2025 (6) TMI 370 - AT - Customs

Levy of penalty u/s 114(iii) and section 114AA of the Customs Act 1962 - diversion of goods to Jebel Ali in UAE by fraudulently amending TR-1 and TR-2 copies of the shipping bills with the help of the appellant - statements recorded under section 108 of the Customs Act can be considered as evidence under section 138B of the Customs Act or not - HELD THAT - A perusal of the order passed by the Commissioner (Appeals) shows that the finding that the appellant helped the exporters in diverting the readymade garments to countries not notified under the Focus Market Scheme for claiming undue benefit of drawback under the Focus Market Scheme is based on the statement made by the appellant under section 108 of the Customs Act as also the statements made by the exporters under section 108 of the Customs Act. The Commissioner (Appeals) also observed that the said statements have not been retracted and so they cannot be ignored. 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 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. Once this determination regarding admissibility of the statement of a witness is made by the adjudicating authority the statement will be admitted as an evidence and an opportunity of cross-examination of the witness is then required to be given to the person against whom such statement has been made. It is only when this procedure is followed that the statements of the persons making them would be of relevance for the purpose of proving the facts which they contain. In view of the aforesaid decision of the Tribunal in Surya Wires the statements made by the appellant and the exporters under section 108 of the Customs Act could not have been considered by the Commissioner of Customs (Appeals). The finding that has been recorded by the Commissioner (Appeals) that the appellant helped the exporters in availing the benefit of drawback cannot therefore be sustained. In this view of the matter the penalties that have been imposed upon the appellant under sections 114(iii) and 114AA of the Customs Act based on the statements of the appellant and the exporters are set aside. The impugned order dated April 04 2022 passed by the Commissioner (Appeals) therefore deserves to be set aside and is set aside - appeal allowed.

Summary

The core legal questions considered in this judgment are:

1. Whether the statements recorded under section 108 of the Customs Act, 1962, can be relied upon as evidence for imposing penalties under sections 114(iii) and 114AA of the Customs Act without following the procedure prescribed under section 138B of the Customs Act.

2. Whether the appellant, a director of a freight forwarding company, was liable for penalties for assisting exporters in fraudulently amending shipping bills to divert goods to unauthorized destinations and claim undue benefits under the Focus Market Scheme.

3. Whether the penalties imposed on the appellant under sections 114(iii) and 114AA of the Customs Act were justified on the facts and evidence available.

Issue-wise Detailed Analysis

Issue 1: Admissibility and Reliance on Statements Recorded under Section 108 of the Customs Act

Relevant Legal Framework and Precedents: Section 108 of the Customs Act empowers officers to record statements of persons during inquiry or investigation. Section 138B of the Customs Act prescribes the conditions under which such statements can be admitted as evidence in adjudication proceedings. Specifically, section 138B mandates that statements recorded during inquiry are relevant only if the person who made the statement is examined as a witness before the adjudicating authority and the adjudicating authority forms an opinion that the statement should be admitted in the interests of justice. Additionally, the person must be given an opportunity for cross-examination.

The Tribunal's decision in M/s Surya Wires Pvt. Ltd. was extensively relied upon, which analyzed the interplay between sections 108 and 138B of the Customs Act and analogous provisions under the Central Excise Act. The Tribunal held that statements recorded during inquiry cannot be relied upon as evidence unless the procedural safeguards under section 138B are complied with. The rationale is to prevent statements being recorded under coercion or compulsion and to ensure fairness by allowing cross-examination.

Court's Interpretation and Reasoning: The Court examined the impugned order and found that the Commissioner (Appeals) relied solely on the statements recorded under section 108 without ensuring compliance with section 138B. The appellant's and exporters' statements were not subjected to examination as witnesses before the adjudicating authority, nor was there an opportunity for cross-examination. Hence, the reliance on these statements violated the mandatory procedural safeguards.

Application of Law to Facts: Since the procedural requirements of section 138B were not followed, the statements under section 108 could not be admitted as evidence. Consequently, the factual foundation for the penalties imposed on the appellant was undermined.

