Confiscation order set aside as Revenue failed to prove smuggling of 352 textile rolls under Section 123

CESTAT Kolkata set aside confiscation order involving 352 rolls of coated textile fabric from Taiwan/China found in appellant's warehouse. The tribunal held that since goods were neither notified under Section 123 nor seized at port/airport/international border, burden of proof lay on Revenue to establish smuggling. Revenue failed to discharge this burden. Consequently, no proceedings could be sustained against appellant, and redemption fine and penalty were deemed unsustainable. Appeal allowed.

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

1. Whether the impugned goods, being 352 rolls of coated textile fabric of alleged Taiwan/China origin, are liable to confiscation under Section 111(d) read with Section 11 of the Customs Act and Section 3(3) of the Foreign Trade (Development and Regulation) Act, 1992.

2. Whether the valuation of the seized goods at Rs. 18.73 Lakhs by relying on contemporaneous Bills of Entry data under the Customs Valuation Rules, 2007 (CVR, 2007) is legally sustainable.

3. Whether the show-cause notice issued to the appellant was valid and issued in accordance with principles of natural justice and not arbitrary or prejudiced.

4. Whether the appellant was given adequate opportunity to defend itself, including to contest the valuation and origin of goods.

5. Whether the goods are smuggled goods warranting confiscation and imposition of penalty under the Customs Act.

6. Whether the burden of proof lies on the Revenue to establish smuggling and whether the Revenue discharged this burden.

7. Whether the goods being non-notified under Section 123 of the Customs Act affects the presumption and liability for confiscation.

8. Whether penalty and redemption fine imposed on the appellant are justified in the facts and circumstances of the case.

Issue-wise Detailed Analysis:

Issue 1 & 5 & 6 & 7: Liability for confiscation and burden of proof on smuggling

The relevant legal framework includes Section 111(d) of the Customs Act which deals with confiscation of goods liable under certain conditions, Section 11 of the Customs Act regarding seizure, and Section 3(3) of the Foreign Trade (Development and Regulation) Act, 1992. Section 123 of the Customs Act provides for notified goods for presumption of smuggling.

The Court noted that the seized goods were found in the appellant's warehouse and were neither notified goods under Section 123 nor seized at a port, airport, or international border. The Tribunal emphasized that in such circumstances, the burden lies on the Revenue to prove that the goods are smuggled. The Revenue failed to discharge this burden as no conclusive evidence was produced to establish smuggling beyond a reasonable doubt.

The Court found that the Revenue's failure to prove smuggling rendered the confiscation proceedings unsustainable. The Tribunal relied on the principle that confiscation is a drastic measure and must be backed by clear evidence. Since the goods were not notified and the seizure location was not a point of import, the presumption of smuggling did not arise. Consequently, the confiscation and penalty imposed were not justified.

Issue 2: Valuation of goods based on contemporaneous imports

The valuation was done by the Revenue by referring to 43 Bills of Entry cleared at various ports during June to August 2021, selecting those with Unit Quantity Code (UQC) as KGS to match the net weight of the seized goods. The lowest assessable value from these was Rs. 18.73 Lakhs.

The appellant challenged this valuation on the ground that the goods were stock lots with assorted colors and sizes, making direct comparison with contemporaneous imports inappropriate. The appellant relied on precedents that held when goods differ in quality, quantity, and period of importation, contemporaneous imports cannot be used for valuation comparison. The Court referred to decisions which held that without similarity in quality and quantity, such comparisons lack factual and legal sanctity.

The Tribunal observed that the Revenue itself admitted difficulty in ascertaining the UQC in terms of square meters (SQM) due to the assorted nature of the goods, corroborating the appellant's contention that the goods were stock lots. Further, no representative samples were drawn to ascertain origin or quality. The Revenue's reliance on DOV data without proper matching of quality and quantity was found to be flawed.

Issue 3 & 4: Validity of show-cause notice and opportunity to the appellant

The appellant contended that the show-cause notice dated 29.11.2021 was issued arbitrarily and without factual basis, citing a Supreme Court judgment emphasizing the need for reasoned and non-prejudiced notices. The appellant also argued that the notice did not disclose the import documents corresponding to the Bill of Entry used for valuation, depriving the appellant of a fair opportunity to contest the valuation.

The Tribunal agreed that the show-cause notice lacked necessary particulars and failed to provide the appellant with an adequate opportunity to defend itself on key issues such as valuation and origin. The absence of detailed import documents and reliance on incomplete data undermined the procedural fairness of the adjudication.

Issue 8: Imposition of penalty and redemption fine

The penalty and redemption fine were imposed based on the confiscation and valuation of the goods. Since the Tribunal set aside the confiscation on grounds of failure of proof of smuggling and flawed valuation, the penalty and redemption fine were also held to be unsustainable. The Court held that penalty cannot be imposed when confiscation is not justified.

Competing Arguments and Their Treatment

The appellant's arguments focused on procedural irregularities, lack of evidence for smuggling, improper valuation, and denial of natural justice. The Revenue relied on the impugned order and valuation based on contemporaneous imports under CVR, 2007.

The Tribunal carefully analyzed the evidence and submissions, finding merit in the appellant's contentions regarding burden of proof, valuation methodology, and procedural fairness. The Revenue's arguments were found insufficient to uphold confiscation and penalty.

Conclusions

The Tribunal concluded that the confiscation proceedings were not sustainable due to failure of the Revenue to prove smuggling, flawed valuation based on non-comparable contemporaneous imports, and procedural lapses in issuing the show-cause notice. Consequently, the penalty and redemption fine imposed were also set aside.

Significant Holdings

The Tribunal held: "It is a fact on record that the goods were seized in the go-down of the appellant wherein 352 Rolls of coated Textile Fabric (assorted colour and size) of Taiwan/China Origin, were found. Admittedly, the goods in question are neither notified goods under Section 123 of the Act nor seizure on the Port/Airport or International Border. In that circumstances, the burden lies on the Revenue that the goods in question are smuggled one, which the Revenue has failed to do so."

Further, "In that circumstances, no proceeding is sustainable against the appellant. Accordingly, no redemption fine and penalty can be imposed on the appellant."

The core principles established include:

• The burden of proof to establish smuggling lies on the Revenue when goods are not notified under Section 123 and seized away from ports or borders.
• Valuation based on contemporaneous imports must consider similarity in quality, quantity, and period of importation; otherwise, it lacks legal sanctity.
• Show-cause notices must disclose material particulars and provide a fair opportunity to the affected party to defend.
• Confiscation and penalty are not sustainable without proper proof and adherence to procedural fairness.

The final determination was to set aside the impugned order of confiscation, penalty, and redemption fine, and allow the appeal with consequential relief.

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