CESTAT sets aside confiscation and penalties under sections 114AA, 114(iii), 114AB for improper reliance on statements

CESTAT Delhi allowed the appeal, setting aside confiscation of goods and penalties imposed under sections 114AA, 114(iii), and 114AB of the Customs Act. The Tribunal held that customs authorities cannot question DGFT-issued instruments without DGFT initiating cancellation proceedings, following Delhi HC precedent in Amit Exports. The adjudicating authority improperly relied on statements recorded under section 108 without examining witnesses under section 138B procedure. The Tribunal found insufficient evidence of fraud or collusion, noting that title passed to buyer upon Let Export Order issuance and appellant was not responsible for subsequent destination changes.

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The core legal questions considered by the Tribunal in this appeal are:

(i) Whether the adjudicating authority had jurisdiction under section 28AAA of the Customs Act to recover ineligible benefits claimed under the Focus Market Scheme (FMS) in the absence of cancellation or initiation of cancellation proceedings of the relevant instrument by the Directorate General of Foreign Trade (DGFT);

(ii) Whether the statement of the Freight Forwarder's proprietor recorded under section 108 of the Customs Act could be admitted as evidence under section 138B of the Customs Act;

(iii) Whether the appellant, as an exporter selling goods on FOB terms, could be held responsible for diversion of goods to unnotified countries and consequent confiscation of goods and imposition of penalties under sections 114(iii), 114AA, and 114AB of the Customs Act;

(iv) Whether penalties and confiscation could be sustained in the absence of valid evidence implicating the appellant in fraudulent acts or misstatements.

Issue-wise detailed analysis:

Jurisdiction under section 28AAA of the Customs Act without DGFT cancellation:

The legal framework involves the Customs Act, 1962, specifically section 28AAA which empowers recovery of duties where an instrument issued under the Foreign Trade (Development and Regulation) Act (FTDR Act) has been obtained by collusion, wilful misstatement, or suppression of facts. The FTDR Act and its Rules vest the DGFT with exclusive authority to issue, suspend, or cancel such instruments. The Focus Market Scheme scrips are instruments issued under the FTDR Act.

The Tribunal extensively relied on a recent authoritative judgment of the Delhi High Court, which held that customs authorities cannot question the validity of an instrument issued under the FTDR Act or deny benefits under such instruments without prior adjudication or cancellation by the DGFT. The Court emphasized that the DGFT's decision on interpretation, classification, and cancellation is final and binding. Section 28AAA must be read harmoniously with the FTDR Act and Rules, implying that recovery proceedings under section 28AAA can only be initiated after the DGFT has declared the instrument invalid or cancelled it.

The Tribunal also referred to a TRU letter dated 01.06.2012, which advised customs formations to issue demands only after DGFT initiates cancellation proceedings and the instrument is cancelled. In the present case, the DGFT had neither cancelled the instrument nor initiated cancellation proceedings. Hence, the Tribunal held the impugned order invoking section 28AAA without DGFT cancellation as without jurisdiction.

Admissibility of statement under section 108 of the Customs Act:

The appellant was implicated based on a statement of the Freight Forwarder's proprietor, recorded under section 108 of the Customs Act, alleging that shipping bills were manually amended to change the destination country. The question was whether such a statement could be considered evidence under section 138B of the Customs Act.

The Tribunal examined the statutory scheme governing statements recorded during inquiries under the Customs Act and the Central Excise Act. Section 108 of the Customs Act allows officers to record statements during inquiry, but section 138B mandates that such statements are relevant only if the person making the statement is examined as a witness before the adjudicating authority and the authority admits the statement in evidence after forming an opinion that it is in the interest of justice. The person against whom the statement is made must be given an opportunity for cross-examination.

The Tribunal relied on its prior decision and various High Court judgments emphasizing that failure to comply with these procedural safeguards renders such statements inadmissible as evidence. Since the Freight Forwarder's proprietor was neither examined as a witness nor was the statement formally admitted, reliance on his statement was impermissible. Consequently, the Tribunal held that the statement could not be used to implicate the appellant.

Responsibility of the exporter under FOB contracts and liability for diversion of goods:

The appellant contended that as the contracts were on FOB terms, title in the goods passed to the buyer once the Let Export Order was issued and the goods were handed over to the shipping line. Therefore, the appellant had no control over the goods thereafter and could not be held responsible for any diversion or change in the destination country.

