2025 (6) TMI 274 - AT - Customs

Levy of penalties u/s 114(iii) and section 114AA of the Customs Act 1962 - instead of exporting the goods to countries listed in the Focus Market Scheme goods were diverted to Dubai to enable the exporter to avail undue benefits under the said Focus Market Scheme - whether the statement recorded under section 108 of the Customs Act could be considered as evidence under section 138B of the Customs Act? - HELD THAT - Reference can be made to the decision of the Tribunal in M/s Surya Wires Pvt. Ltd. vs. Principal Commissioner CGST Raipur 2025 (4) TMI 441 - CESTAT NEW DELHI . The Tribunal examined the provisions of sections 108 and 138B of the Customs Act as also the provisions of sections 14 and 9D of the Central Excise Act 1944 and observed that 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. In this view of the matter the statement of Shanti Swaroop Sharma made under section 108 of the Customs Act would not be relevant - This apart the finding that Shanti Swaroop Sharma and Sangeeta Tuteja knowingly prepared and gave false or indirect information regarding the country of export destination is not based of any evidence but is based on mere statements recorded under section 108 of the Customs Act. These statements cannot be relied upon. The penalty imposed upon Shanti Swaroop Sharma and Sangeeta Tuteja under section 114AA of the Customs Act cannot also be sustained - Appeal allowed.

Summary

The core legal questions considered by the Tribunal in these appeals revolve around the imposition of penalties under sections 114(iii) and 114AA of the Customs Act, 1962 on two directors of an exporting company. The issues include:

(i) Whether the appellants, as directors, were liable for penalties under section 114(iii) for mis-declaring the export destination to avail undue benefits under the Focus Market Scheme (FMS), especially in light of the confiscation of goods being set aside;

(ii) Whether penalties under section 114AA could be imposed based on statements recorded under section 108 of the Customs Act without compliance with the procedural safeguards prescribed under section 138B;

(iii) The evidentiary value and admissibility of statements recorded during investigation under section 108 vis-`a-vis the requirements of section 138B for their use in penalty proceedings;

(iv) The applicability of the procedural safeguards and the necessity of examining witnesses before the adjudicating authority with an opportunity for cross-examination;

(v) Whether the appellants had knowledge or intention to cause undue benefit to the exporter by mis-declaring export destinations.

Issue-wise Detailed Analysis

1. Liability under Section 114(iii) of the Customs Act in relation to mis-declaration and confiscation

The statutory framework under section 114(iii) provides for penalty where a person does or omits an act that renders goods liable to confiscation under section 113. The Principal Commissioner had imposed penalties on the appellants on the basis that they connived with a freight forwarder to mis-declare export destinations to countries listed under the FMS, while diverting goods to Dubai, a non-FMS country, thereby enabling undue benefit.

However, the Tribunal noted that the confiscation order under section 113 had been set aside in a separate appeal. Since the penalty under section 114(iii) is contingent upon the confiscation of goods under section 113, the setting aside of confiscation necessarily precludes the imposition of penalty under section 114(iii). This interpretation aligns with the statutory scheme linking penalty to confiscation liability.

Therefore, the Tribunal concluded that penalties under section 114(iii) could not be sustained against the appellants once confiscation was quashed.

2. Admissibility and evidentiary value of statements recorded under Section 108 in penalty proceedings under Section 114AA

Section 114AA imposes penalties on persons who knowingly or intentionally provide false or incorrect information in customs transactions, with penalties up to five times the value of goods. The Principal Commissioner relied heavily on statements recorded under section 108 of the Customs Act from one appellant, which allegedly admitted to the fraudulent scheme.

The Tribunal examined the procedural safeguards laid down in section 138B of the Customs Act, which governs the admissibility of statements recorded during inquiry or investigation. Section 138B mandates that statements recorded under section 108 are relevant only if the person making the statement is examined as a witness before the adjudicating authority, and the authority forms an opinion that the statement should be admitted in evidence in the interests of justice. Additionally, the person against whom the statement is used must be afforded an opportunity for cross-examination.

The Tribunal referred to its earlier decision in a related matter, which analyzed the interplay between sections 108 and 138B of the Customs Act, and corresponding provisions under the Central Excise Act. It emphasized that statements recorded during inquiry have a risk of coercion or compulsion, necessitating the protective procedural steps to ensure fairness and reliability of evidence.

Since the statements of the appellants were not recorded in accordance with the procedure under section 138B - specifically, the appellants were not examined as witnesses before the adjudicating authority nor given an opportunity for cross-examination - the Tribunal held that such statements could not be relied upon as evidence to impose penalties under section 114AA.

3. Knowledge and intention of appellants to cause undue benefit

The Principal Commissioner found that the appellants knowingly prepared and signed export documents containing false information regarding export destinations, with the intent to defraud the exchequer by availing benefits under the FMS for goods actually diverted to Dubai.

However, the Tribunal observed that this finding was primarily based on the inadmissible statements under section 108. No independent evidence was brought on record to substantiate the knowledge or intention of the appellants. Furthermore, one appellant's claim of being a non-working director was rejected by the Principal Commissioner as an attempt to evade liability, but again this was not supported by evidence independent of the inadmissible statements.

Thus, the Tribunal found the conclusion on knowledge and intention to be unsubstantiated.

4. Treatment of competing arguments

The appellants contended that the penalty imposition was illegal due to procedural non-compliance and lack of evidence, especially after the confiscation order was set aside. They argued that statements not recorded in compliance with section 138B could not be used against them. The Department defended the penalty imposition, relying on the statements and findings of the Principal Commissioner.

The Tribunal sided with the appellants on the procedural and evidentiary grounds, emphasizing the mandatory nature of section 138B safeguards and the dependency of penalty under section 114(iii) on confiscation.

Conclusions

The Tribunal set aside the penalty orders under both sections 114(iii) and 114AA of the Customs Act against the appellants. It held that:

• Penalty under section 114(iii) could not be imposed once confiscation was quashed;
• Statements recorded under section 108 without compliance with section 138B procedural safeguards are inadmissible for penalty proceedings;
• The findings of knowledge and intention to defraud were unsupported by admissible evidence;
• Therefore, penalties under section 114AA could not be sustained.

Significant Holdings

The Tribunal articulated the following crucial legal principles:

"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."

"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."

"Penalty under section 114(iii) of the Customs Act could not have been imposed upon the appellants once the confiscation of goods under section 113 was set aside."

Accordingly, the appeals were allowed and the impugned penalty orders were set aside.