2025 (6) TMI 369 - AT - Customs

Invocation of jurisdiction under section 28AAA of the Customs Act without the Directorate General of Foreign Trade (DGFT) initiating or completing cancellation proceedings of the relevant export license or instrument - 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. 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 is without jurisdiction as the DGFT has neither cancelled the instrument nor even initiated proceedings for cancellation of the instrument. 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. Penalties u/s 114AA and section 114(iii) of the Customs Act - 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 for the reasons stated above cannot be relied upon as evidence. Thus penalty under section 114AA of the Customs Act could not have been imposed upon the appellant. Penalties u/s 114(iii) of the Customs Act - HELD THAT - 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 stated above. 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. Conclusion - The impugned order dated 29.05.2019 set aside in entirety holding that the Principal Commissioner lacked jurisdiction to invoke section 28AAA without DGFT cancellation that the evidence relied upon was inadmissible and that penalties and confiscation could not be sustained on the record before it. It is therefore not possible to sustain the order dated 29.05.2019 passed by the Principal Commissioner. It is accordingly set aside and the appeal is allowed.

The core legal questions considered by the Tribunal are:

(i) Whether the jurisdiction under section 28AAA of the Customs Act could be invoked without the Directorate General of Foreign Trade (DGFT) initiating or completing cancellation proceedings of the relevant export license or instrument;

(ii) Whether the statement of Imran Mirza, 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 basis, could be held responsible for any change in the country of export destination effected by the freight forwarder or buyer;

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

(v) The applicability of confiscation provisions under section 113 of the Customs Act in the facts of the case.

Issue-wise detailed analysis:

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

The legal framework involves section 28AAA of the Customs Act, inserted by the Finance Act, 2012, which provides for recovery of duties where an instrument such as a license or scrip issued under the Foreign Trade (Development and Regulation) Act (FTDR Act) is obtained by collusion, willful misstatement, or suppression of facts. The DGFT is the competent authority empowered to issue, suspend, or cancel such instruments under the FTDR Act and its Rules.

The Tribunal relied heavily on a recent decision of the Delhi High Court, which held that the customs authorities do not have the jurisdiction to question the validity of an instrument issued under the FTDR Act absent a prior adjudication or cancellation by the DGFT. The Court emphasized the primacy of DGFT in matters relating to export licenses and benefits, noting that the Foreign Trade Policy (FTP) and FTDR Rules confer exclusive authority on DGFT to interpret, suspend, or cancel such instruments. The relevant portion of the judgment was quoted extensively, stating that section 28AAA contemplates a prior determination by DGFT before customs can initiate recovery actions.

Additionally, a Trade and Regulatory Unit (TRU) circular dated 01.06.2012 was referenced, which advises customs formations to issue demands under section 28AAA 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 at the time of the impugned order. Therefore, the Tribunal concluded that the order invoking section 28AAA was without jurisdiction.

2. Admissibility of statement under section 108 of the Customs Act

Section 108 of the Customs Act empowers officers to record statements during inquiry or investigation. Section 138B of the Customs Act governs the admissibility of such statements as evidence. The law requires that statements recorded under section 108 can be admitted as evidence only if the person who made the statement is examined as a witness before the adjudicating authority, and the authority forms an opinion that the statement should be admitted in the interests of justice, after which the opposing party must be given an opportunity for cross-examination.

The Tribunal referred to its own precedent which examined analogous provisions under the Central Excise Act and Customs Act, emphasizing that failure to comply with these procedural safeguards renders the statements inadmissible. This is to prevent coercion or compulsion in recorded statements and to ensure fairness in adjudication.

In the instant case, the statement of Imran Mirza, the freight forwarder proprietor, was recorded under section 108 but he was neither examined as a witness before the adjudicating authority nor was the statement formally admitted in evidence. Therefore, the Tribunal held that reliance on such statement was impermissible.

