TaxTMI 
TaxTMI 
2015 (9) TMI 1370
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....4 of the Customs Act, 1962 (the Act) ranging from Rs. 25 Crores to Rs. 25 Lacs has been imposed on the different Companies and individuals associated therewith. The learned Commissioner has held that the FOB value of Cut and Polished Diamonds (CPD for short) of assorted variety, exported by 6 Indian companies referred to herein, during the periods 2004-05 and 2005-06, not to be correct, rendering the goods liable to confiscation under Section 113(i) of the Act. However, as the goods are not available for confiscation, no redemption fine has been imposed. There is also no demand of duty in this case. 2. The appellant Adani Enterprises Ltd. (formerly known as Adani Exports Ltd.) has been in the business of foreign trade, that is export and import for more than 20 years. The appellant had been exporting and importing CPD during the financial years 19 94-95. The said activity of import and export of CPD was restarted in 2001 - 02 when the appellant also renewed the membership of Gem and Jewellery export promotion council, with a view to further grow its business. The appellant also obtained private bonded warehouse licence under Section 58 of the Customs Act in July, 2003 in order t....
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....td. (JAOL) and M/s. Midex Overseas Ltd. (MOL). It is further alleged that in addition to the 5 Indian Companies mentioned above, AEL also managed and controlled 45 legal entities overseas. The list of 45 overseas entities is given on pages 40 and 41 of the show-cause notice (SCN). It is alleged that the 5 Indian entities and the 45 overseas entities wee all managed and controlled by AEL. It is further alleged that AEL indulged in circular trading of diamonds by importing into India and exporting the same either after no processing or after insignificant processes. It is alleged that the diamonds were imported into private bonded warehouses, for which all the 6 Indian Companies including AEL had obtained bonded warehouse licences. It is alleged that after import, the goods were taken into private bonded warehouse and without processing the same were removed for export within 3-4 hours or the next day as the case may be. It was therefore, alleged that the claim of AEL, that processes such boiling, sieving, sorting and packing was done as claimed by AEL and other appellants was bogus and that the same diamonds, without processing, were exported out of India. Reliance is placed heavily....
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....f circular trading and the period during which these lots were imported/exported. Investigations were also conducted to show abnormal and unusual payment of high commissions amounts for exports to overseas parties some of whom were also buyers from Indian Companies, for which purpose although MOUs were entered into with the overseas entities for payment of commission, no disclosure thereof was made in the shipping bills by the Indian Companies at the time of export. It was alleged that the MOUs also show that part of the Commission was payable upon receipt of benefit under TPS. Investigation further revealed, as set out in the table at Page 138 of the show-cause notice that AEL also controlled the flow of funds between Indian companies and overseas entities by resorting to L/C discount and buyers credit which was an abnormal trend indicating circular trading. 6. On the basis of the above allegations, show-cause notice dated 30.03.2007 was issued alleging that the Indian entities have: (i) Mis-declared the FOB value of export goods in contravention of the provisions of Section 14 and Section 50 of the Act read with Section 11 of the Foreign Trade (Development & Regulation) Act....
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.... 7. AEL filed a detailed reply dated 26.10.2007 to the show-cause notice and on 27.02.2012 filed further written submissions. The gist of the submissions made by AEL and others before the lower authority is as under: a) 'Contemporaneous exports' show that the FOB value declared by them was correct; b) All the shipping bills were duly assessed and goods examined by the Proper officer as provided for in Public Notice No. 11/1998 dated 4.8.1998 issued by the Commissioner of Customs, Airport, Mumbai; c) All the consignments of imported diamonds underwent the process of sieving, cleaning, boiling and sorting in the bonded warehouse which was a permissible activity also recognised by the Central Board of Excise and Customs in Circular No. 40/1999 dated 28.06.1999; d) The Gem and Jewellery Export Promotion Council in its letter dated 23.10.2006 addressed to then Union Minister of Commerce and Industry had accepted that the processing activity of the nature carried out by them in the bonded warehouse resulted in value addition of 5% or more; e) There was no circular trading and that as demonstrated by the number of examples in Annexure-H & I to the show-cause notic....
