2025 (11) TMI 1816 - AT - Customs

FOB value restored, blended fabric classification upheld, penalty under section 114(iii) sustained, no redetermination under rule 6

Commissioner Of Customs ICD TKD, New Delhi Versus M/s Om Udyog

CESTAT New Delhi partly allowed Revenue's appeal. It upheld the Commissioner (Appeals)'s setting aside of the Joint Commissioner's rejection and ... Detention of goods on the ground of overvaluation - rejection of declared FOB value and re-determination of the same under rule 6 of the Valuation Rules - redetermination of benefits of Drawback and ROSCTL payable based on the revised value of the exported goods - confiscation of export goods - redemption fine - penalty. Rejection of the FOB value and it’s re-determination under rule 6 of the Valuation Rules - HELD THAT:- The transaction value for delivery of the goods at the time and place of exportation (i.e., the FOB value) shall be the value under section 14 except when it is rejected by the proper officer and re-determined under the Valuation Rules. It must be noted that it is the proper officer and NOT THE EXPORTER who can reject the transaction value and re-determine it following some other method. It would be impossible for the exporter to anticipate if the proper officer would reject his transaction value and if so, what value the proper officer would fix and following which method and accordingly file the Shipping Bill. All that the exporter can do is truthfully declare the transaction value in the Shipping Bills. Once the exporter declares the transaction value, if the proper officer wants to re-determine it and fix some other value, he must, in the first place, reject the transaction value under rule 8 - In this case, there are no reasonable doubt has been recorded by the Joint Commissioner. On the other hand, according to the learned counsel, the officers examined the suppliers of the goods who had sold the goods to the respondent and they confirmed the transaction value. Subsequently, the remittance from the overseas buyers, as evidenced by the BRCs also showed that the transaction value was correct. Since the rejection of the transaction value under rule 8 cannot be sustained neither can its re-determination under rule 6. It must also be pointed out even if the value was rejected under rule 8, it could only be redetermined sequentially under rules 4 to 6 and the officer could not jump to rule 6 without first recording the reasons for not determining the values under rules 4 and 5. As per section 76 (1) (b), no drawback will be payable at all. Even in such a case, there is no prohibition on exporting the goods at such a high price; only the drawback will not be paid. Section 76 makes it more than explicit that the transaction value of the export goods can be much higher than the market value of such goods in Indian market - the drawback, ROSCTL, etc. are paid on the FOB value (transaction value) and not on the assessable value determined under the Customs Valuation Rules. The re-determination of the FOB value of the export goods by the Joint Commissioner has been correctly set aside by the Commissioner (Appeals) in the impugned order. Change of the serial number in the drawback schedule and the ROSTCL schedule and consequent re-determination of admissible drawback and ROSCTL - HELD THAT:- The fact that the garments were found to be of blended fabrics and not of 100% cotton is not in dispute. CRCL tested and gave a report and the appellant accepted the test report. There is no contrary evidence or test reports even before us to say that the goods were actually made of 100% cotton. However, in the impugned order, the Commissioner (Appeals) completely ignored this aspect when setting aside the order of the Joint Commissioner which was an error - the re-determination of the drawback and ROSTCL schedules by the Joint Commissioner must be restored. Confiscation of the goods and redemption fine - HELD THAT:- The Commissioner (Appeals) has presumed that seizure under section 110 is a pre-requisite for confiscation under section 113. Such is, however, not the case. Nothing in section 113 (or section 111 in case of imported goods) stipulates that only seized goods can be confiscated. Section 113 provides for confiscation of export goods and section 111 provides for confiscation of imported goods. Seizure is the act of taking physical possession of the goods which are believed to be liable to confiscation whereas on confiscation the goods vest in the central government. The only important thing is that the goods must be available for confiscation and in order to ensure that they are available, goods are seized. If the goods are otherwise available (say, by being in the custody of the custodian), they can be confiscated. A perusal of section 110, 110A, 113 and 126 will clarify the position that seizure is not a pre-requisite for confiscation. Section 110A provides for provisional release of things seized on execution of a bond. In this case, the respondent had sought release of the detained goods to export them and for that purpose executed a bond. Once a bond is executed, the bond binds the owner of the goods to pay the redemption fine in lieu of confiscation and therefore, fine can be imposed in lieu of confiscation. But for the bond, the owner of the goods can only be given an option to pay fine in lieu of confiscation. The owner of the goods may choose the option, pay fine and redeem the goods or may not choose the option, not pay fine and not redeem the goods. It is held by the Supreme Court in Weston components [2000 (1) TMI 45 - SC ORDER] that if goods are released provisionally on bond, redemption fine