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Issues: (i) Whether the FOB value declared in the shipping bills for export of cut and polished diamonds could be rejected on the ground that no processing activity to achieve value addition was undertaken in the bonded warehouses; (ii) Whether the Indian companies artificially inflated export turnover to obtain benefit under the Target Plus Scheme by resorting to circular trading of the same diamonds with allegedly inter-related overseas entities; (iii) Whether payment of commission and arrangement of buyers credit affected the FOB value declared or established circular trading; (iv) Whether the exported goods were liable to confiscation under Section 113(i) of the Customs Act, 1962 and whether the penalties imposed under Section 114 of the Customs Act, 1962 were sustainable.
Issue (i): Whether the FOB value declared in the shipping bills for export of cut and polished diamonds could be rejected on the ground that no processing activity to achieve value addition was undertaken in the bonded warehouses?
Analysis: The declared FOB value had been rejected by the Commissioner on the premise that simple processes such as sieving, boiling and sorting could not yield the stipulated value addition. The record, however, showed that such processes were in fact carried out in the bonded warehouses, as supported by witness statements and the surrounding evidence. Paragraph 4A.18 of the Foreign Trade Policy 2004-09 permitted import and re-export of cut and polished diamonds from bonded warehouses subject to value addition, but did not require proof that value addition must necessarily arise from a particular manufacturing process. The Tribunal distinguished between FOB value under Section 14 of the Customs Act, 1962 and value addition for FTP purposes, holding that the latter is not the test for rejecting export value under customs law. The contemporaneous assessment of shipping bills, examination by Customs officers, and realisation of export proceeds supported the declared value.
Conclusion: The FOB value declared in the shipping bills was held to be correct and the rejection of that value was set aside, in favour of the assessee.
Issue (ii): Whether the Indian companies artificially inflated export turnover to obtain benefit under the Target Plus Scheme by resorting to circular trading of the same diamonds with allegedly inter-related overseas entities?
Analysis: The allegation of circular trading rested on selected lots, charts recovered from a computer, email chains, and statements of witnesses. The Tribunal found that the department had treated individual lots as if they were the entire consignment, although each invoice covered multiple lots with differing weight, quality, size and value. The documentary evidence did not establish that the same lots had been repeatedly circulated, and the witness statements were not conclusive when tested against the invoices and cross-examination. As to the alleged relationship with overseas entities, the material did not establish control, voting power, or power to appoint directors, nor mutuality of business interest in the manner required to displace the declared transaction value. Suspicion, even if strong, was held insufficient to prove circular trading.
Conclusion: The charge of circular trading was rejected, in favour of the assessee.
Issue (iii): Whether payment of commission and arrangement of buyers credit affected the FOB value declared or established circular trading?
Analysis: The Tribunal treated these allegations as ancillary to the failed charge of circular trading and the alleged control over overseas entities. It found no pleading or finding that commission payments, LC discounting, or buyers credit were unlawful in themselves, and noted that the materials did not show that these financial arrangements contradicted the export declarations or proved circular movement of goods. The commission issue was also relevant, if at all, to the licensing authority while considering the pending Target Plus applications, not to customs valuation of FOB price.
Conclusion: These financial arrangements did not affect the FOB value or establish circular trading, in favour of the assessee.
Issue (iv): Whether the exported goods were liable to confiscation under Section 113(i) of the Customs Act, 1962 and whether the penalties imposed under Section 114 of the Customs Act, 1962 were sustainable?
Analysis: Once the declared FOB value was accepted and the allegation of circular trading failed, the foundation for confiscation and penalty disappeared. The Tribunal also noted that Section 114 creates personal liability and that the Commissioner had imposed penalties mechanically without establishing the individual role of several noticees. In the absence of a sustainable finding of misdeclaration or liability to confiscation, the penalties could not stand.
Conclusion: Confiscation under Section 113(i) and penalties under Section 114 were set aside, in favour of the assessee.
Final Conclusion: The impugned order was set aside in entirety, the assessee appeals were allowed, and the departmental appeals seeking confirmation and enhancement of penalties were dismissed.
Ratio Decidendi: FOB value under customs law must be tested independently under Section 14 on the basis of the transaction and contemporaneous evidence, and cannot be rejected merely because the department disputes the extent of value addition under the Foreign Trade Policy or relies on unproved allegations of circular trading or control over counterparties.
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