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....een reproduced by the Commissioner from para 14.0 to 14.8.2 of the impugned order. AEL filed its rebuttal to the DRI comments, which also have been reproduced by the Commissioner in para 15.0 to 15.7.6 of the impugned order. 9. By the impugned order, the Commissioner relied upon the statements of Lumesh Sanghavi and Kamaraj Bodal. He rejected the claim that retraction affidavits were sent to DRI and further also rejected the evidence recorded during cross-examination as an afterthought. On this basis, the Commissioner held as under: "It is therefore clear that no processing was carried out by any of the six Noticees to achieve value addition of 5% or 10% as the case may be. Even if it is taken that processes of boiling, sieving and assortment were carried out, the Noticees have not shown how these simple process can result in value addition of 5% or 10% in the two respective years". 10. The Commissioner, therefore, concluded that "Thus, the FOB value declared in the shipping bills by simply adding 5% or 10% of the CIF value is artificial and hence, the export value which is not a correct value has to be rejected under Section 14 of the Customs Act, 1962". Accordingly....
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....l. The department have also filed appeals in all cases on two grounds, the first being challenging the finding of the Commissioner with regard to Circular trading and second being for enhancement of penalties. All appeals were heard together. AEL and the department have also filed written submissions after the hearing. 14. We have heard M/s Vikram Nankani and Atul Nanda, Senior Advocates for the parties and V.K. Singh, Special Counsel for the department. We acknowledge the assistance rendered by both sides to us in painstakingly taking us through the complex facts and the voluminous record of documents. A brief record of the submissions made before us at the time of hearing is set out. 15. On behalf of the parties, it was urged that in diamond industry labour intensive work at low cost, yields high value and therefore, processes like sieving, boiling and assorting could result in value addition even higher than 5% or 10%. While reiterating that Lumesh Sanghavi had retracted his statements, the Ld. Advocates sought to explain his statements and submitted that the Commissioner have not correctly appreciated the same. It was further submitted that the charge of circular trading ....
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....bmitted that once foreign exchange have been realised in relation to the exports made from India within the time stipulated under Foreign Exchange Management Act (FEMA), the FOB value declared under shipping bill cannot be doubted. It was submitted that burden to prove our valuation is on the department and the investigations have not revealed any contemporaneous exports at lower prices or valuation based on market inquiry before discarding the FOB value. It was therefore submitted that neither the goods are liable for confiscation nor any penalty warranted against the Indian companies and the Individuals associated thereto. 16. Shri V.K. Singh, Ld. Special Counsel stated that the appellant Adani Enterprises Ltd. formed a consortium with 5 other companies namely Aditya Corpex Private Ltd., Hinduja Exports Private Ltd., Midex Overseas, Jayant Agro Organics and Bagadia Brothers and obtained permission for setting up of Private bonded warehouses for import/export of CPD's. The activities covered under private bonded warehouses were - to import polished diamonds, to sieve the diamonds, to assort, to do boiling of the cut and polished diamonds, to pack the cut and polished diamon....
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.... USD was only to 7 companies. That during the year 2004-05 out of total imports worth 1304.13 million USD were effected from only 7 companies. Similarly is the position in the financial year 2005-06. 16.4 It is further urged that on perusal of the details of the 7-8 companies and report of High Commission of India, it was observed - two Hong Kong- based companies namely 'Kwality Diamonds' and 'Seven Stars', and for UAE - based companies namely 'Excel Global', 'Jewel Trade', Crown Diamonds' and 'KVK Diamonds' has acted as supplier as well as buyer of the CPD's for the appellant companies. Eight of the overseas companies were all incorporated after September 2004, which was after the introduction of the 'Target Plus scheme'. Out of these, 5 companies stopped their business activities during the year 2005. Three of the overseas companies were functioning from the same premises at Hong Kong. One Global Enterprises is a supplier of the CPD to the Indian companies whereas the other 2 companies namely 'Kamsun Development International' and 'Wingate Trading' were importing CPD from the Indian companies and that too ....
