2025 (7) TMI 9 - AT - Customs

Valuation of imported goods - remote control devises - EHT and FBT transformers - rejection of declared value - determination of surrogate value under rule 9 of Customs Valuation (Determination of Value of Imported Goods) Rules 2007 - authority of rule 9 of Customs Valuation (Determination of Value of Imported Goods) Rules 2007 - retraction of statements obtained under corecion - reliance upon best judgement - adoption of lowest value - HELD THAT - It is seen from the facts of the case that value has been sought to be enhanced from the reported appraisal in the statements of the individual-appellant which was sought to be reinforced by reference to email exchanges containing information purportedly dealing with the sale transaction of the overseas supplier. Rejection of value under rule 12 of Customs Valuation (Determination of Value of Imported Goods) Rules 2007 which offer broad flexibility to the proper officer may not really be susceptible to discard. Nonetheless it is clear from rule 3(4) read with rule 12 of Customs Valuation (Determination of Value of Imported Goods) Rules 2007 that surrogate value draws authenticity from any one of rule 4 to rule 9 of Customs Valuation (Determination of Value of Imported Goods) Rules 2007 applied sequentially. The reasons adduced for rejection of recourse to computed value and deductive value does not sit well with the reliance placed by the adjudicating authority on the market survey report. At best market survey report may indicate a local price which then would have to be adjusted in terms of rule 7 and rule 8 of Customs Valuation (Determination of Value of Imported Goods) Rules 2007 for arriving at surrogate value which is not the case here. Such an exercise has not been carried out and consequently in the absence of recourse to either of these rules any market survey undertaken and relied upon does not acquire credibility as best judgment of rule 9 of Customs Valuation (Determination of Value of Imported Goods) Rules 2007. In any case as the said rule now stands best judgment is a misnomer and only resides in the title. It is seen that cross-examination of the departmental officers who undertook survey was also not permitted owing to which the contents of the report fail the test of credibility for adoption in the impugned proceedings - From Section 12 of Customs Valuation (Determination of Value of Imported Goods) Rules 2007 itself it is very clear that the circumscribing features incorporated consequent upon amendment of section 14 in 2007 has not been born in mind by the adjudicating authority. Consequently notwithstanding the rejection of the declared value being unopposable the substitution of surrogate value without conformity to rule 9 of Customs Valuation (Determination of Value of Imported Goods) Rules 2007 does not permit its deployment in terms of rule 3(4) therein. There are no merit in the impugned order which is set aside - appeal allowed.

Summary

The core legal questions considered by the Appellate Tribunal (AT) in this matter revolve around the determination and enhancement of the assessable value of imported goods under the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007, specifically focusing on the application and interpretation of rules 3, 9, 10A, and 12. The issues include:

• Whether the rejection of the declared transaction value and the subsequent determination of 'surrogate value' under rule 9 of the Customs Valuation Rules was legally valid and procedurally proper.
• The admissibility and credibility of evidence relied upon for value enhancement, including statements recorded from appellants, proforma invoices, email correspondences, and a market survey report.
• The applicability of section 138B and 138C of the Customs Act, 1962, concerning the evidentiary value and procedural safeguards related to statements recorded during investigation.
• The legal distinction between imported goods and associated rights or services (such as royalties and copyrights), particularly in the context of valuation and duty liability.
• The correctness of penalty imposition under sections 114A and 112(a) of the Customs Act, 1962, and the confiscation of goods under sections 111(d) and 111(m).
• The procedural propriety regarding the opportunity of cross-examination of departmental witnesses and the use of 'best judgment' valuation under rule 12.

Issue-wise Detailed Analysis

1. Validity of Rejection of Declared Value and Adoption of Surrogate Value under Rule 9

The Customs Valuation (Determination of Value of Imported Goods) Rules, 2007, provide a sequential framework for determining the assessable value of imported goods. Rule 3 mandates that if the declared transaction value is rejected, alternative methods under rules 4 to 8 must be applied sequentially before resorting to surrogate value under rule 9. The appellants argued that the surrogate value was adopted in breach of this sequence, relying on statements and documentary evidence that should have been accorded credibility under section 138C of the Customs Act, 1962.

The Tribunal referred to a precedent where it was held that rule 9 applies only to adjust the declared transaction value and not to replace it after rejection under rule 10A. The Court emphasized that the impugned order erred by rejecting the declared price and then enhancing it by adding royalty components under rule 9, which is impermissible. The Tribunal noted that the declared value could not be simultaneously rejected and adjusted under rule 9 without following the prescribed sequence.

Thus, the Court concluded that the enhancement of value by invoking rule 9 without adherence to the procedural framework was legally unsustainable.

2. Credibility and Admissibility of Evidence for Value Enhancement

The adjudicating authority relied heavily on statements recorded from the appellants and email exchanges to establish undervaluation and justify enhancement. The appellants contended that these statements were retracted, obtained under coercion, and lacked credibility, invoking protections under sections 138B and 138C of the Customs Act, which restrict the use of such statements without cross-examination.

The Tribunal observed that the statements were indeed retracted and that the impugned order relied on them without affording the appellants a proper opportunity for cross-examination, thereby violating procedural safeguards. The Court also noted that the documents relied upon were pieced together to create a narrative of conspiracy, which was not sufficiently substantiated.

