Customs evidence rules defeat SEZ diversion allegations where retracted statements and non-conclusive data cannot displace business records.

In an SEZ customs dispute, the note states that procurement could not be treated as excessive where a later Bond cum Legal Undertaking had been accepted and acted upon by the competent authority. It further records that allegations of non-manufacture and diversion of duty-free goods could not rest on retracted statements, unverified stock checks or NSDL data alone; compliance with statutory requirements for statement admissibility was necessary, and business records and supporting invoices were not discredited. On that basis, confiscation, duty demand and penalties against the unit and connected persons were held unsustainable.

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Issues: (i) whether the SEZ unit exceeded the prescribed procurement limit under the approved Bond cum Legal Undertaking and Letter of Approval; (ii) whether the finding of non-manufacture and diversion of duty-free goods could be sustained on the basis of statements, stock verification and NSDL data; (iii) whether confiscation, duty demand and penalties on the unit and connected persons were sustainable.

Issue (i): whether the SEZ unit exceeded the prescribed procurement limit under the approved Bond cum Legal Undertaking and Letter of Approval.

Analysis: The subsequent Bond cum Legal Undertaking dated 05.01.2016 had been accepted by the competent authority and acted upon. Once such approval had been granted, the unit was entitled to proceed on that basis. The procurement limit could not be tested by ignoring the later accepted undertaking merely because it was signed by an authorised signatory.

Conclusion: The finding of excess procurement was not justified and was set aside in favour of the assessee.

Issue (ii): whether the finding of non-manufacture and diversion of duty-free goods could be sustained on the basis of statements, stock verification and NSDL data.

Analysis: Reliance on statements recorded under section 108 of the Customs Act, 1962 was impermissible without compliance with section 138B of the Customs Act, 1962. The statements had also been retracted. The absence of heavy machinery did not by itself establish absence of manufacture, particularly where hand-made jewellery activity, business records and supporting invoices were produced. NSDL data was not conclusive and could not be treated as the sole basis to reject the unit's records. The presumption that goods were exported in a different form was not supported by reliable evidence.

Conclusion: The finding that the unit had not manufactured jewellery and had diverted imported goods into the domestic tariff area was unsustainable and was set aside in favour of the assessee.

Issue (iii): whether confiscation, duty demand and penalties on the unit and connected persons were sustainable.

Analysis: Once the foundational findings of excess procurement, diversion and non-manufacture failed, the confiscation under section 111(o) of the Customs Act, 1962, the duty demand with interest under section 28(4) of the Customs Act, 1962, and the penalties under sections 112(b)(ii), 114A and 114AA of the Customs Act, 1962 could not survive. The alleged joint and several responsibility of the associated entities and employees also fell with the collapse of the demand itself.

Conclusion: Confiscation, duty demand and all penalties were not sustainable and were set aside in favour of the assessee.

Final Conclusion: The impugned order was wholly unsustainable against the appellants, and all connected appeals succeeded with the adverse demands, confiscation and penalties annulled.

Ratio Decidendi: Statements recorded during customs inquiry cannot be relied upon unless the statutory requirements governing their admissibility are followed, and a demand for duty or penalties cannot rest on conjecture, retracted statements or non-conclusive electronic data when the assessee's business records and supporting material are not discredited.

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