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....Pages 39 to 80 of the show-cause notice which he took us through in detail, which according to him was duly corroborated by the instances of circular trading set out in detail in paragraphs 9.1 to 9.13 of the show-cause notice. Lastly, Shri Singh submitted that but for these investigations, these Indian Companies would have made whopping windfall on the artificially inflated export turnover and therefore, while the Commissioner was justified in invoking Section 112(i) of the Act, and discarding the declared FOB value, he was wrong in taking lenient view on penalties imposed by him. Shri Singh, therefore, submitted that the penalties should be suitably enhanced. 17. We have considered the lengthy arguments made by both sides and gone through the detailed written submissions filed by them. We have also perused the record and find that essentially the issues raised are questions of fact which we need to decide based on voluminous documents which each side has taken us through. We therefore first frame the issues for our decision. The issues framed are as under: I] Whether FOB value declared in the shipping bills for export of cut and polished diamonds by appellant companies is l....
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.... The process of sieving on a sieve, which is a round apparatus which consists of perforated metal sheet of various sizes. The process of sieving for an average lot would normally take around 30 minutes. However, according to my experience, in the bonded warehouse activity, only about 25% consignments were put for sieving. The rest of the consignments did not go through this process at all. The process of boiling involves boiling of the diamonds in a small glass like see through beaker (machine) which operates on electricity. The diamonds are normally boiled for about 20 minutes to remove dust/impurities. Again according to my experience of bonded warehouse, only 50% consignments were subjected to boiling. After the process of sieving and boiling, if at all done, the next process was assortment, i.e., segregating the diamonds on purity basis. vii) Lot wise assorting of received consignments of CPD in the respective bonded warehouses of the aforesaid companies / firms by way of boiling for cleaning, sieving for separating diamonds size wise, size wise weightment of diamonds using weighing machine, further assortment with regard to quality required." ....
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.... segregation." E. On this issue of whether processing at all was carried out or not, Kamaraj Bodal, who reported to Lumesh Sanghavi in his statement dated 30.01.2006 stated as under: "Qn.7: Who used to physically receive the diamonds and what activities were carried out in the office of M/s. Adani Exports Ltd after receiving the diamonds? Ans.7: I used to physically receive the diamonds brought by our Security Agency and I used make an entry of the same in bond register. Shri Lumesh Sanghavi used to bring assorters along with him and they used to assort the diamonds by sieving and boiling. They used to segregate the diamonds as per quality and they used to pack the same for exports. I have never participated in said assorting of diamonds. As per the instructions of Shri Lumesh Sanghavi, I used to prepare export invoices by typing the same on the computer installed in our office and I used to fax the same to our CHA and the Security Agency who used to transport the same from our office to Custom Office." F. To the same effect is also the statement of Kaushal Pandya recorded on 06.02.2006 and the relevant portion reads as under: "The imported diamonds....
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....bt that processes such as sieving, boiling and sorting were carried out by the Indian companies in the bonded warehouse. It is therefore not possible to hold no process at all was carried out by the Indian companies in the bonded warehouse. 18.1 This takes us to the next question as to whether processes of boiling, sieving and sorting carried out in the bonded warehouse resulted in value addition of 5% or more in the years 2004-05 and 2005-06. These percentages of value addition flow from provisions of Para 4A.18 of FTP which was amended in 2005-06 to increase the value addition from 5% to 10%. Para 4A.18 as it stood in2004-05 reads as under: "4.18 Private/Public Bonded Warehouse may be set up in SEZ/DTA for import and re-export of cut and Polished diamonds, cut & polished coloured gemstones, uncut & unset precious & semi-precious stones, Import & re-export of cut & polished diamonds & cut & polished coloured gemstones will be subject to achievement of minimum value addition of 5%." 18.2 Save and except increase in the percentage of value addition there is no other charge in para 4A.18 in 2005-06. A plain reading of para 4A.18 shows that it does not contain any condi....
