2025 (6) TMI 276 - AT - Customs

Invocation of jurisdiction under section 28AAA of the Customs Act without the DGFT having initiated process for cancellation of the license - whether 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. This apart the impugned order has relied upon the statement of Imran Mirza the proprietor of the Freight Forwarder that the manual amendments in the copies of the shipping bills were made by him in his own handwriting and that to endorse the said manual amendments he had forged the signatures of the Customs Superintendent and appended the stamps of the Customs Superintendent. The Principal Commissioner therefore held that a transaction based on fraud precludes the party from deriving any benefit. Whether the statement of Imran Mirza 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 In view of the provisions of subsection (2) of section 9D of the Central Excise Act or sub-section (2) of section 138B of the Customs Act the provisions of sub-section (1) of these two Acts shall apply to any proceedings under the Central Excise Act or the Customs Act as they apply in relation to proceedings before a Court. What therefore follows is that 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. 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. 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. Levy of penalties - HELD THAT - The title of the goods passed to the buyer as soon as the Let Export Order was issued and the appellant was not responsible for any changes that may have been made in regard to the destination port. Section 114AA provides that if a person knowingly or intentionally makes signs or uses or causes to be made any material particular in the transaction of any business for the purposes of the Customs Act shall be liable to a penalty not exceeding five times the value of goods. The Principal Commissioner has relied upon the statement made under section 108 of the Customs Act that the changes were made on the instructions given by the appellant. This statement cannot be relied upon as evidence. Thus penalty under section 114AA of the Customs Act could not have been imposed upon the appellant. Section 114(iii) of the Customs Act provides that any person who in relation to any goods does or omits to do any act which act or omission would render such goods liable to confiscation under section 113 of the Customs Act shall be liable to a penalty not exceeding the value of the goods as declared by the exporter or the value as determined under the Customs Act which ever is greater. The Principal Commissioner has confiscated the goods under section 113 of the Customs Act for the reason that the appellant and Imran Mirza colluded. This finding is again based on the statement made by Imran Mirza under section 108 of the Customs Act which statement cannot be relied upon for the reasons. Confiscation of goods would therefore have to be set aside and consequently penalty under section 114(iii) of the Customs Act could not have been levied upon the appellant. Penalty under section 114AB of the Customs Act could not have been imposed upon the appellant as the appellant had not obtained any instrument by fraud collusion wilful mis-statement or suppression of fact. Such allegations have been made in the impugned order based on statements of persons who were not examined by the Adjudicating Authority in accordance with the procedure prescribed under section 138B of the Customs Act. The statements therefore could not have been considered. The impugned order cannot be sustained - appeal allowed.

Summary

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

(i) Whether the adjudicating authority had jurisdiction under section 28AAA of the Customs Act to recover ineligible benefits claimed under the Focus Market Scheme (FMS) in the absence of cancellation or initiation of cancellation proceedings of the relevant instrument by the Directorate General of Foreign Trade (DGFT);

(ii) Whether the statement of the Freight Forwarder's proprietor recorded under section 108 of the Customs Act could be admitted as evidence under section 138B of the Customs Act;

(iii) Whether the appellant, as an exporter selling goods on FOB terms, could be held responsible for diversion of goods to unnotified countries and consequent confiscation of goods and imposition of penalties under sections 114(iii), 114AA, and 114AB of the Customs Act;

(iv) Whether penalties and confiscation could be sustained in the absence of valid evidence implicating the appellant in fraudulent acts or misstatements.

Issue-wise detailed analysis:

Jurisdiction under section 28AAA of the Customs Act without DGFT cancellation:

The legal framework involves the Customs Act, 1962, specifically section 28AAA which empowers recovery of duties where an instrument issued under the Foreign Trade (Development and Regulation) Act (FTDR Act) has been obtained by collusion, wilful misstatement, or suppression of facts. The FTDR Act and its Rules vest the DGFT with exclusive authority to issue, suspend, or cancel such instruments. The Focus Market Scheme scrips are instruments issued under the FTDR Act.

The Tribunal extensively relied on a recent authoritative judgment of the Delhi High Court, which held that customs authorities cannot question the validity of an instrument issued under the FTDR Act or deny benefits under such instruments without prior adjudication or cancellation by the DGFT. The Court emphasized that the DGFT's decision on interpretation, classification, and cancellation is final and binding. Section 28AAA must be read harmoniously with the FTDR Act and Rules, implying that recovery proceedings under section 28AAA can only be initiated after the DGFT has declared the instrument invalid or cancelled it.

The Tribunal also referred to a TRU letter dated 01.06.2012, which advised customs formations to issue demands only after DGFT initiates cancellation proceedings and the instrument is cancelled. In the present case, the DGFT had neither cancelled the instrument nor initiated cancellation proceedings. Hence, the Tribunal held the impugned order invoking section 28AAA without DGFT cancellation as without jurisdiction.

Admissibility of statement under section 108 of the Customs Act:

The appellant was implicated based on a statement of the Freight Forwarder's proprietor, recorded under section 108 of the Customs Act, alleging that shipping bills were manually amended to change the destination country. The question was whether such a statement could be considered evidence under section 138B of the Customs Act.

