2025 (6) TMI 933 - AT - Customs

Re-determination of the transaction value of imported goods under the Customs Act 1962 - Steam coal - rejection of declared transaction value - confiscation - penalty - HELD THAT - The declared value representing the price in transaction was proposed to be rejected by recourse to rule 12 of Customs Valuation (Determination of Value of Imported Goods) Rules 2007 and in its stead an alternative transaction value of the imported goods which was nothing but the ascertained price at an earlier stage in the invoice trail was proposed as legally tenable following which the injunction in rule 11 of Customs Valuation (Determination of Value of Imported Goods) Rules 2007 was proposed as sufficing for confiscation and other detriments. The substituted value was assigned credibility coefficient from the impugned consignments having been exported to India directly from Indonesia and therefore comparatively more in conformity with section 14 of Customs Act 1962. In so doing it would appear that rule 3 of Customs Valuation (Determination of Value of Imported Goods) Rules 2007 was denuded of its true significance without care for its relevance stemming from the totality of section 14 of Customs Act 1962 affording inclusion of value of services as well as administration of the antidote for transaction between related persons in which the influence of relationship toxified contracted price. The present controversy starts by positing belief that the transactional engagement was no reflection of the qualifiers for acceptability in rule 3(1) of Customs Valuation (Determination of Value of Imported Goods) Rules 2007 mandating not only recourse to rule 12 of Customs Valuation (Determination of Value of Imported Goods) Rules 2007 but also discard of declared value which should have had in terms of rule 3(4) therein consequence of recourse to one of the surrogate values which is absent. Instead a truncation of the declared price or actual value by reason of non-conformity with description in section 14 of Customs Act 1962 for transaction value was arrived at and by matching the physical movement of impugned goods with invoice representing dispatch from Indonesia by seller in Indonesia as preferable over invoice representing dispatch from Indonesia by seller in Hong Kong. Neither the notice nor the grounds of appeal demonstrate any part of the valuation scheme which accords acceptance of this thesis for substitution of invoice. Clearly an invoice raised on a buyer shamed as sham inclusion in the notice outside India even if concerning the impugned goods which has not been established by provenanced documentation is not evidence of price between seller and buyer in India and hence not conforming either to section 14 of Customs Act 1962 or to rule 3(1) of Customs Valuation (Determination of Value of Imported Goods) Rules 2007. The scheme of valuation does not stand in support of the manner in which the value has been sought to be substituted in the notice. The facts evinced are not sufficient to tear down the weave of commercial engagement and for recourse thereby to discard of declared value. The mark-up is not of unreasonable magnitude as to suggest that transaction should be penalized. Even without pressing into service the law as judicially determined on jurisdictional competence and on evidentiary value of documents for visiting penalties on the respondents under Customs Act 1962 and as found in the impugned order too the facts suffice to erase the proposals in the notice. Conclusion - i) The adjudicating authority was correct in rejecting the proposal to discard the declared transaction value and substitute it with an alternative value derived from earlier stages of the supply chain without following the statutory valuation sequence. ii) The proposals for confiscation and penalties under the Customs Act 1962 were legally untenable in the absence of duty evasion or misdeclaration affecting assessment. iii) The Committee of Chief Commissioners of Customs exceeded its jurisdiction by attempting to revisit and overturn settled Tribunal precedents and judicial determinations. There are no merits in the appeal - appeal dismissed.

Summary

The core legal issues considered by the Tribunal in this matter revolve around the validity and propriety of re-determination of the transaction value of imported goods under the Customs Act, 1962, specifically in the context of valuation of imported steam coal. The principal questions include:

• Whether the adjudicating authority was correct in discarding the proposal to reject the declared transaction value and re-appraise it under the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007;
• The scope and limits of invoking penal provisions such as confiscation under section 111(m) and penalties under sections 112 and 114AA of the Customs Act, 1962, when the declared customs duty was paid and no evasion was established;
• The applicability and interpretation of the valuation scheme under section 14 of the Customs Act, 1962 and the related Customs Valuation Rules, particularly rules 3, 4, 9, 11, and 12 of the 2007 Rules;
• The legitimacy of substituting declared invoice value with an alternative "surrogate" or "actual" value derived from earlier stages of the supply chain or "invoice trail";
• The competence of the Committee of Chief Commissioners of Customs to review and overturn Tribunal decisions and settled judicial precedents in valuation matters;
• The relevance and admissibility of evidence, including statements and documentation from third parties, in establishing misdeclaration or overvaluation of imported goods;
• The legal and commercial implications of complex multi-stage supply chains involving intermediaries and related parties in international trade transactions;
• The limits of customs jurisdiction vis-`a-vis commercial and contractual arrangements, particularly in the energy sector and long-term procurement contracts.