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....ould be restricted to individual consignment only and mixing of different consignments for the purpose of carrying out the activities of assortment, sieving and cleaning shall not be permitted." 18.4 Besides, we find that the Commissioner has not relied upon any evidence to show that minimum value addition of 5% or more cannot be achieved by such processes. The show cause notice also does not refer to any evidence on this point. The question whether these simple processes can result in value addition of 5% or more is a matter of fact. If the Commissioner wants to read such a condition in para 4A.18, even if one were to presume that para 4A.18 has an inbuilt condition of achieving value addition out of processing activity in the bonded warehouse. Both sides agree and therefore, we take note, that value of a diamond depends on "4 Cs" which are colour, clarity, cut and carat. Therefore, if diamonds are segregated into a homogenous lot based on their size and quality, the value shall change even by employing simple labour intensive processes like sieving, boiling and assorting. The only piece of evidence we find on the relationship between the value addition and the process is in th....
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....etermining value addition is given in para 4A.6 of the FTP for 2004-09 which is reproduced herein: "4A.6 The value addition for the purpose of gem and jewellery sector shall be as per paragraph 4A.2.1 of Handbook (Vol.1) V.A. = (A-B) x 100, where B V.A. = Value Addition A = FOB Value of the export realised/FOR value of supply received. B = The Value of inputs such as gold/silver/platinum content in the export product plus the admissible wastage along with the value of the other times such as gemstone etc. 'Value' for this purpose includes both imported as well as domestically procured inputs. Wherever gold has been obtained on loan basis, the value shall also include interest paid in free foreign exchange to the foreign supplier." 18.7 FOB value is therefore only one of the components for determining the value addition. Determination of value addition is a function of DGFT/licensing authorities. We are here not concerned with the determination of value addition. We are informed that the applications by the appellant companies under TPS are pending w....
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....Commissioner "in case of diamonds, it is not possible to have evidence of identical or similar goods since each lot of diamonds varies from the other and valuation of diamonds, which is based on carat, colour, cut and clarity cannot be compared." May be the Commissioner is right. But that be so, we have no option but to go with the examination reports recorded at the time of assessment of the export consignments on the shipping bill, on the basis of which let export orders were passed by the proper officer of Customs under Section 51 of the Act, in each case. A few photocopies of the duplicate copy of the shipping bills have been produced before us. We have also perused the record of cross-examination of 5 Customs Officers, who examined the goods. All of them have unambiguously stated that they strictly followed the procedure prescribed by law as contained in Public Notice No. 11/1998 dated 4.8.1998. The Commissioner confirms that these officers ".............. only verified that the goods confirmed to the description, quantity and value as declared in the shipping bill." The confirmation of the value by these Customs officers in our opinion is a clinching evidence and there is not....
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....s that evidences disclosed in the show-cause notice, there is an allegation that the FOB value declared is not genuine on account of control by AEL over all the overseas parties involved in the transactions as buyers or sellers of diamonds. Having recorded this objection, the Commissioner does not give any categorical finding thereon but instead treads into the question of circular trading. We therefore prefer to deal with this issue in the context of valuation and circular trading as the department has also heavily relied upon the allegations in the show cause notice on the inter relationship between AEL and other Indian companies as well as AEL and overseas entities. 18.11 We shall first deal with the relationship between AEL and Indian companies. There is no definition either in the Customs Act or the FTP of such a relationship. Obviously in such a case, one will have to go by the provisions of Companies Act, 1956 to see whether one company controls the other and broadly, the two tests to establish "control" of one over the other is either 'voting power' or control over the appointment of Board of Directors. The relationship in the context of determination of FOB valu....
