2025 (6) TMI 275 - AT - Customs

Jurisdiction under section 28AAA of the Customs Act could have been invoked without the DGFT having initiated process for cancellation of the license - adjudication could be done as the DGFT did not cancel the instrument or not - HELD THAT - This issue was examined by the Delhi High Court in M/s Amit Exports 2024 (11) TMI 1150 - DELHI HIGH COURT . The Delhi High Court held that it was not possible to recognize a right that may be to said to inhere in the customs authority to doubt the issuance of the instrument. After referring to the FTP 2015-20 the Delhi High Court held that it provides in paragraph 2.57 that it would be the decision of the DGFT on all matters pertaining to interpretation of policy provisions in the handbook of procedures and so it would be impermissible for the customs authority to deprive a holder of the instrument the benefits that can be claimed absent any adjudication of declaration of invalidity by the DGFT. The impugned order therefore is without jurisdiction as the DGFT has neither cancelled the instrument nor even initiated proceedings for cancellation of the instrument. Clearly if the exporter applied for FMS scrips it is the responsibility of the exporter to ensure that the goods reach that market and to produce proof as above. The responsibility of the exporter does not end with obtaining the Let Export Order. In this case neither side produced before us the documents which were produced as proof that the goods reached the Focus Market. The Customs authorities investigating the matter should have summoned the relevant documents from the DGFT. Either the goods must have reached the Focus Market or if they were diverted the exporter may have submitted fake documents as proof of landing or the DGFT may have issued the scrips without obtaining the proof of landing. The impugned order however does not address this issue. Likewise penalty could not have been imposed on Vijay Kumar Maggu Director of the appellant under sections 114AA and 114(iii) of the Customs Act. Conclusion - i) The invocation of section 28AAA without DGFT cancellation or initiation of cancellation proceedings is without jurisdiction and invalid. ii) The statement of Imran Mirza under section 108 is inadmissible evidence as procedural safeguards under section 138B were not complied with. iii) The appellant as FOB exporter is not responsible for diversion of goods post Let Export Order but must ensure and prove goods reach the focus market to claim benefits. iv) Penalties on the appellant and its director are unsustainable due to lack of evidence and procedural infirmities. v) Confiscation order is ineffective as goods were exported and not available for confiscation. The impugned order set aside - appeal allowed.

Summary

The core legal questions considered by the Tribunal include:

(i) Whether the jurisdiction under section 28AAA of the Customs Act could be invoked without the Directorate General of Foreign Trade (DGFT) having initiated or completed cancellation proceedings against the instrument (Focus Market Scheme scrips) alleged to have been obtained improperly;

(ii) Whether the statement of a third party, recorded under section 108 of the Customs Act, can be admitted as evidence under section 138B of the Customs Act without examination and admission by the adjudicating authority;

(iii) Whether the appellant, as an exporter selling goods on FOB terms, bears responsibility for the ultimate destination of the exported goods and the correctness of the country of export declared for availing benefits under the Focus Market Scheme;

(iv) Whether penalties under sections 114(iii) and 114AA of the Customs Act were rightly imposed on the appellant and its director;

(v) The applicability and scope of confiscation provisions under sections 113(d), (g), and (i) of the Customs Act in the context of exported goods not physically available for confiscation.

Regarding the first issue on jurisdiction under section 28AAA of the Customs Act, the Tribunal extensively examined the statutory framework governing export incentives and the interplay between the Customs Act and the Foreign Trade (Development & Regulation) Act (FTDR Act). Section 28AAA empowers customs authorities to recover duties where instruments such as export scrips are obtained by collusion, willful misstatement, or suppression of facts. However, the DGFT is the designated authority under the FTDR Act empowered to issue, suspend, or cancel such instruments.

The Tribunal relied heavily on a recent decision of the Delhi High Court which held that customs authorities cannot independently challenge the validity of instruments issued under the FTDR Act without prior adjudication or cancellation by the DGFT. The Court emphasized that the DGFT's decision on cancellation or suspension is final and binding, and customs authorities must await such determination before initiating recovery proceedings under section 28AAA. This interpretation prevents jurisdictional overlap and preserves the primacy of the DGFT in matters relating to export incentives.

The Tribunal also referred to a Trade and Revenue Unit (TRU) letter dated 01.06.2012, which explicitly advises customs formations to issue demands under section 28AAA only after the DGFT initiates cancellation proceedings and that adjudication should follow cancellation. Since in the present case, the DGFT had neither cancelled the instrument nor initiated cancellation proceedings, the Tribunal held that the impugned order invoking section 28AAA was without jurisdiction.

