – Sec. 120B – Criminal conspiracy. |
Criminal offences applicable to fraudulent invoicing cases. | Police / CBI / ED |
| Companies Act,
2013 (if applicable) |
– Sec. 447 – Punishment for fraud.
Sec. 448 – Punishment for false statements. |
Corporate liability for fraudulent financial or trade records. | Ministry of
Corporate Affairs (MCA) |
Case Reference: Delhi High Court (2022)
In Raja Ram & Co. v. Union of India (dated 14 May 2025), the Delhi High Court upheld that when duty exemption instruments (like DEPB licences/scrips) are found to be forged or fraudulent, they are considered void ab initio under the Customs Act. Consequently, the court ruled that invoking the extended period of limitation is justified in such cases. The court also acknowledged that the fraud vitiates all related benefits, which solidifies the principle that genuine businesses cannot retain illegitimate gains, even if unintentionally received.
Preventive Contract Clauses
1. Compliance Warranties
The Vendor expressly warrants that it shall comply with all applicable laws, rules, and regulations relating to customs, foreign exchange, and international trade.
2. Audit & Inspection Rights
The Company shall have the right, at its sole discretion, to inspect, audit, and verify all invoices, shipping documents, customs filings, and related records of the Vendor to ensure accuracy and compliance.
3. Indemnity Clause
The Vendor shall indemnify, defend, and hold harmless the Company against any losses, damages, penalties, costs, or legal proceedings arising directly or indirectly from any fraudulent act, misrepresentation, or non-compliance on the part of the Vendor.
4. Termination Clause
The Company shall have the right to terminate this Agreement with immediate effect, without notice or compensation, if the Vendor is found to be involved in any fraudulent or illegal activity.
5. Jurisdiction & Dispute Resolution
Any dispute arising out of or in connection with this Agreement shall be subject to the exclusive jurisdiction of the competent courts at [City/State], and shall be resolved in accordance with applicable laws. Alternative dispute resolution mechanisms, such as arbitration or mediation, may be specified as per Company policy.
How a Law Firm Can Help
A law firm plays a crucial role in safeguarding businesses from prosecution risks associated with vendor fraud and bogus import/export invoices. Their support can include:
1. Contract Drafting & Review –
o Ensuring vendor agreements include strong preventive clauses such as compliance warranties, audit rights, indemnity, and termination provisions.
o Tailoring clauses to meet industry-specific trade, customs, and foreign exchange regulations.
2. Due Diligence & Vendor Verification –
o Conducting background checks and verifying the authenticity of vendors, their trade licenses, and past compliance records.
o Assessing the vendor’s history with customs and trade authorities to detect potential red flags.
3. Legal Compliance Advisory –
o Advising businesses on applicable import/export laws, FEMA (Foreign Exchange Management Act) compliance, and customs regulations.
o Training procurement teams on identifying and preventing fraudulent documentation practices.
4. Evidence Preservation & Documentation –
o Guiding clients on the preservation of invoices, bills of lading, correspondence, and payment records for potential future disputes.
o Implementing document retention policies that strengthen the company’s defence in case of investigation.
5. Crisis Management & Litigation Support –
o Representing the company before customs authorities, ED (Enforcement Directorate), DRI (Directorate of Revenue Intelligence), or other regulatory bodies if allegations arise.
o Negotiating settlements, reducing penalties, and defending against criminal prosecution.
6. Internal Policy Formulation –
o Assisting in the creation of internal SOPs (Standard Operating Procedures) for vendor onboarding, invoice verification, and reporting of suspicious transactions.
Conclusion
Every overlooked clause and undocumented transaction leave a crack for fraud to slip through. In the fast-paced world of trade and commerce, even a single lapse in documentation or contract clarity can escalate into disputes that drain both time and resources. Businesses must not wait for problems to arise before taking action, proactive measures such as detailed contract reviews, regular audits of payment trails, and timely legal consultations can prevent costly legal battles. Protect your revenue now by ensuring every agreement is watertight and every transaction is transparent, because prevention is always more cost-effective than litigation.