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....all UAE entities, respectively are employees of Adani Global FZE, while Vinod Shantilal Shah who is Director of Adani Global FZE and G A International is the brother in law of the Chairman and Managing Director of AEL. 18.13 The fact that some of the overseas entities were started around time of introduction of TPS or closed business simultaneously with closure of TPS does not establish these entities in Singapore and Hongkong were controlled by AEL. We find that out of 45 overseas entities, six have started business between September and December, 2004 and two of them in May and August, 2005. Again out of 45 overseas entities, only 4 closed down and that too, between September and November, 2005 which is well before the deletion of diamonds from TPS on 20.02.2006 or the closure of TPS on 31.03.2006. No adverse inference can be drawn on this aspect. The fact that some of the companies have common registered offices or that registered office happened to be the residential premises of their Directors is again something which cannot be faulted in law and by no stretch of imagination shows control by AEL over them on this account. Common Directors or Directors who are employees of A....
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....e are related. We have arrived at this finding based on the information given on page 46 of the show cause notice. As long as price of exports to independent parties in respect of whom there is no allegation of relationship is available, the same would apply to all other exports including those made to related persons. This is notwithstanding the fact that the department has failed to discharge the onus of proving relationship between AEL and overseas entities, as concluded above. 18.15 We have noted that Lumesh Sanghavi has in his statement said that the diamonds were over-invoiced. This statement by itself does not prove the case of the department. There are many reasons for the same. He himself admitted that he examined only a few consignments when the sorters were absent. Besides the price was decided by Sameer Vora or Saurin Shah based in Ahmedabad. This had also been admitted by Lumesh himself. Likewise, though Lumesh Sanghavi, admits to circular trading, on being shown during cross-examination the same examples referred to in his statements, which show the difference in quality, size and weight of each consignment, he had deposed to the contrary. We have independently als....
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....he judgment in Euresian Equipment and Chemicals Ltd. and Others vs. CC 1980 (6) ELT 38 (CAL) does not arise for consideration in the facts of the instant case, as it is not the claim of the appellants that liability if any is wiped out or extinguished with the exportation of goods. 18.20 In CC vs. D. Bhormull, 1983 (13) ELT 1546 (SC), the Hon'ble Apex Court held that a case need not be proved with a mathematical precision in the context of smuggled goods seized from the shop where the claimant sought to justify the purchase with the help of documents which were not found to be credible. The Apex Court observed that - "30. It cannot be disputed that in proceedings for imposing penalties under clause (8) of Section 167, to which Section 178A does not apply, the burden of proving that the goods are smuggled goods, is on the Department..........All that it requires is the establishment of such a degree of probability that a prudent man may, on its basis, believe in the existence of the fact in issue. Thus legal proof is not necessarily perfect proof often it is nothing more than a prudent man's estimate as to the probabilities of the case. "32.............H....
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....ice. We have found each invoice to cover number of lots ranging from 8 to 23 in number. Identifying one or two lots from a consignment consisting of 8 to 23 different lots being the same which have been allegedly circulated more than once is a method which is unknown to law. The subject matter of assessment is a consignment as a whole. The Bill of Entry under Section 46 or the shipping bill under Section 50 contains a declaration of the goods covered by the total quantity and value of the goods supported by the invoice, which covers the totality of all the lots constituting the consignment. Singling out one or two lots from a consignments to say that the same set of diamonds have been traded again and again is a misnomer. The Commissioner also admits in the impugned order that the value of each diamond varies on account of non-comparability of carat, colour, cut and clarity (r C's). It is therefore not possible to come to the conclusion that the appellant companies indulged in circular trading merely with reference to single lots (out of a consignment) which are said to be imported and exported during different periods. Curiously, the show cause notice itself admits in para 9.1....
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....ce also relies upon the statement of Lumesh Sanghavi. In his statement dated 28.02.2006, he has admitted to circular trading in relation to documents shown to him in respect of imports and exports by and to the Indian companies in July, 2005 as recorded on pages 4 to 6 of the said statement. To the same effect, he has also admitted to lots of diamonds being imported and exported over and over again in the transaction which were shown to him and recorded by him on pages 4 to 8 of his statement dated 03.01.2007. We have already dealt with the aspect of retraction of the statements of Lumsh Sanghavi. We have also gone through the record of cross-examination of Lumesh Sanghavi which has been set out by the Commissioner in extensor. We find that when confronting with the same documents such as invoice relating to the transactions which he has deposed in statement dated 28.02.2006 and 3.1.2007, he accepted that there was a variation in the weight and quality of diamonds. On re-examination by DRI officer, LUmesh Sanghavi maintained the variation in the specifications of the lots covered by two different invoices. Besides the documents speaks for themselves, oral evidence if contrary to do....
