2023 (6) TMI 156 - AT - Customs

Tribunal allows appeal against Customs valuation, rejects re-determination

The Tribunal allowed the appeals filed by the appellants, rejecting the re-determination of the assessable value of imported consignments under Customs ... Valuation of imported goods - machinery oil /machinery lubricant oil - rejection of declared value - redetermination of value - Ash content in the samples - HELD THAT:- With respect to rejection of declared value under Rule 12 of Customs Valuation Rules, 2007 and/ or re-determination of the same under Rule 5 ibid is seriously bad in law since for rejection of transaction value, the Ld. Commissioner could not allege that the transaction value of the import consignments of the Appellant were fake and/or forged. There is nothing on-record even to suggest that the transaction value of import was not the correct value for the purpose of assessment. It is settled position of law that unless the transaction value could be established to be improper upon the finding that import invoices were either fabricated or fake or that any relationship exists between the importer and the exporter, the transaction value has to be accepted as correct value for assessment under Rule 3 of the Customs Valuation Rules, 2007. That in the present case, there is nothing on record to show that the transaction value of imports were not actual value of transaction. The basis of re-valuation by the department is re-classification of goods and when the re-classification is itself not proper, question of re-valuation of imported goods and/ or demand of any differential duty on the same, cannot arise. When the Test Reports of examiner cannot classify the goods specifically as ‘base oil’, rejection of classification and /or re-valuation of imported goods, is not permissible in law. Re-classification cannot even be reason of re-valuation of imported consignment. Moreover, the attempt of the authority to classify the imported goods as ‘base oil’ is bereft of any evidence and hence, not maintainable. There is no merit in the impugned order and the same is liable to be set aside - Appeal allowed. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether a demand for differential duty and ancillary penal consequences can be raised prior to finalization of assessments under Section 18(2) of the Customs Act when assessments on the relevant Bills of Entry were not finalized. 2. Whether the imported goods declared as 'machinery oil'/'machinery lubricant oil' could be re-classified as 'base oil' on the basis of laboratory test reports that expressly state uncertainty ('may be base oils') and on comparison with observations in an unrelated third-party report. 3. Whether evidence of domestic supplies (sales/purchases) of base oil by the importer to a third party can be used to infer that specific imported consignments were base oil, thereby supporting re-classification, confiscation and fines. 4. Admissibility and evidentiary value of statements recorded during investigation that were subsequently retracted by affidavit, and whether such statements can support re-classification and penal measures. 5. Whether rejection of declared transaction value under Rule 12 and re-determination under Rule 5 of the Customs Valuation Rules is lawful in the absence of proof that the transaction value was improper, fabricated or influenced by a relationship between importer and exporter. 6. Whether confiscation under Section 111(m), redemption fine under Section 125 and penalties under Sections 112(a)(ii) and 114AA can be sustained when re-classification and re-valuation on which they rest are not supported by admissible or conclusive evidence. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of raising demand prior to finalization under Section 18(2) Legal framework: Assessments finalized under Section 18(2) fix the assessment; actions affecting duty liability must respect the statutory finalization process. Precedent treatment: Authorities recognize that demands based on re-assessment before statutory finalization may be unsustainable. Interpretation and reasoning: The record shows that none of the 41 assessments for the relevant period were finalized under Section 18(2) when the Show Cause Notice was issued. Consequently, the Department's attempt to raise differential duty prior to or independent of statutory finalization is legally infirm. Ratio vs. Obiter: Ratio - demands premised on assessments that were not finalized cannot properly be sustained. Conclusion: Demand of differential duty prior to finalization is bad in law and cannot support subsequent confiscation, fines or penalties. Issue 2 - Re-classification from 'machinery oil' to 'base oil' based on test reports and third-party observation Legal framework: Classification must ordinarily be supported by scientific test reports capable of reasonably identifying the trade identity of the product; expert reports that are inconclusive cannot form the sole basis for re-classification. Precedent treatment: Courts/Tribunals have required positive, probative evidence for rejection of declared classification; inconclusive or permissive expert language (e.g., 'may be') is insufficient. Interpretation and reasoning: The CRCL reports explicitly indicated inability to categorically classify the samples as base oil and used tentative wording ('may be base oils'). The Customs authority relied additionally on an unrelated observation by a research institute in another