Issue-wise Detailed Analysis

1. Validity of Rejecting Declared Transaction Value and Re-appraisal under Customs Valuation Rules

The statutory framework for customs valuation is anchored in section 14 of the Customs Act, 1962, which mandates that the value of imported goods be the transaction value-the price actually paid or payable for goods sold for export to India, subject to conditions and adjustments specified in rules made thereunder. The Customs Valuation (Determination of Value of Imported Goods) Rules, 2007, provide a detailed scheme for acceptance, rejection, or adjustment of declared values, including provisions for related party transactions and alternative valuation methods.

The adjudicating authority relied on precedents including the Tribunal's decisions in Knowledge Infrastructure Systems Private Limited, Adani Power Maharashtra Ltd, and Maharashtra Eastern Grid Power Transmission Company Ltd, which emphasize that declared transaction value should not be discarded without valid and credible evidence and that mere existence of intermediaries or complex supply chains does not justify substitution of declared value.

The impugned show cause notice sought to reject the declared invoice value on the basis of evidence from third parties suggesting existence of lower negotiated prices at earlier stages of the supply chain, and proposed substitution of value by reference to these earlier "actual prices" in the invoice trail, invoking rule 12 of the 2007 Rules. The adjudicating authority held that such substitution was inconsistent with the statutory scheme, which requires sequential application of rules 4 through 9 to arrive at surrogate values when declared value is rejected, and that direct substitution with an alternative invoice value from an earlier stage was impermissible.

The Tribunal underscored that the valuation scheme contemplates a "gold standard" of transaction value, and that rejection of declared value must be followed by application of prescribed surrogate valuation methods, not arbitrary replacement by prices from unrelated or upstream transactions. The notice's approach was characterized as a "throwback" to a pre-valuation regime era, lacking legal authority and contrary to the evolved international and domestic valuation framework.

2. Scope of Penal Provisions and Confiscation in Absence of Duty Evasion

The show cause notice proposed confiscation under section 111(m) of the Customs Act, 1962, and penalties under sections 112 and 114AA, predicated on alleged overvaluation and misdeclaration of value. However, the adjudicating authority found no evidence of underpayment or evasion of customs duty, as duties were paid at the declared value rates, and no prohibited goods were involved.

The Tribunal reiterated that confiscation and penalties under the Customs Act are contingent on misdeclaration that results in evasion or short payment of duty or contravention of prohibitory provisions. Mere overvaluation, especially when duties are paid in full and no contravention is established, does not justify confiscation or penalties. The Committee of Chief Commissioners' attempt to revive confiscation proposals was held to be legally untenable, as it sought to impose penal consequences without statutory basis.

The Tribunal further noted that the Customs Act's jurisdiction to revisit valuation post-clearance is circumscribed, and once goods are cleared for home consumption with duties paid, the proper officer's jurisdiction to reopen valuation is limited and cannot be exercised arbitrarily or without statutory cause.

3. Interpretation and Application of Section 14 and Related Valuation Rules

Section 14 of the Customs Act, 1962, and the 2007 Valuation Rules collectively establish a structured, hierarchical valuation mechanism. The primary valuation is the transaction value (rule 3(1)), which includes price paid or payable for goods sold for export to India. If the declared value is doubted, the rules prescribe a sequential approach to determine surrogate values (rules 4 to 9), including identical or similar goods, deductive and computed values.

The Tribunal emphasized that rule 12, which allows rejection of declared value, must be read in conjunction with rule 3(4), mandating recourse to surrogate values thereafter. The impugned notice's attempt to substitute declared value with an earlier invoice price from a different seller or location, without following the prescribed sequence, was contrary to the statutory scheme.

The Tribunal also rejected the notion that the place of export must be geographically congruent with the seller, clarifying that "export to India" in section 14 is a description of normal transaction context, not a restrictive geographic mandate. The invoice from an overseas intermediary is not evidence of transaction value between buyer and seller in India, and cannot be substituted for declared value without compliance with valuation rules.

4. Competence of Reviewing Authority and Binding Nature of Tribunal Precedents

The Committee of Chief Commissioners of Customs challenged the adjudicating authority's reliance on Tribunal precedents, arguing that some decisions were not affirmed by the Supreme Court or were withdrawn. The Tribunal clarified that the Committee's review jurisdiction is limited to testing legality and propriety of orders and does not extend to revisiting or overruling Tribunal decisions, especially those not appealed or upheld by the Supreme Court.

The Tribunal underscored the binding nature of its precedents on valuation and classification matters within the customs appellate hierarchy and rejected the Committee's attempt to discard settled law. It held that executive authorities are bound by Tribunal decisions unless overturned by higher courts, and that review powers cannot be used to undermine judicial discipline or settled jurisprudence.

