Alleged export diversion to non-notified destination for Focus Market Scheme benefits fails as s108 statements breach s138B

Statements recorded under s.108 of the Customs Act were held inadmissible because the adjudicating authority did not comply with s.138B requirements of examining the maker as a witness, forming an opinion on admissibility, and affording cross-examination; consequently, the alleged fraudulent diversion to a non-notified destination for Focus Market Scheme benefits was not proved. Confiscation under s.113(d),(g),(i) was set aside because the goods had already been exported pursuant to Let Export Orders before initiation of investigation, so the provision governing attempted improper export was inapplicable. Penalties under s.114(iii) were quashed as contingent on confiscability/attempt, and penalties under s.114AA were quashed as based on inadmissible s.108 statements. The impugned appellate order was set aside and the appeal allowed.

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1. ISSUES PRESENTED AND CONSIDERED

(i) Whether statements recorded during inquiry under section 108 of the Customs Act could be relied upon to establish fraudulent diversion/unauthorised amendment of export documents, when the statutory procedure for admissibility under section 138B was not followed.

(ii) Whether confiscation under section 113(d), 113(g) and 113(i) was sustainable where (a) the foundational finding of fraudulent diversion was based solely on inadmissible section 108 statements, and (b) the exports had already been completed on Let Export Orders before commencement of investigation, in light of section 113 addressing goods "attempted to be improperly exported".

(iii) Whether penalties under section 114(iii) and section 114AA could stand once confiscation under section 113 failed and the alleged role/knowledge was supported only by statements rendered inadmissible for non-compliance with section 138B.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (i): Reliance on section 108 statements without following section 138B

Legal framework: The Court examined the interplay between section 108 (recording statements during inquiry) and section 138B (conditions for treating such statements as relevant for proving the truth of their contents) and treated the safeguards under section 138B as mandatory for adjudication purposes.

Interpretation and reasoning: The finding of fraudulent diversion/unauthorised amendment was recorded "merely on the basis" of statements of various persons recorded under section 108. The Court held that such statements could become relevant to prove their contents only if the procedure contemplated by section 138B was followed. Since the adjudication did not follow that procedure, the statements could not be treated as relevant evidence to establish the alleged diversion and fraudulent amendments.

Conclusion: Statements recorded under section 108 were held not to be relevant for proving the alleged misconduct because section 138B procedure was not complied with; consequently, the foundational finding of fraudulent diversion based solely on those statements could not stand.

Issue (ii): Sustainability of confiscation under section 113(d), (g) and (i) in completed exports

Legal framework: The Court considered section 113 as dealing with confiscation of goods "attempted to be improperly exported," and assessed its applicability where exports were already effected pursuant to Let Export Orders prior to investigation.

Interpretation and reasoning: The confiscation finding was derivative of the first issue, because liability to confiscation was concluded on the basis that the export documents were fraudulently amended and the destination was changed. Once the Court rejected reliance on section 108 statements, the basis for holding fraudulent diversion collapsed, and the confiscation finding became unsustainable. Independently, the Court held that section 113 would not apply because the goods had already been exported between January 2015 and July 2015 on Let Export Orders, while investigation started later; section 113 addresses improper "attempt" to export, not completed exports on that factual footing.

Conclusion: Confiscation under section 113(d), (g) and (i) was set aside both because it depended on an unsustainable factual finding founded on inadmissible statements, and because section 113 was held inapplicable to the case of goods already exported prior to investigation.

Issue (iii): Validity of penalties under sections 114(iii) and 114AA

Legal framework: The Court examined penalties linked to improper export (section 114(iii)) and penalty for knowingly/intentional use of false or incorrect material particulars in customs business (section 114AA).

Interpretation and reasoning: The Court held that penalty under section 114(iii) could not be sustained because it is tied to "attempt" to export goods improperly; moreover, once confiscation under section 113 failed, the penalty premised on such confiscation could not survive. As to section 114AA, the adjudicating authority had relied on section 108 statements to attribute instructions/knowledge; with those statements held inadmissible for non-compliance with section 138B, the evidentiary foundation for section 114AA penalties failed.

Conclusion: Penalties under section 114(iii) and section 114AA were held unsustainable and were set aside, as the statutory basis (attempt/improper export) and the evidentiary basis (inadmissible section 108 statements) did not support imposition of penalty.

Final outcome applied to the decision

The Court set aside the order upholding confiscation and penalties, holding that the core findings rested on statements that could not be relied upon absent compliance with section 138B, that section 113 was inapplicable to exports already completed before investigation, and that penalties under sections 114(iii) and 114AA consequently could not be maintained.

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