The Tribunal examined the statutory scheme governing statements recorded during inquiries under the Customs Act and the Central Excise Act. Section 108 of the Customs Act allows officers to record statements during inquiry, but section 138B mandates that such statements are relevant only if the person making the statement is examined as a witness before the adjudicating authority and the authority admits the statement in evidence after forming an opinion that it is in the interest of justice. The person against whom the statement is made must be given an opportunity for cross-examination.

The Tribunal relied on its prior decision and various High Court judgments emphasizing that failure to comply with these procedural safeguards renders such statements inadmissible as evidence. Since the Freight Forwarder's proprietor was neither examined as a witness nor was the statement formally admitted, reliance on his statement was impermissible. Consequently, the Tribunal held that the statement could not be used to implicate the appellant.

Responsibility of the exporter under FOB contracts and liability for diversion of goods:

The appellant contended that as the contracts were on FOB terms, title in the goods passed to the buyer once the Let Export Order was issued and the goods were handed over to the shipping line. Therefore, the appellant had no control over the goods thereafter and could not be held responsible for any diversion or change in the destination country.

The Tribunal acknowledged the principle that under FOB contracts, the risk and title pass to the buyer once goods are loaded on board or the Let Export Order is granted. This was supported by a CBIC Circular dated 28.02.2015, which clarified that the exporter's responsibility ends after the Let Export Order is issued and goods are handed over to the shipping line.

However, the Tribunal noted that under the Focus Market Scheme, the exporter is the sole beneficiary of the scrips and is responsible to ensure that the goods actually reach the designated Focus Market. The Handbook of Procedures requires the exporter to submit proof of landing of goods in the Focus Market, such as import bills of entry, delivery orders, arrival notices, or certified tracking reports. Without such proof, entitlement to benefits is not established.

In the present case, neither the appellant nor the authorities produced such proof. The investigation did not clarify whether the goods reached the Focus Market or were diverted, or if fake documents were submitted. The impugned order failed to address this crucial issue of proof of landing, which is central to entitlement under the FMS.

Penalties and confiscation under sections 114(iii), 114AA, and 114AB of the Customs Act:

Section 114AA penalizes knowingly or intentionally making or using any material particulars in customs transactions; section 114(iii) penalizes acts or omissions that render goods liable to confiscation; and section 114AB penalizes obtaining instruments by fraud, collusion, or wilful misstatement.

The Principal Commissioner imposed penalties on the appellant relying primarily on the Freight Forwarder's statement under section 108. Since that statement was inadmissible, the penalties could not be sustained. The Tribunal held that in the absence of admissible evidence implicating the appellant in fraudulent acts or misstatements, penalties under these provisions could not be imposed.

Moreover, confiscation of goods under section 113 was also set aside because the finding of collusion was based on inadmissible evidence. The Tribunal emphasized that fraud vitiates everything but such a finding must be supported by legally admissible evidence.

Treatment of competing arguments:

The appellant argued that the show cause notice under section 28AAA was without jurisdiction because DGFT had not cancelled the instrument; the appellant was a bona fide exporter under FOB contracts; and the statement implicating them was inadmissible. The appellant also highlighted pending criminal proceedings against the Freight Forwarder's proprietor for false statements.

The department contended that DGFT was in the process of cancellation; section 28AAA could be invoked even without cancellation if the instrument was obtained by collusion or misstatement; and fraud vitiates all acts, justifying reliance on the Freight Forwarder's statement.

The Tribunal rejected the department's contentions on jurisdiction and evidence, relying on statutory interpretation, authoritative judicial precedents, and procedural safeguards. It found the appellant's arguments more consistent with the legal framework and evidence requirements.

Conclusions:

The Tribunal concluded that the adjudicating authority lacked jurisdiction under section 28AAA without DGFT cancellation or initiation of cancellation proceedings. The statement of the Freight Forwarder's proprietor under section 108 was inadmissible without examination and admission under section 138B. The appellant, as an FOB exporter, was not responsible for diversion of goods post Let Export Order, but entitlement to FMS benefits required proof of landing which was not established. Penalties and confiscation based on inadmissible evidence could not be sustained. Accordingly, the impugned order was set aside and the appeal allowed.

Significant holdings:

"We find ourselves unable to recognize a right that may be said to inhere in the customs authorities to doubt the issuance of an instrument. The FTP 2015-20 in unequivocal terms provides in para 2.57 that it would be the decision of the DGFT on all matters pertaining to interpretation of policy... which would be final and binding... It would thus 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."

"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."

"Statements recorded during inquiry/investigation by officers have every chance of being recorded under coercion or compulsion and it is in order to neutralize this possibility that statements of the witnesses have to be recorded before the adjudicating authority, after which such statements can be admitted in evidence."

"The exporter will be entitled to these scrips if and only if the goods reach the destination market and not otherwise... The responsibility of the exporter does not end with obtaining the Let Export Order."

"Penalties under sections 114AA, 114(iii) and 114AB of the Customs Act cannot be imposed in the absence of admissible evidence implicating the appellant in fraudulent acts or misstatements."