Regarding the market survey report relied upon by the department, the Tribunal found it to be a general study indicating probable assessable values for unbranded remote controls, with explicit disclaimers that values vary depending on utility. The Court held that such a report, without adjustment as per rules 7 and 8, cannot be used as surrogate value under rule 9. Moreover, the departmental officers who conducted the survey were not cross-examined, further undermining the report's credibility.

Consequently, the Tribunal held that the evidence used for enhancement lacked the requisite reliability and procedural propriety.

3. Application of Sections 138B and 138C of the Customs Act

Sections 138B and 138C impose restrictions on the use of statements recorded during investigation, requiring that such statements cannot be used against the accused unless they are given an opportunity for cross-examination. The appellants argued that the statements used to reject the declared value and enhance the assessable value were inadmissible as these procedural safeguards were not observed.

The Tribunal agreed that these provisions were not complied with, which vitiated the evidentiary basis for the valuation enhancement. This non-compliance rendered the reliance on such statements legally impermissible.

4. Distinction Between Imported Goods and Associated Rights or Services (Royalties and Copyrights)

The appellants invoked the Tribunal's earlier decision in a related case concerning the import of master tapes containing 'motion pictures' and the distinction between goods and rights associated with them, such as royalties for exploitation or reproduction rights. The Tribunal reiterated that royalties connected to post-importation manufacture or exploitation rights do not form part of the assessable value of imported goods under rule 9 unless they relate directly to the imported goods themselves.

The Court emphasized that 'motion pictures' as intellectual property are not goods per se for customs valuation but are protected under copyright law and subject to service tax when transferred temporarily. The adjudicating authority's error in including royalty amounts in the valuation of imported master tapes was highlighted as contrary to established legal principles.

This principle was applied analogously to the present case, where the inclusion of royalty components in the customs valuation was found to be erroneous.

5. Penalty and Confiscation under Sections 114A, 112(a), 111(d), and 111(m) of the Customs Act

The imposition of penalties and confiscation was challenged on the ground that the underlying valuation and duty demand were flawed. Since the Tribunal found the valuation enhancement and consequent duty demand to be unsustainable, the penalties and confiscation orders, which were predicated on the finding of undervaluation and attempted evasion, lacked a sound legal foundation.

Therefore, the Tribunal implicitly negated the basis for such punitive measures by setting aside the valuation enhancement.

6. Procedural Issues Regarding Cross-Examination and 'Best Judgment' Valuation under Rule 12

The department defended its approach by invoking rule 12, which permits the proper officer to adopt 'best judgment' valuation in the absence of reliable declared values. The appellants contended that denial of cross-examination to departmental witnesses undermined the fairness of the proceedings and the credibility of the valuation method.

The Tribunal noted that although rule 12 confers broad discretion, it must be exercised in conformity with the procedural safeguards and sequential application of valuation rules. The failure to allow cross-examination of officers who conducted the market survey and the absence of adherence to the valuation sequence under rules 3 to 9 rendered the 'best judgment' valuation suspect.

Hence, the Tribunal held that the 'best judgment' valuation was not a valid substitute for proper application of valuation rules and procedural fairness.

Significant Holdings

"Rule 9 is to be invoked for adjusting the declared value to reflect the components specified therein to reflect the transaction value to be adopted. Impliedly, the declared price is accepted and subjected to the adjustments when invoking Rule 9. On the contrary, with the rejection of declared price under Rule 10A, the transaction value under Rule 4 becomes irrelevant and, in accordance with Rule 3, the provisions of Rule 5 to 8 are to be applied sequentially. Therein lies the nub in the present dispute the declared price is sought to be rejected under Rule 10A without taking it to its logical conclusion as prescribed in Rule 3 and, instead, the very same rejected price is sought to be adjusted by adding the 'royalty' component as provided in Rule 9 which applies only to the transaction value in Rule 4. On this ground alone, the entire proceedings would fail."

"The 'motion picture' can be re-sent should the need arise. And it is the motion picture that the viewing public has in mind with reference to the product - and source of revenue to render the production venture viable... Consequently, it would not be in accordance with law to hold that a value must needs be assigned to the contents of the tape/stamper that is imported."

"Sections 138B and 138C of the Customs Act, 1962 circumscribe the use of statements recorded during investigation, requiring opportunity for cross-examination to uphold their evidentiary value. Non-compliance with these provisions vitiates reliance on such statements for valuation enhancement."

"Market survey reports indicating probable assessable values without adjustment as per rules 7 and 8 cannot be relied upon as surrogate value under rule 9. Further, denial of cross-examination of officers who conducted such surveys undermines the credibility of such evidence."

"The adoption of 'best judgment' valuation under rule 12 must conform to procedural safeguards and the sequential application of valuation rules. Failure to do so renders such valuation legally unsustainable."

In conclusion, the Tribunal set aside the impugned order enhancing the assessable value and duty liability, finding that the valuation was arrived at in violation of the statutory framework and procedural safeguards. The penalties and confiscation orders, being contingent on the flawed valuation, were also negated. The principles established reinforce strict adherence to the sequential valuation methodology under the Customs Valuation Rules, the non-inclusion of post-importation royalties in assessable value, and the necessity of procedural fairness, including the right to cross-examination, in customs adjudication.