Customs authorities cannot invoke section 28AAA without DGFT completing export license cancellation proceedings first

CESTAT New Delhi set aside the Principal Commissioner's order dated 09.03.2022 in entirety. The tribunal held that customs authorities lacked jurisdiction to invoke section 28AAA of the Customs Act without DGFT initiating or completing cancellation proceedings of the export license. Following Delhi HC precedent in Amit Exports case, customs cannot deprive instrument holders of benefits absent DGFT's adjudication of invalidity. Penalties under sections 114AA and 114(iii) were set aside as they relied on inadmissible statements under section 108. Confiscation under section 113 was also quashed. Appeal allowed.

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The core legal questions considered in this case include:

1. Whether the jurisdiction under section 28AAA of the Customs Act could be invoked without the Directorate General of Foreign Trade (DGFT) having initiated or completed cancellation proceedings of the export incentive instrument (Focus Market Scheme scrips).

2. Whether the statement made by the freight forwarder's proprietor under section 108 of the Customs Act could be admitted as evidence under section 138B of the Customs Act.

3. Whether the appellant, being an exporter selling goods on FOB terms, could be held responsible for unauthorized changes in the country of destination made by the freight forwarder after issuance of Let Export Order.

4. Whether penalties under sections 114(iii) and 114AA of the Customs Act could be imposed on the appellant and its partner based on the alleged fraudulent diversion of exports.

Issue 1: Jurisdiction under Section 28AAA of the Customs Act without DGFT cancellation of instrument

The relevant legal framework includes section 28AAA of the Customs Act, which provides for recovery of duties in cases where export incentive instruments such as duty credit scrips are obtained by collusion, willful misstatement, or suppression of facts. The Foreign Trade (Development and Regulation) Act (FTDR Act) and the Foreign Trade Policy (FTP) vest the DGFT with exclusive authority to issue, suspend, or cancel such instruments.

The Court relied heavily on the Delhi High Court's decision which held that customs authorities cannot question the validity of an export incentive instrument or deny benefits under the scheme unless the DGFT, as the competent authority under the FTDR Act, has adjudicated and cancelled the instrument. The judgment emphasized that section 28AAA actions must be preceded by DGFT's cancellation or at least initiation of cancellation proceedings. This interpretation avoids conflicting parallel authorities and preserves the primacy of DGFT in matters related to export incentives.

The Court also referred to a Central Board of Indirect Taxes and Customs (CBIC) Technical Reference Unit (TRU) letter, which advised that demands under section 28AAA should be issued only after DGFT initiates cancellation proceedings.

Applying this legal framework, the Court found that since DGFT had neither cancelled nor initiated proceedings to cancel the appellant's Focus Market Scheme scrips, the invocation of section 28AAA by the customs authorities was without jurisdiction. The impugned order demanding recovery of the scrip amount was therefore invalid.

Issue 2: Admissibility of statement under section 108 of the Customs Act as evidence under section 138B

Section 108 of the Customs Act empowers customs officers to record statements during inquiries. Section 138B governs the admissibility of such statements in adjudication or court proceedings. It requires that the person making the statement be examined as a witness before the adjudicating authority, who must form an opinion that the statement should be admitted in the interests of justice. The person against whom the statement is used must be given an opportunity for cross-examination.

The Tribunal's prior ruling was cited, which clarified that failure to comply with this procedure renders the statements inadmissible as evidence. The rationale is to prevent coerced or compelled statements from being used unfairly.

In the present case, the statement of the freight forwarder's proprietor, implicating the appellant's partner in unauthorized amendments to shipping bills, was recorded under section 108 but was not followed by examination or opportunity for cross-examination before the adjudicating authority. Consequently, the Court held that this statement could not be relied upon as evidence.

Issue 3: Liability of the exporter on FOB basis for unauthorized change in country of destination

The appellant contended that since the contracts with overseas buyers were on FOB terms, title and control over the goods passed to the buyer once the Let Export Order was issued and goods were handed over to the freight forwarder or shipping line. Therefore, any changes made by the freight forwarder to the country of destination after that point could not be attributed to the appellant.

The Court acknowledged that under FOB terms, the exporter's title passes to the buyer at the port of shipment and the exporter loses control thereafter. However, the Court emphasized that under the Focus Market Scheme, the exporter alone is entitled to the scrip benefits, which are conditional upon the goods actually reaching the designated Focus Market.

The Handbook of Procedures requires the exporter to produce proof of landing of goods in the Focus Market, such as import bills, delivery orders, arrival notices, or certified tracking reports. The Court noted that in this case, neither party produced evidence that the goods reached the declared Focus Market (Panama). The customs authorities also did not obtain relevant documents from DGFT to verify the actual destination or landing of goods.

Thus, while the exporter's lack of control after Let Export Order was recognized, the exporter's responsibility to ensure and prove that the goods reached the Focus Market was underscored. The impugned order did not address this crucial issue.

Issue 4: Imposition of penalties under sections 114(iii) and 114AA of the Customs Act

Section 114(iii) prescribes penalties for acts or omissions that render goods liable for confiscation under section 113. Section 114AA penalizes knowingly making or using false or fraudulent particulars in customs transactions.

The Additional Commissioner imposed penalties on the appellant and its partner based on the finding that unauthorized amendments to shipping bills were made on instructions from the appellant's partner, constituting fraudulent diversion of exports and rendering the goods liable for confiscation.

However, since the statement implicating the appellant's partner was inadmissible, the foundation for these penalties collapsed. Without admissible evidence of fraudulent intent or acts, penalties under sections 114(iii) and 114AA could not be sustained.

Additionally, the appellant's argument that penalties cannot be imposed simultaneously on a partnership firm and its partners was rejected. The Court confirmed that partnership firms and partners are independent legal entities and can be penalized separately.

Competing Arguments and Court's Treatment

The appellant argued lack of jurisdiction under section 28AAA without DGFT cancellation, denial of involvement in destination change, inadmissibility of the freight forwarder's statement, and invalidity of penalties.

The department contended that DGFT was in process of cancellation, that section 28AAA applied even without cancellation if fraud was established, and relied on the freight forwarder's statement to prove fraudulent diversion.

The Court rejected the department's jurisdictional argument based on authoritative judicial precedent and statutory interpretation, and held the statement inadmissible due to procedural non-compliance. The Court partially accepted the appellant's FOB argument but emphasized the exporter's obligation to ensure goods reach the Focus Market to claim benefits.

Conclusions

The Court concluded that:

- The customs authorities lacked jurisdiction to invoke section 28AAA without DGFT cancellation or initiation of cancellation proceedings of the export incentive instrument.

- The statement recorded under section 108 of the Customs Act without examination and admission as evidence under section 138B was inadmissible and could not support findings of fraud or imposition of penalties.

- The exporter's responsibility under the Focus Market Scheme to ensure and prove actual export to the designated market remains paramount.

- Penalties under sections 114(iii) and 114AA could not be imposed without admissible evidence of fraudulent acts.

- Penalties on both the partnership firm and its partner are legally sustainable as they are separate legal entities.

Accordingly, the Court set aside the impugned order of the Commissioner (Appeals) and allowed the appeals.

Significant holdings and principles established:

"It would be wholly impermissible for the customs authorities to either question or go behind an instrument issued under the FTDR in law."

"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."

"The statement of Imran Mirza made under section 108 of the Customs Act would not be relevant" due to non-compliance with section 138B procedural safeguards.

"The exporter will be entitled to these scrips if and only if the goods reach the destination market and not otherwise."

"The partnership firm and its partners are independent legal identities and can be penalised simultaneously."

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