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.... recorded. We have however, independently considered these charts without the benefit of the statement of the author thereof. We find that the Chart by themselves do not prove circular trading. AEL has explained these charts to depict the business plan and a pattern of transactions. This in fact appears to be so, these charts appeared to be graphic representation of information which have been tabulated by DRI in the show cause notice covering the names and identities of overseas entities into buyer and seller as can be seen form pages 40, 41 and 45 to 48 of the show cause notice. The Indian companies have also not disputed the fact that they were importing cut and polished diamonds from some of the overseas entities and exporting the cut and polished diamonds to other overseas entities. We do not find anything incriminating in the 3 charts except a pictorial representation admitted by the parties. 20. On the contrary, AEL has sought to justify what they call as the business plan and the pattern of transactions on the basis of MOU dated 19.03.2003 between its subsidiary in Dubai, Daboul and Gudami whereby the UAE subsidiary agreed to arrange for and organise processing of unasse....
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..... The most significant material relied upon in the show cause notice are the number of e-mails sent mainly by Ms. Mary and others. Some of the e-mails have been extracted in the show cause notice, as for instance at pages 59 to 64, again from pages 67 to 69 and thereafter from 70 to 79. All the e-mails have been complied in Annexure-M to the show cause notice to support the allegation of control of overseas entities by AEL, in view of the overlapping submissions made by the Ld. Special Counsel of the department, here while dealing with the issue of circular trading. According to the department, these e-mails reveal that AEL controlled all the overseas entities because there is reference to the bank accounts of different overseas entities in the mails and also to transfer of funds from account of one overseas entity to another. These e-mails are sent by Ms. Mary who is an employee/Director of Adani Global Pte. Ltd. Singapore and these e-mails are sent internally to all persons connected with AEL based in either India or Singapore or Dubai. It is alleged that if AEL does not control overseas entities there was no reasons for Ms. Mary to pass on information relating to bank accounts a....
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....th parties other than the 45 overseas entities, as for example, Aramex International Exchange, Radya Baqer Trading LLC, Navy Impex LLC and White Monitor General Trading LLC to name a few. (c) The e-mails provide no explanation on the transfer from one overseas entity to another. In many cases where there is no reference to corresponding invoice related to either import or export of cut and polished diamonds which are the subject matter of the present case. For instance against Sr. No. 4 at page 71 of the show cause notice, why have GA International, Gold Star, and Labdhi transferred funds to Al Shahad considering that Labdhi is not even one of the 45 overseas entities in this case or are these entries representing settlement of accounts of some other independent transactions which has nothing to do with the transactions of cut and polished diamonds. (d) None of the e-mails show fund flow corresponding to the circular trading of the lots as alleged in the show-cause notice, meaning thereby the allegation of circular trading is unsupported by evidence of corresponding financial trail. 21.2 As has been stated in the show-cause notice, the e-mails referred to in Annexure-M to ....
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....different from the other, and not of the same goods, thereby militating against their own case of circular trading. The Indian companies contend and rightly so, that the implications of acceptance of CIF value means each time a new consignment has been imported unrelated to any other in the past or future, duly corroborated by remittance of foreign exchange through banks or authorised dealers equal to the value of the goods received in India. Correspondingly in relation to exports, receipt of foreign exchange through banks and authorised dealers as proceeds of exports in compliance with the provisions of Foreign Exchange Management Act, 1999. We, therefore hold that the charge of circular trading fails. 22.0 Issue No. III The issue relating to payment of commission and fund flow through mechanisms such as buyers credit or LC discounting are connected to the charge of circular trading and to support the allegation of control by AEL. We have for reasons recorded above, found both these charges to be unsustainable. On behalf of the Indian companies it was submitted that payment of commission in fact proves that the transactions of import and export of diamonds were genuine an....