2025 (6) TMI 1679 - AT - Customs

Under-valuation of imported goods - Rejection of transaction value of the imported silk fabrics from China - re-determination of transaction value under rule 5 of the 1988 Valuation Rules - reliance placed upon contemporaneous imports and documents retrieved from premises of other importers pertaining to import of silk fabrics from China - burden of proof - Failure on the part of Revenue to produce contemporaneous imports of identical goods. Rejection of transaction value of the imported goods under rule 10A of the Valuation Rules - HELD THAT - A perusal of sub-rule (1) of rule 4 of the 1988 Valuation Rules which deals with transaction value shows that the transaction value of the imported goods shall be the price actually paid or payable for the goods when sold for export to India adjusted in accordance with the provisions of rule 9. However sub-rule (2) of rule (4) provides that the transaction value of the imported goods under sub-rule (1) shall be accepted provided that the circumstances set out in clauses (a) to (h) are satisfied. The burden to prove undervaluation is on the department as was observed by the Supreme Court in Mirah Exports Pvt. Ltd. vs. Collector of Customs 1998 (2) TMI 124 - SUPREME COURT . In Commissioner of Cus. Vishakhapatnam vs. Aggarwal Industries Ltd 2011 (10) TMI 4 - SUPREME COURT the Supreme Court analyzed the provisions of section 14(1) of the Customs Act and rule 4(2) of the 1988 Valuation Rules and observed that save and except for the circumstances indicated in section 14(1) of the Customs Act and particularized in sub-rule (2) of rule 4 of the 1988 Valuation Rules the invoice price is the basis for determination of the transaction value. The Supreme Court also observed that before rejecting the transaction value declared by the importer as incorrect or unacceptable the revenue has to bring on record cogent material to show that contemporaneous imports were at a higher price and for this rule 10A of the 1988 Valuation Rules would have to be resorted to. In the present case the impugned order proceeds to hold that since under invoicing was done by Zhejiang China in respect of imports of silk fabrics by other importers namely M/s. Purnima Enterprises Om Fabrics and Vedant Enterprises it should be presumed that Zhejiang China would have done so for every customer in India including the appellant. It was imperative for the department to have substantiated the allegation of undervaluation of the silk fabric imported by the appellant from Zhejiang China by cogent evidence and not by drawing an inference from the imports made by other importers of silk fabrics from Zhejiang China. The impugned order also relies upon the statement made by Ajit Kumar Gupta who was looking after the activities of the appellant as a Director to establish that the goods were undervalued - This statement was made by Ajit Kumar Gupta under section 108 of the Customs Act. In the absence of the procedure contemplated under section 138B of the Customs Act having been followed this statement could not have been relied upon. Thus the transaction value of silk fabric imported by the appellant could not have been rejected under rule 10A of the 1988 Valuation Rules. In such a situation re- determination of the transaction value would not arise. Failure on the part of Revenue to produce contemporaneous imports of identical goods - HELD THAT - The appellant had imported various grades of silk fabrics. The grade of each of them have been provided in the sales contract which the appellant entered with the suppliers. The sale contract has been cross-referenced in the invoices issued by the suppliers to the appellant. However none of the documents of other importers relied upon by the department show the grammage grade of silk fabric and quality of weave. In the absence of such information the comparison of quality of the silk fabric imported by the other importers and the quality of the silk fabric imported by the appellant could not have been drawn - In this view of the matter the finding recorded by the Commissioner that the silk fabric imported by the other four importers and the silk fabric imported by the appellant were identical as same article member was provided in the Bills of Entry cannot be sustained. Conclusion - i) The Commissioner was not justified in rejecting the transaction value of silk fabrics in the 37 Bills of Entry during the period from September 2003 to January 2005 under rule 10A of the 1988 Valuation Rules. ii) The issue of re-determination of the transaction value under the provisions of rule 5 of the 1988 Valuation Rules would therefore not arise. iii) The imposition of redemption fine or imposition of penalty under section 114(A) of the Customs Act cannot therefore also be sustained. The order dated 06.02.2009 passed by the Commissioner would therefore have to be set aside and is set aside. The appeal is accordingly allowed.

Summary

The core legal questions considered by the Tribunal in this appeal are:

(i) Whether the Commissioner was justified in rejecting the transaction value declared by the appellant for imported silk fabrics under rule 10A of the Customs Valuation (Determination of Price of Imported Goods) Rules, 1988 (the 1988 Valuation Rules);

(ii) Whether the transaction value could be re-determined under rule 5 of the 1988 Valuation Rules after rejection under rule 10A;

(iii) Whether the evidence relied upon by the department, including duplicate invoices recovered from other importers and statements recorded under section 108 of the Customs Act, was sufficient and admissible to justify rejection of the declared value;

(iv) Whether the imported goods of the appellant were identical or comparable to those imported by other importers, such that the declared values of other importers could be used as contemporaneous imports to challenge the appellant's declared value;

(v) Whether the imposition of redemption fine under section 111(m) and penalty under section 114(A) of the Customs Act was justified;

(vi) Ancillary issues regarding the applicability of rule 10A after clearance of goods for home consumption and the procedural safeguards in reliance on statements recorded under section 108 of the Customs Act.

Issue-wise Detailed Analysis

1. Justification for rejection of declared transaction value under rule 10A of the 1988 Valuation Rules

The relevant legal framework includes section 14 of the Customs Act, 1962, which mandates that the value of imported goods for customs duty purposes shall be the price at which such or like goods are ordinarily sold for delivery at the time and place of importation, subject to certain conditions. Rule 4 of the 1988 Valuation Rules defines "transaction value" as the price actually paid or payable for the goods sold for export to India, subject to acceptance criteria under sub-rule (2). Rule 10A permits rejection of declared value if the proper officer has "reason to doubt" the truth or accuracy of the declared value, after affording the importer an opportunity to furnish further information and be heard.