5. Evidentiary Value and Treatment of Complex Supply Chains Involving Intermediaries

The investigation alleged that multiple intermediaries and related parties were used to inflate the declared value of coal imports, suggesting over-invoicing and siphoning off of funds. However, the adjudicating authority and Tribunal found no credible evidence of such manipulation affecting the transaction value as declared, nor proof of flowback or indirect benefits to depress assessable value.

The Tribunal recognized the legitimacy of complex commercial arrangements and centralized procurement systems in the energy sector, noting that customs authorities lack expertise to second-guess commercial prudence or contract structuring. It rejected the notion that the presence of intermediaries or related party transactions per se warranted rejection of declared value without evidence of influence on price.

The Tribunal also noted that the mark-up of approximately 20% over the base supply price was not unreasonably high and did not justify penal consequences. It cautioned against customs administration venturing into commercial judgments beyond statutory mandate.

6. Jurisdictional Limits Post Clearance and Legal Finality of Valuation

The Tribunal highlighted that once goods are cleared for home consumption with duties paid, jurisdiction to reopen valuation is limited and must be based on statutory grounds such as prohibited goods or fraud. The notice's attempt to invoke confiscation and penalties without reversing clearance or establishing misdeclaration affecting duty was impermissible.

The Tribunal also emphasized that valuation for customs purposes is a legal determination distinct from commercial pricing or contractual arrangements, and that customs jurisdiction does not extend to policing business models or commercial risk mitigation strategies.

7. Commercial and Regulatory Context in Energy Sector Procurement

The Tribunal acknowledged the specialized nature of the energy sector, including long-term contracts, tariff pass-through mechanisms, and regulatory oversight by tariff authorities. It noted that customs authorities' narrow understanding of these commercial realities led to flawed assumptions about pricing and procurement strategies.

The Tribunal accepted that the procurement through intermediaries was approved by principal power corporations and was commercially rational given domestic coal shortages. It rejected the appeal's attempt to impose customs valuation principles in a manner inconsistent with the commercial and regulatory framework governing the sector.

Significant Holdings

"A framework that was embedded with a deeming fiction merely for integrating one of the enabling provisions within the construct of the law and to which a machinery provision has been tethered as contextual necessity to make it work has been stretched to breaking point, and, that too, by appropriation at subaltern level, beyond the design of intent in legislated enactment or even contemplated for policy formulation."

"The adjudicating authority arrived at the outcome on 'first principle' appreciation of the provisions sought to be invoked and in disfavouring the proposals to confiscate imported goods for obtaining access to penal detriments."

"Declaration of law left open does not exclude all the findings in a decision of the Tribunal from the catena of binding judicial precedent... all other executive authorities, and not excepting the reviewing authority, are bound, too."

"Any invoice is only a reflection of price agreed between buyer and seller as payable for goods and is not a field in which the State can insert itself under any circumstance; an invoice submitted as evidence of price for assessment to duties of customs may conceivably be rejected by the tax administration but should have the consequence of alternative stipulated in the valuation mechanism, viz., 'surrogate value'."

"The scheme of valuation does not stand in support of the manner in which the value has been sought to be substituted in the notice. The facts evinced are not sufficient to tear down the weave of commercial engagement and for recourse, thereby, to discard of declared value."

"The appeal has failed to take note of the stage, and manner, of incorporating the enabling of belief to subject declared value to the rigour of rule 10A of Customs Valuation (Determination of Price of Imported Goods) Rules, 1988 thereafter as well as the more stringent context in which the corresponding rule 12 of Customs Valuation (Determination of Value of Imported Goods) Rules, 2008 was emplaced."

"The scope of review is limited to examining an order for not being legal and proper and to be exercised over original authority that does not stretch to review of not only any order of the Tribunal let alone those in which appeals of Revenue had been dismissed."

"The attempt to have the findings therein re-considered, after the Central Government withdrew its appeal in one and lost its appeal in the other, by a subordinate executive authority is not in keeping with respect owed to judicial determination."

Final Determinations

• The adjudicating authority was correct in rejecting the proposal to discard the declared transaction value and substitute it with an alternative value derived from earlier stages of the supply chain without following the statutory valuation sequence.
• The proposals for confiscation and penalties under the Customs Act, 1962, were legally untenable in the absence of duty evasion or misdeclaration affecting assessment.
• The Committee of Chief Commissioners of Customs exceeded its jurisdiction by attempting to revisit and overturn settled Tribunal precedents and judicial determinations.
• The valuation scheme under section 14 of the Customs Act, 1962, and the 2007 Rules must be applied strictly and sequentially, with declared transaction value as the primary basis unless valid grounds and evidence justify rejection.
• The complex commercial arrangements involving intermediaries and related parties did not, on the facts, justify rejection of declared value or penal consequences.
• The appeals were dismissed for lack of merit, affirming the impugned order as legal and proper.