Commissioner cannot rely on Director's statements without following mandatory section 138B procedure in customs valuation disputes

The CESTAT NEW DELHI allowed the appeal in a customs valuation case involving imported motorcycles. The Commissioner (Appeals) had rejected the declared value and re-determined it under rules 4 and 10(a) of the Customs Valuation Rules, 1988, relying on statements made by the appellant company's Director under section 108 of the Customs Act, 1962. The Tribunal held that since the mandatory procedure under section 138B of the Customs Act was not followed, the Director's statements could not be relied upon, following the precedent in Surya Wires case. The Commissioner's finding of under-valuation and misdeclaration was unsustainable, and the order was set aside.

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The core legal questions considered in this appeal were:

1. Whether the motorcycle imported by the appellant was second-hand or new at the time of import.

2. Whether the declared value of the motorcycle was undervalued under the Customs Valuation (Determination of Price of Imported Goods) Rules, 1988 and the Customs Act, 1962.

3. Whether the statements made by the Director of the appellant company under section 108 of the Customs Act could be relied upon as evidence to determine undervaluation and misdeclaration.

Issue-wise detailed analysis:

Issue 1 & 2: Whether the motorcycle was second-hand and undervalued

The Customs authorities initially rejected the declared value of the imported motorcycle and re-determined the value under rules 4 and 10(a) of the Customs Valuation Rules, 1988 read with section 14 of the Customs Act, 1962. The Commissioner of Customs (Appeals) upheld this re-determination and confirmed differential customs duty with penalty, primarily on the basis that the motorcycle was second-hand and undervalued.

The Commissioner (Appeals) relied heavily on the statements made by the Director of the appellant company, recorded under section 108 of the Customs Act, wherein the Director admitted to undervaluation and misdeclaration (declaring the motorcycle as 'bike parts'). This admission formed the cornerstone of the finding against the appellant on these issues.

Issue 3: Admissibility and reliance on statements under section 108 of the Customs Act

The Tribunal examined the legal framework governing the admissibility of statements recorded under section 108 of the Customs Act. It referred extensively to its earlier decision in M/s Surya Wires Pvt. Ltd., which clarified the procedural safeguards required under section 138B of the Customs Act (read with section 9D of the Central Excise Act) for admitting such statements as evidence.

According to the Tribunal's interpretation, statements recorded during inquiry under section 108 of the Customs Act are relevant only if:

• The person making the statement is examined as a witness before the adjudicating authority.
• The adjudicating authority forms an opinion that the statement should be admitted in evidence in the interests of justice.
• An opportunity for cross-examination of the witness is provided to the opposing party.

The Tribunal emphasized that these procedural safeguards are mandatory. Failure to comply with them renders the statements inadmissible and not to be relied upon for proving the facts contained therein.

The rationale behind these safeguards is to neutralize the possibility that statements recorded during inquiry might have been made under coercion or compulsion, ensuring fairness and reliability of evidence.

In the present case, the Tribunal found that the procedural requirements under section 138B of the Customs Act were not complied with. The Director's statements under section 108 were recorded during inquiry but he was not examined as a witness before the adjudicating authority, nor was the opportunity for cross-examination afforded.

Therefore, the Tribunal held that the statements could not be relied upon by the Commissioner (Appeals) to hold the appellant liable for undervaluation or misdeclaration.

Treatment of competing arguments:

The department's authorized representative argued in support of the Commissioner (Appeals) order, relying on the statements made by the Director under section 108. However, the Tribunal rejected this reliance due to non-compliance with the mandatory procedural safeguards.

The appellant did not appear for the hearing, but the Tribunal proceeded to decide the appeal on merits based on the record and submissions by the department.

Conclusions:

The Tribunal concluded that the findings of undervaluation and second-hand nature of the motorcycle were based solely on inadmissible evidence (the Director's statements under section 108 without procedural compliance). Consequently, the order of the Commissioner of Customs (Appeals) was set aside, and the appeals were allowed.

Significant holdings include the following verbatim legal reasoning:

"A person who makes a statement during the course of an inquiry has to be first examined as a witness before the adjudicating authority and thereafter the adjudicating authority has to form an opinion whether having regard to the circumstances of the case the statement should be admitted in evidence, in the interests of justice. Once this determination regarding admissibility of the statement of a witness is made by the adjudicating authority, the statement will be admitted as an evidence and an opportunity of cross-examination of the witness is then required to be given to the person against whom such statement has been made. It is only when this procedure is followed that the statements of the persons making them would be of relevance for the purpose of proving the facts which they contain."

"The provisions of section 9D of the Central Excise Act and section 138B(1)(b) of the Customs Act have been held to be mandatory and failure to comply with the procedure would mean that no reliance can be placed on the statements recorded either under section 14D of the Central Excise Act or under section 108 of the Customs Act. The Courts have also explained the rationale behind the precautions contained in the two sections. It has been observed that the statements recorded during inquiry/ investigation by officers has 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."

Core principles established:

• Statements recorded under section 108 of the Customs Act during inquiry are not self-sufficient evidence for adjudication unless procedural safeguards under section 138B are complied with.
• Admissibility of such statements requires examination of the declarant as a witness before the adjudicating authority, formation of an opinion by the authority on admissibility, and opportunity for cross-examination.
• Failure to comply with these mandatory procedures renders such statements inadmissible and unreliable for proving facts.
• Reliance solely on inadmissible statements for determining undervaluation or misdeclaration is unsustainable.

Final determinations on each issue:

• The motorcycle's characterization as second-hand and undervaluation could not be sustained due to lack of admissible evidence.
• The statements under section 108 of the Customs Act made by the Director were inadmissible and could not be relied upon.
• The order confirming differential duty and penalty was set aside.
• The appeals filed by the importer and its Director were allowed.

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