The Tribunal acknowledged the principle that under FOB contracts, the risk and title pass to the buyer once goods are loaded on board or the Let Export Order is granted. This was supported by a CBIC Circular dated 28.02.2015, which clarified that the exporter's responsibility ends after the Let Export Order is issued and goods are handed over to the shipping line.

However, the Tribunal noted that under the Focus Market Scheme, the exporter is the sole beneficiary of the scrips and is responsible to ensure that the goods actually reach the designated Focus Market. The Handbook of Procedures requires the exporter to submit proof of landing of goods in the Focus Market, such as import bills of entry, delivery orders, arrival notices, or certified tracking reports. Without such proof, entitlement to benefits is not established.

In the present case, neither the appellant nor the authorities produced such proof. The investigation did not clarify whether the goods reached the Focus Market or were diverted, or if fake documents were submitted. The impugned order failed to address this crucial issue of proof of landing, which is central to entitlement under the FMS.

Penalties and confiscation under sections 114(iii), 114AA, and 114AB of the Customs Act:

Section 114AA penalizes knowingly or intentionally making or using any material particulars in customs transactions; section 114(iii) penalizes acts or omissions that render goods liable to confiscation; and section 114AB penalizes obtaining instruments by fraud, collusion, or wilful misstatement.

The Principal Commissioner imposed penalties on the appellant relying primarily on the Freight Forwarder's statement under section 108. Since that statement was inadmissible, the penalties could not be sustained. The Tribunal held that in the absence of admissible evidence implicating the appellant in fraudulent acts or misstatements, penalties under these provisions could not be imposed.

Moreover, confiscation of goods under section 113 was also set aside because the finding of collusion was based on inadmissible evidence. The Tribunal emphasized that fraud vitiates everything but such a finding must be supported by legally admissible evidence.

Treatment of competing arguments:

The appellant argued that the show cause notice under section 28AAA was without jurisdiction because DGFT had not cancelled the instrument; the appellant was a bona fide exporter under FOB contracts; and the statement implicating them was inadmissible. The appellant also highlighted pending criminal proceedings against the Freight Forwarder's proprietor for false statements.

The department contended that DGFT was in the process of cancellation; section 28AAA could be invoked even without cancellation if the instrument was obtained by collusion or misstatement; and fraud vitiates all acts, justifying reliance on the Freight Forwarder's statement.

The Tribunal rejected the department's contentions on jurisdiction and evidence, relying on statutory interpretation, authoritative judicial precedents, and procedural safeguards. It found the appellant's arguments more consistent with the legal framework and evidence requirements.

Conclusions:

The Tribunal concluded that the adjudicating authority lacked jurisdiction under section 28AAA without DGFT cancellation or initiation of cancellation proceedings. The statement of the Freight Forwarder's proprietor under section 108 was inadmissible without examination and admission under section 138B. The appellant, as an FOB exporter, was not responsible for diversion of goods post Let Export Order, but entitlement to FMS benefits required proof of landing which was not established. Penalties and confiscation based on inadmissible evidence could not be sustained. Accordingly, the impugned order was set aside and the appeal allowed.

Significant holdings:

"We find ourselves unable to recognize a right that may be said to inhere in the customs authorities to doubt the issuance of an instrument. The FTP 2015-20 in unequivocal terms provides in para 2.57 that it would be the decision of the DGFT on all matters pertaining to interpretation of policy... which would be final and binding... It would thus be wholly impermissible for the customs authorities to either ignore the MEIS certificate or deprive a holder thereof of benefits that could be claimed under that scheme absent any adjudication or declaration of invalidity being rendered by the DGFT."

"Section 28AAA would thus have to be interpreted as contemplating a prior determination on the issue of collusion, wilful misstatement or suppression of facts tainting an instrument issued under the FTDR Act before action relating to recovery of duty could be possibly initiated."

"Statements recorded during inquiry/investigation by officers have every chance of being recorded under coercion or compulsion and it is in order to neutralize this possibility that statements of the witnesses have to be recorded before the adjudicating authority, after which such statements can be admitted in evidence."

"The exporter will be entitled to these scrips if and only if the goods reach the destination market and not otherwise... The responsibility of the exporter does not end with obtaining the Let Export Order."

"Penalties under sections 114AA, 114(iii) and 114AB of the Customs Act cannot be imposed in the absence of admissible evidence implicating the appellant in fraudulent acts or misstatements."

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