can be imposed. While the export goods were liable to confiscation, in order to actually confiscate them, they must be available because after confiscation, the adjudicating authority has to take possession of the goods as per section 124 (2). The goods had already been provisionally allowed to be exported on execution of a bond. The Joint Commissioner could have imposed a fine in lieu of confiscation in terms of the bond. Instead, the Joint Commissioner confiscated the goods and gave the respondent an option to redeem them on payment of redemption fine which made it perfectly possible for the respondent to not exercise this option. There was no appeal by the Revenue before the Commissioner (Appeals) against this part of the order of the Joint Commissioner. The redemption fine cannot be sustained for two reasons (i) the Joint Commissioner had only given the respondent an option to pay fine in lieu of confiscation and the respondent is perfectly within his right to not exercise this option; and (ii) the bond for provisional release executed by the respondent and accepted by the officer did not provide that if the goods are held liable to confiscation, the respondent would pay a fine in lieu of confiscation. Penalties under section 114 (iii) and 114AA - HELD THAT:- The penalty under section 114AA can be imposed if there was a mis-declaration with knowledge and has nothing to do with confiscation of the goods under section 113. The Commissioner (Appeals) clearly fell in error in holding that penalty under section 114AA is dependent on the confiscation under section 113. According to the Joint Commissioner, the respondent had mis-declared both the value of the goods and the nature of the fabric of which the garments were made. We have held in favour of the respondent on the question of value and there is no dispute that the nature of the fabric was different from what was declared. The question is whether it was done knowingly. From the records of the case, the intention to mis-declare the nature of the fabric is not clearly emerging. For this reason alone, it is not possible to restore the penalty on the respondent under section 114AA imposed by the Joint Commissioner. The setting aside of this penalty by the Commissioner (Appeals) must be upheld although the reasons given by the Commissioner (Appeals) that this penalty is contingent upon confiscation is contrary to law. The declared FOB value of the goods was Rs.10,88,05,179/- in the four shipping bills and the penalty imposed by the Joint Commissioner under section 114 (iii) was only Rs. 2,00,000/- way below the value of the goods. The Commissioner (Appeals) did not discuss this penalty when setting it aside. In view of the undisputed fact that the nature of the fabrics in the export goods were mis-declared and consequently, they were liable to confiscation and the respondent’s actions rendered them liable to confiscation, the penalty of Rs. 2,00,000/- under section 114 (iii) imposed by the Joint Commissioner must be restored and the impugned order must be set aside to this extent. The appeal filed by the Revenue is partly allowed by upholding the redetermination of the drawback and ROSTCL as per the correct serial number of the Schedules as per the nature of the fabrics of the garments and restoring penalty of Rs. 2,00,000/- on the respondent under section 114(iii). The impugned order is modified to the said extent only. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether the declared FOB/transaction value of the export garments could be rejected and re-determined under rule 6 of the Customs Valuation (Determination of Value of Export Goods) Rules, 2007. 1.2 Whether mis-declaration of fabric composition (100% cotton versus polyester-cotton blend) warranted change of serial numbers in the Drawback and ROSCTL Schedules and consequential re-determination of benefits. 1.3 Whether confiscation of the export goods under section 113 and imposition of redemption fine under section 125 were legally sustainable in the absence of a formal seizure under section 110, when the goods had been detained and allowed to be exported on execution of a bond. 1.4 Whether penalty under section 114AA was contingent upon confiscation under section 113 and whether, on facts, such penalty was sustainable. 1.5 Whether penalty under section 114(iii) could be imposed where the goods were held liable to confiscation under section 113 but were not actually confiscated. 2. ISSUE-WISE DETAILED ANALYSIS 2.1 Rejection and re-determination of FOB/transaction value under the Valuation Rules Legal framework 2.1.1 The Court examined section 14 of the Customs Act, 1962 and rules 3, 4, 5, 6 and 8 of the Customs Valuation (Determination of Value of Export Goods) Rules, 2007. It noted that: (a) the value of export goods is the 'transaction value' (FOB value) unless rejected by the proper officer; (b) under rule 3(1), subject to rule 8, the value shall be the transaction value; (c) rules 4 to 6 are to be applied sequentially if the value cannot be determined under rule 3; and (d) rule 8 prescribes the mechanism and preconditions for rejection of the declared value on 'reason to doubt' and 'reasonable doubt' standards. Interpretation and reasoning 2.1.2 The Court held that only the proper officer, not the exporter, can reject the transaction value, and that rejection under rule 8 is a mandatory two-stage process: (i) formation of 'reason to doubt' and calling for further information; and (ii) after considering such information (or its absence), recording a continuing 'reasonable doubt' before deeming the transaction value as not determined in accordance with rule 3(1) and then proceeding sequentially under rules 4 to 6. 