3. Responsibility of exporter on FOB exports for change in country of destination

The appellant sold goods on FOB (Free on Board) terms, whereby title and risk pass to the buyer upon issuance of the Let Export Order and loading of goods onto the vessel. The appellant contended that it had no control over the goods after this point and was unaware of any changes made by the freight forwarder or buyer regarding the final destination.

The Tribunal acknowledged that while title passes on FOB terms, the Focus Market Scheme (FMS) benefits are contingent on the goods reaching the specified Focus Market. The exporter is the sole beneficiary of the scrips and must provide proof of landing in the Focus Market as per paragraph 3.20.3 of the Handbook of Procedures, which includes documents such as import bills of entry, delivery orders, arrival notices, or certified tracking reports.

The Tribunal noted that neither the appellant nor the authorities produced evidence that the goods actually reached the Focus Market (Panama or Netherlands). The investigation did not clarify whether the goods were diverted or if fake documents were submitted. The impugned order failed to address this crucial aspect.

Thus, while the appellant's argument on FOB terms was partly accepted, the responsibility to ensure and prove that goods reached the destination market for claiming FMS benefits remained with the exporter.

4. Imposition of penalties under sections 114AA and 114(iii) of the Customs Act

Section 114AA penalizes knowingly or intentionally making or using any false document or material particular for customs purposes, with penalty up to five times the value of goods. Section 114(iii) penalizes acts or omissions rendering goods liable to confiscation under section 113.

The Principal Commissioner imposed penalties relying primarily on the statement of Imran Mirza, implicating the appellant in fraudulent amendments of shipping documents and forging signatures.

Given the inadmissibility of Imran Mirza's statement as evidence, the Tribunal held that penalties could not be sustained. The appellant's claim of bona fide export on FOB terms and lack of involvement in destination changes stood unrebutted by admissible evidence.

5. Confiscation of goods under section 113 of the Customs Act

The Principal Commissioner held the goods liable for confiscation under sections 113(d), (g), and (i) of the Customs Act on grounds of fraud and misdeclaration. However, the goods were already exported and not available for confiscation, so no redemption fine was imposed.

The confiscation finding was again based on the inadmissible statement of Imran Mirza. The Tribunal found no valid evidence to uphold confiscation and consequently set aside the confiscation order.

Treatment of competing arguments

The appellant argued procedural and jurisdictional errors, lack of evidence, and reliance on inadmissible statements. The department contended that DGFT was in the process of initiating cancellation, and that the customs authorities had jurisdiction under section 28AAA independent of DGFT cancellation. The department also argued that fraud vitiates everything, supporting the recovery and penalties.

The Tribunal rejected the department's contentions on jurisdiction and evidence admissibility, emphasizing the statutory scheme and procedural safeguards. It accepted the appellant's bona fide exporter status and absence of control post Let Export Order, but underscored the exporter's responsibility to ensure goods reach the Focus Market for claiming benefits.

Significant holdings and core principles established:

"It would be wholly impermissible for the customs authorities to either doubt the validity of an instrument issued under the FTDR Act or go behind benefits availed pursuant thereto absent any adjudication having been undertaken 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 under section 108 of the Customs Act shall be relevant for proving truth of facts only when the person making the statement is examined as a witness before the adjudicating authority, and the statement is admitted in evidence after giving opportunity for cross-examination."

"The exporter selling goods on FOB terms transfers title and control upon issuance of Let Export Order, but for claiming Focus Market Scheme benefits, the exporter remains responsible to ensure and prove that goods reach the designated Focus Market."

"Penalties under sections 114AA and 114(iii) of the Customs Act cannot be imposed based solely on inadmissible statements lacking corroboration."

The Tribunal set aside the impugned order dated 29.05.2019 in entirety, holding that the Principal Commissioner lacked jurisdiction to invoke section 28AAA without DGFT cancellation, that the evidence relied upon was inadmissible, and that penalties and confiscation could not be sustained on the record before it.

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