case. Such cross-comparison to an external observation in a different case is not a legitimate substitute for affirmative, case-specific expert classification. The Tribunal found reliance on an absence of ash content and an unrelated observation to be legally unsustainable. The Test Reports therefore do not corroborate the re-classification. Ratio vs. Obiter: Ratio - re-classification cannot be based on inconclusive laboratory reports or on comparisons with unrelated case observations. Conclusion: Change of classification to 'base oil' is not supported by the test reports and is liable to be quashed. Issue 3 - Use of domestic supply transactions to infer nature of imported consignments Legal framework: Inferential linkage between imports and domestic supplies requires proof that the specific imported lots were the source of the domestic supply; mere contemporaneous purchases/sales of similar products are insufficient. Precedent treatment: Findings that treat separate domestic procurements as proof of identity of particular imports are vulnerable where documentary evidence shows distinct purchase streams and distinct invoicing regimes. Interpretation and reasoning: Documentary evidence on record (purchase/sale statements, central excise invoices, and certificates of CENVAT pass-on) demonstrated that purchases of base oil for supply to the third party were separate transactions covered by domestic excise documents. The Tribunal accepted that those domestic transactions had no nexus with the imported consignments sold to multiple other customers. Hence inferring that the imports were base oil because of separate domestic sales was an error of fact. Ratio vs. Obiter: Ratio - unconnected domestic transactions cannot be used to impute the nature of specific imported consignments without direct evidentiary linkage. Conclusion: The finding that imported goods were base oil by relying on separate domestic supplies was erroneous and must be set aside. Issue 4 - Evidentiary value of retracted statements recorded during investigation Legal framework: Statements obtained in investigation which are subsequently retracted may be of little or no evidentiary value, particularly where retraction is timely and documentary evidence contradicts the statement. Precedent treatment: Retractions and the presence of contrary documentary proof reduce probative weight of such statements; reliance on involuntary or retracted statements for penal consequences is precarious. Interpretation and reasoning: The statements relied upon were retracted by affidavit immediately after recording; the record also contains documentary proof contradicting the investigatory assertion (separate excise invoices, CENVAT pass-on certificates). Thus the impugned reliance on those statements is unsustainable. Ratio vs. Obiter: Ratio - retracted/involuntary statements lacking corroboration cannot sustain re-classification or penalties. Conclusion: Reliance on the retracted statements is of no consequence and cannot support the Department's findings. Issue 5 - Rejection of transaction value under Rule 12 and re-determination under Rule 5 of Customs Valuation Rules Legal framework: Transaction value under Rule 3 is the primary valuation method; rejection of transaction value under Rule 12 requires positive proof that the declared transaction value is unacceptable (e.g., fabricated invoices or related-party manipulation). Re-determination under Rule 5 must follow legally permissible grounds. Precedent treatment: Binding authority establishes that transaction value must be accepted unless the Department proves impropriety, fabrication or a relationship negating arm's-length value. Interpretation and reasoning: There is no evidence suggesting that invoices were fabricated or that the transaction value was improper. The Department's re-valuation was founded on the contested re-classification, which itself lacked conclusive support. Given the absence of proof of impropriety, the transaction value could not lawfully be rejected. Ratio vs. Obiter: Ratio - rejection of transaction value is impermissible without proof of improper transaction value; re-valuation based solely on unsupported re-classification is not lawful. Conclusion: Rejection of declared transaction value and re-determination of value are unsustainable; differential duty demand based on such re-valuation must be quashed. Issue 6 - Validity of confiscation, redemption fine and penalties premised on flawed classification/valuation Legal framework: Confiscation, redemption fines and statutory penalties require that the underlying factual and legal bases (mis-declaration, prohibited import, or undervaluation) be established on admissible evidence. Precedent treatment: Penalties and confiscation cannot be upheld where foundational findings (classification/valuation) are legally invalid or unsupported by evidence. Interpretation and reasoning: Because the change of classification and the re-valuation were not supported by conclusive tests or admissible evidence, and because demands were premature in the context of non-finalized assessments, the attendant confiscation and penalties lack lawful foundation. Ratio vs. Obiter: Ratio - ancillary punitive measures collapse where the primary findings upon which they rest are invalid. Conclusion: Confiscation, redemption fine and penalties based on the impugned re-classification/re-valuation are not maintainable and must be set aside; consequential relief follows as a matter of law.