2.1.3 In the present case, the initial doubt was only that the garments 'appeared to be overvalued'. The Court found no recorded 'reasonable doubt' by the Joint Commissioner as required by rule 8. On the contrary, the supplier had confirmed the prices during investigation and, post-export, the full declared FOB value was realised from the overseas buyer as evidenced by Bank Realisation Certificates. 2.1.4 The Court rejected the departmental contention that BRCs and buyer's remittances could not be relied upon. It held that where price between buyer and seller is under scrutiny, the primary check is what was actually paid, and in exports, BRCs are the documentary reflection of such payment. The Department's approach of discarding invoices, remittances and BRCs in favour of subjective market enquiries and opinions of traders could not be accepted. 2.1.5 The Court further held that even assuming rejection under rule 8, the proper officer could not 'jump' directly to rule 6. Rules 4 and 5 must be exhausted or reasons recorded why values under those rules could not be determined before resorting to rule 6. This sequential methodology had not been followed. 2.1.6 By reference to section 76(1)(b), the Court held that the statute itself contemplates that the export price (FOB value) may be significantly higher than the domestic market price, and in such cases the consequence is denial of drawback if the drawback amount exceeds the market price, not alteration of the transaction value between buyer and seller. It reiterated that drawback and ROSCTL are computed on FOB (transaction value), not on an officer-determined 'assessable value' under the Valuation Rules, and that 'no stranger to the contract can change the transaction value (FOB value) of the goods'. Conclusions 2.1.7 The Court held that the transaction value (declared FOB value) was not validly rejected under rule 8; consequently, re-determination of FOB value under rule 6 was unsustainable. It upheld the Commissioner (Appeals)'s setting aside of the re-determined FOB value. 2.2 Mis-declaration of fabric composition and re-determination of Drawback and ROSCTL Interpretation and reasoning 2.2.1 The garments were declared as made of 100% cotton. CRCL testing established that the fabric was a polyester-cotton blend. The respondent had no objection to the CRCL report and there was no contrary test report on record. 2.2.2 The Joint Commissioner had, on this basis, changed the applicable serial numbers in the Drawback and ROSCTL Schedules and re-computed the admissible amounts, both: (i) on the basis of the altered fabric composition; and (ii) using his re-determined FOB value. 2.2.3 The Commissioner (Appeals), while setting aside the Joint Commissioner's order in toto, did not discuss or record any finding on the effect of the changed fabric composition on the applicable serial numbers under the Drawback and ROSCTL Schedules, which the Court held to be an error. Conclusions 2.2.4 The Court held that the mis-declaration of fabric composition was undisputed; therefore, the correct serial numbers in the Drawback and ROSCTL Schedules, corresponding to polyester-cotton blend garments, must be applied. To that extent, re-determination of Drawback and ROSCTL by the Joint Commissioner was required to be restored, subject to the FOB value remaining as declared. 2.3 Confiscation under section 113 and redemption fine under section 125 in the absence of seizure Legal framework 2.3.1 The Court examined sections 110, 110A, 113, 124, 125 and 126. It noted that section 110 deals with seizure; section 110A with provisional release of seized goods on bond; section 113 with liability of export goods to confiscation; section 124 with show cause notice procedure; section 125 with redemption fine 'whenever confiscation is authorised'; and section 126 with vesting of property in Central Government on confiscation. Interpretation and reasoning 2.3.2 The Commissioner (Appeals) had held that, as only a detention memo was issued and there was no seizure memo under section 110, confiscation under section 113 and consequential redemption fine were unsustainable because 'confiscation cannot be an action independent of seizure'. 2.3.3 The Court held that nothing in sections 113, 111 or 126 makes seizure a pre-requisite for confiscation. Seizure is merely the act of taking physical possession of goods believed liable to confiscation; confiscation is a legal consequence which vests property in the Government. The only requirement for actual confiscation is that the goods be available so that, under section 126(2), the adjudicating officer can 'take and hold possession' of them. The wording of section 126(2) itself contemplates confiscation of goods that were not previously seized. 2.3.4 The Court accepted that, as a matter of practice and judicial interpretation, detention is treated akin to seizure for purposes of computing limitation under section 110(2), but clarified that this does not convert detention into a statutory condition precedent for confiscation under section 113. 2.3.5 In the case at hand, the goods were detained while in the customs area, then released and allowed to be exported on execution of a bond at the respondent's request. At the time of adjudication, the goods were no longer physically available in India. 2.3.6 The Court held that the export goods were liable to confiscation under section 113(i), (ia) and (ja) because: (i) they did not correspond in description (fabric composition) with the entries made (s.113(i)); (ii) they were entered for exportation under claim for drawback and did not correspond in material particulars relevant to fixation of drawback rate (s.113(ia)); and (iii) they were entered for export under claim of remission/refund (ROSCTL) and the mis-declaration rendered the claim wrongful (s.113(ja)). 