On the evidentiary issue concerning the statement of Imran Mirza, the proprietor of the Freight Forwarder, recorded under section 108 of the Customs Act, the Tribunal analyzed the procedural safeguards mandated by section 138B of the Customs Act. Section 108 enables customs officers to record statements during inquiries, but such statements are not automatically admissible as evidence. Section 138B requires that the person making the statement be examined as a witness before the adjudicating authority, who must then decide whether to admit the statement in the interests of justice. Only after such admission is the statement relevant and the affected party entitled to cross-examine the witness.

The Tribunal cited its own precedent and various High Court decisions interpreting these provisions, underscoring the mandatory nature of this procedure. Since Imran Mirza was neither examined as a witness nor was his statement formally admitted in evidence, reliance on his statement to implicate the appellant was impermissible. Consequently, the Tribunal rejected the department's contention that the statement established fraud.

Regarding the appellant's liability for changes in the country of export and entitlement to Focus Market Scheme benefits, the Tribunal acknowledged that under FOB contracts, title to goods passes to the buyer once the Let Export Order is issued and the goods are shipped. The exporter loses control over the goods thereafter, and the freight forwarder or shipping line handles the actual movement.

However, the Tribunal emphasized that entitlement to Focus Market Scheme scrips depends on the goods actually reaching the designated focus market. The Handbook of Procedures mandates that exporters submit proof of landing in the focus market, such as import bills of entry, delivery orders, arrival notices, or certified tracking reports. The exporter's responsibility extends beyond obtaining the Let Export Order to ensuring and proving that the goods reached the focus market.

In the instant case, neither the appellant nor the department produced evidence that the goods arrived in Panama, the declared focus market. The investigation did not clarify whether the goods were diverted or whether false documents were submitted to claim benefits. The impugned order failed to address this critical issue, undermining the basis for confiscation and recovery of benefits.

On penalties under sections 114(iii) and 114AA of the Customs Act, the Tribunal found no justification for imposing penalties on the appellant or its director. The penalties require proof of culpable intent or involvement in wrongdoing. Since the appellant was not responsible for the alleged change in destination and the evidence of fraud was inadmissible, penalties could not be sustained.

Regarding confiscation of goods under sections 113(d), (g), and (i), the Tribunal noted that since the goods were exported and not available for confiscation, and were not cleared under bond, no redemption fine was imposed. The confiscation order was thus effectively inoperative and did not warrant enforcement.

The Tribunal concluded that the impugned order was without jurisdiction and unsustainable on evidentiary and legal grounds. The appeals were allowed and the order dated 29.03.2019 was set aside.

Significant holdings include the following verbatim excerpt from the Delhi High Court decision on section 28AAA jurisdiction:

"It would be wholly impermissible for the customs authorities to either ignore the MEIS certificate or deprive a holder thereof of benefits that could be claimed under that scheme absent any adjudication or declaration of invalidity being rendered by the DGFT in exercise of powers conferred by either Rules 8, 9 or 10 of the FTDR Rules. The customs authorities cannot be recognised to have the power or the authority to either question or go behind an instrument issued under the FTDR in law."

And further:

"Section 28AAA would thus have to be interpreted as contemplating a prior determination on the issue of collusion, wilful misstatement or suppression of facts tainting an instrument issued under the FTDR Act before action relating to recovery of duty could be possibly initiated."

On admissibility of statements under section 108 of the Customs Act, the Tribunal held:

"Statements made under section 108 of the Customs Act during the course of inquiry shall be relevant for proving the truth of facts contained therein only when the person making the statement is examined as a witness before the adjudicating authority and the adjudicating authority forms an opinion that the statement should be admitted in evidence, in the interests of justice. Failure to comply with this procedure precludes reliance on such statements."

Core principles established are:

- The primacy of the DGFT in adjudicating validity and cancellation of export incentive instruments under the FTDR Act, precluding customs authorities from independent adjudication under section 28AAA before DGFT action;

- Mandatory procedural safeguards for admission of statements recorded under section 108 of the Customs Act as evidence under section 138B;

- Exporter's entitlement to Focus Market Scheme benefits is contingent upon actual landing of goods in the designated market and submission of prescribed proof thereof;

- Penalties under the Customs Act require proof of culpability and cannot be imposed solely on uncorroborated or inadmissible evidence;

- Confiscation provisions under the Customs Act are inapplicable to goods already exported and not available for confiscation.

Final determinations on each issue are:

(i) The invocation of section 28AAA without DGFT cancellation or initiation of cancellation proceedings is without jurisdiction and invalid;

(ii) The statement of Imran Mirza under section 108 is inadmissible evidence as procedural safeguards under section 138B were not complied with;

(iii) The appellant, as FOB exporter, is not responsible for diversion of goods post Let Export Order, but must ensure and prove goods reach the focus market to claim benefits;

(iv) Penalties on the appellant and its director are unsustainable due to lack of evidence and procedural infirmities;

(v) Confiscation order is ineffective as goods were exported and not available for confiscation.