Supreme Court precedents emphasize that the burden of proving under-valuation lies on the revenue, which must produce cogent evidence such as contemporaneous imports at higher prices to justify rejection of declared transaction value. Mere suspicion or inference is insufficient. The Court held that "reason to doubt" must be based on material evidence and not mere speculation.

In the present case, the Commissioner rejected the declared transaction value on the basis of evidence recovered during searches of other importers-namely duplicate invoices issued by the Chinese supplier Zhejiang Cathaya International showing two sets of values for the same consignments, one reflecting actual higher value and another showing lower value used for customs clearance. No such incriminating documents were found at the appellant's premises despite a search. The Commissioner held that the identical nature of goods imported by the appellant and other importers, coupled with the recovery of duplicate invoices from other importers, justified rejection of the declared value under rule 10A.

The Tribunal analyzed this reasoning and found that the department failed to bring cogent material specific to the appellant's imports. The mere fact that Zhejiang issued duplicate invoices to other importers did not establish a similar practice in respect of the appellant. The absence of incriminating documents from the appellant's premises and the Director's residence undermined the department's case. Reliance on evidence relating solely to other importers without direct or circumstantial evidence against the appellant was held to be insufficient to justify rejection under rule 10A.

The Tribunal also relied on a precedent involving another importer (Regent Exim International) where similar facts were considered, and the Tribunal held that under-invoicing by the supplier for other importers could not be presumed to extend to every customer without specific evidence.

2. Admissibility and evidentiary value of statements recorded under section 108 of the Customs Act

The department relied on statements recorded under section 108 of the Customs Act from Ajit Gupta, who was managing the appellant's activities, to support the allegation of under-valuation. The Tribunal examined the statutory provisions under section 138B of the Customs Act and relevant case law, which mandate that statements recorded during inquiry must be tested by examination of the declarant as a witness before the adjudicating authority, and an opportunity for cross-examination must be provided before such statements can be admitted as evidence.

Since the procedural safeguards under section 138B were not complied with, the Tribunal held that the statements recorded under section 108 could not be relied upon. This procedural non-compliance further weakened the department's case for rejecting the declared value.

3. Whether the imported goods of the appellant were identical or comparable to those imported by other importers

The department's case rested heavily on the contention that the goods imported by the appellant and other importers were identical or comparable, as indicated by matching "article numbers" assigned to the silk fabrics. The Commissioner found that since the article numbers matched, the goods were identical, justifying comparison of declared values.

The Tribunal scrutinized this finding and noted that the article numbers primarily reflect the quality of raw silk and grammage but do not capture the full range of quality variations. The appellant's imports included various "grades" of silk fabric (e.g., Grades 1a to 7a), which significantly affect price. The sales contracts and invoices of the appellant specified these grades, whereas the documents relied upon by the department for other importers did not disclose such details. Without information on grade, quality of weave, and other factors, the Tribunal held that the goods could not be deemed identical or comparable for valuation purposes.

Further, the Tribunal noted other differentiating factors such as the quantity imported, time of importation, and multiple suppliers involved in the appellant's imports, which were not accounted for in the department's comparison. The appellant demonstrated significant differences in these respects compared to other importers.

Hence, the Tribunal concluded that the Commissioner's finding of identical goods based solely on article numbers was unsustainable.

4. Applicability of rule 10A and re-determination of transaction value under rule 5

The Commissioner invoked rule 10A to reject the declared transaction value and proceeded to re-determine the value under rule 5 of the 1988 Valuation Rules, which provides for sequential valuation methods if transaction value cannot be determined or is rejected under rule 10A.

The Tribunal observed that since rejection under rule 10A was not justified, there was no occasion for re-determination under rule 5. The department's reliance on re-determination was, therefore, misplaced.

5. Imposition of redemption fine and penalty under sections 111(m) and 114(A) of the Customs Act

The Commissioner imposed redemption fine on the confiscated silk fabrics and penalty on the appellant for alleged undervaluation and mis-declaration. The Tribunal held that since the foundational finding of undervaluation was not sustainable, the imposition of redemption fine and penalty could not be sustained either.

6. Other ancillary issues

The appellant contended that once goods are cleared for home consumption, they cease to be "imported goods" under section 2(25) of the Customs Act, and thus rejection of transaction value under rule 10A would not be applicable. The Tribunal found it unnecessary to decide this issue in view of its findings on the primary issues.

Significant Holdings

"The mere fact that Zhejiang, China had abetted under invoicing by other importers by issuing parallel sets of invoices cannot be presumed to have done so for every customer in India."

"The burden to prove under-valuation is on the department, and it must produce cogent material specific to the importer concerned; reliance solely on evidence relating to other importers is insufficient."

"Statements recorded under section 108 of the Customs Act cannot be relied upon unless the procedural safeguards under section 138B are complied with, including examination and cross-examination before the adjudicating authority."

"Article numbers alone do not establish identity or comparability of goods for customs valuation; detailed factors such as grade, quality of weave, quantity, and time of importation must be considered."

"Rejection of transaction value under rule 10A requires 'reason to doubt' based on material evidence, not mere suspicion or inference."

"Where rejection under rule 10A is not justified, re-determination of transaction value under rule 5 does not arise."

"Imposition of redemption fine and penalty cannot be sustained without a valid finding of undervaluation."

The Tribunal set aside the impugned order dated 06.02.2009 passed by the Commissioner, allowed the appeal, and held that the transaction value declared by the appellant could not be rejected under rule 10A of the 1988 Valuation Rules. Consequently, re-determination of value, redemption fine, and penalty imposed were quashed.