2.3.7 However, since the goods had already been exported, the Court held that actual confiscation was not feasible. The Joint Commissioner erred by purporting to confiscate the goods and then 'offering' the respondent an option to redeem on payment of redemption fine, as if the goods were still in his control, instead of treating them as merely 'liable to confiscation' and then levying fine in lieu of confiscation in accordance with the bond conditions, if any. 2.3.8 The Court examined the bond executed for provisional release and noted that it did not contain a stipulation that, if the goods were held liable to confiscation, the exporter would pay redemption fine in lieu of confiscation. In the absence of such a condition, the bond could not serve as an undertaking to pay redemption fine. 2.3.9 Further, once the Joint Commissioner chose the statutory route under section 125(1) and merely granted an 'option' to pay fine in lieu of confiscation, the respondent was legally entitled to decline that option; this structure could not be converted thereafter into a compulsory liability to pay fine. Conclusions 2.3.10 The Court held: (i) seizure under section 110 is not a legal precondition for confiscation under section 113; (ii) in the present case, the export goods were liable to confiscation under section 113(i), (ia) and (ja), but were not actually available for confiscation as they had been exported; (iii) the Joint Commissioner erred in ordering confiscation with an option to redeem; and (iv) redemption fine could not be sustained because: (a) only an option had been granted, which the respondent was free not to exercise; and (b) the bond did not contain an undertaking to pay fine in lieu of confiscation. Consequently, redemption fine was not restored. 2.4 Penalty under section 114AA Legal framework 2.4.1 The Court analysed section 114AA, which provides that any person who knowingly or intentionally makes, signs, uses, or causes to be made, signed or used, any declaration, statement or document which is false or incorrect in any material particular in the transaction of any business for the purposes of the Act, shall be liable to a penalty not exceeding five times the value of the goods. Interpretation and reasoning 2.4.2 The Commissioner (Appeals) had set aside the penalty under section 114AA on the premise that it was 'contingent upon confiscation' of the goods. The Court held this view to be contrary to the explicit text of section 114AA, which contains no requirement that goods be confiscated or even liable to confiscation. The provision turns solely on the existence of a knowing or intentional false or incorrect declaration or document. 2.4.3 The Joint Commissioner had invoked section 114AA on the basis of alleged mis-declarations of both value and fabric composition. The Court, however, having upheld the declared FOB value, confined its examination to mis-declaration of fabric composition. It found that while the fabric was admittedly different from the declaration, the record did not clearly establish that the mis-declaration was 'knowingly or intentionally' made. Conclusions 2.4.4 The Court held that: (i) penalty under section 114AA is not dependent on confiscation under section 113; but (ii) in the facts of this case, the requisite mens rea (knowledge or intention) was not satisfactorily proved. On this limited factual ground, the penalty under section 114AA could not be restored. The setting aside of this penalty by the Commissioner (Appeals) was therefore upheld, though for reasons different from those stated in the impugned order. 2.5 Penalty under section 114(iii) Legal framework 2.5.1 The Court considered section 114, particularly clause (iii), which provides that any person who, in relation to any goods, does or omits any act that would render such goods liable to confiscation under section 113, or abets such act or omission, shall be liable, in the case of 'any other goods' (i.e., goods other than prohibited or dutiable goods), to a penalty not exceeding the value of the goods as declared or as determined under the Act, whichever is greater. Interpretation and reasoning 2.5.2 The export garments were neither 'prohibited' nor 'dutiable' goods; therefore, section 114(iii) squarely applied. The Commissioner (Appeals) had not discussed this provision at all while setting aside the penalty. 2.5.3 The Court held that section 114(iii) does not require that the goods be actually confiscated; it is sufficient that the acts or omissions render the goods liable to confiscation under section 113. In this case, due to mis-declaration of the nature of the fabric, the goods were clearly held liable to confiscation under section 113(i), (ia) and (ja), satisfying the precondition for imposition of penalty under section 114(iii). 2.5.4 The declared FOB value of the goods across the four shipping bills was Rs. 10,88,05,179/-. The penalty imposed by the Joint Commissioner under section 114(iii) was Rs. 2,00,000/-, which the Court described as modest and far below the statutory ceiling (the value of the goods). Conclusions 2.5.5 The Court concluded that the Commissioner (Appeals) erred in setting aside the penalty under section 114(iii) without discussion. Given that the respondent's acts rendered the export goods liable to confiscation under section 113, the penalty of Rs. 2,00,000/- under section 114(iii) imposed by the Joint Commissioner was legally sustainable and was restored.