Treatment of Competing Arguments: The appellant contended that the statements were recorded under coercion and should not be relied upon. The Court rejected this plea on the ground that no complaint was made at the relevant time, and the statements remained un-retracted before the proper authority. However, the Court emphasized that irrespective of retraction or coercion claims, the statutory procedure under section 138B must be followed for admissibility.

Conclusion: The Court concluded that the statements recorded under section 108 without compliance with section 138B could not be relied upon for imposing penalties.

Issue 2: Liability of the Appellant for Fraudulent Amendment of Shipping Bills and Diversion of Goods

Relevant Legal Framework: Sections 113 and 114 of the Customs Act deal with confiscation of goods and imposition of penalties for violations. Section 114(iii) penalizes persons who assist in fraudulent acts relating to customs procedures. Section 114AA penalizes persons who forge or fraudulently endorse documents related to customs.

Court's Interpretation and Reasoning: The Additional Commissioner of Customs found that the appellant had actively assisted exporters in fraudulently amending the TR-1 and TR-2 copies of shipping bills to change the port of discharge and country of destination from Mogadishu (Somalia) to Jebel Ali (UAE), thereby enabling exporters to claim undue benefits under the Focus Market Scheme. The amendments were made in the appellant's handwriting, and he had endorsed these amendments with forged signatures and stamps purporting to be of the Customs Superintendent, without due authentication.

The Commissioner (Appeals) upheld these findings, relying heavily on the statements recorded under section 108, which the appellant had not retracted. The appellant admitted involvement in these amendments in his statements. The Court noted that these acts rendered the goods liable for confiscation under section 113, and the appellant liable for penalties under sections 114(iii) and 114AA.

Key Evidence and Findings: The investigation revealed fraudulent amendments to shipping bills, corroborated by the appellant's own statements and those of the exporters. The unauthorized change of destination and port was done without Customs Superintendent's authentication. The appellant's admission under section 108 was a critical piece of evidence.

Application of Law to Facts: The fraudulent amendments and the appellant's active role in them constituted violations attracting penalties under the Customs Act. However, as discussed under Issue 1, the reliance on these statements was procedurally flawed.

Treatment of Competing Arguments: The appellant denied the allegations but did not retract his statements recorded under section 108. The plea of coercion was rejected. The department argued that the appellant's involvement was established by documentary and testimonial evidence.

Conclusion: While the facts indicated the appellant's involvement in fraudulent amendments, the procedural infirmity in admitting evidence under section 108 without compliance with section 138B vitiated the imposition of penalties.

Issue 3: Validity of Penalties Imposed under Sections 114(iii) and 114AA of the Customs Act

Court's Reasoning: The penalties were imposed based on the appellant's involvement in fraudulent amendments and endorsement of forged documents. The Commissioner (Appeals) upheld the penalties, finding the appellant actively concerned with the goods and the fraudulent acts.

However, the Court found that since the statements relied upon to establish these facts were inadmissible due to non-compliance with section 138B, the penalties could not be sustained.

Conclusion: The penalties imposed under sections 114(iii) and 114AA were set aside as the foundational evidence was improperly admitted.

Significant Holdings

"The statements recorded during inquiry/ investigation by officers has 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."

"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. Once this determination regarding admissibility of the statement of a witness is made by the adjudicating authority, the statement will be admitted as an evidence and an opportunity of cross-examination of the witness is then required to be given to the person against whom such statement has been made."

"Failure to comply with the procedure under section 138B of the Customs Act means that no reliance can be placed on the statements recorded under section 108 of the Customs Act."

"The appellant had assisted and connived with the exporters for claiming inadmissible benefit of incentives scheme and by the above said acts of omission and commission, he was actively concerned with the goods pertaining to the amended shipping bills. Therefore, the Adjudicating authority has rightly penalised the Appellant under Section 114(iii) of the Act. The Appellant had also endorsed the manual amendments in those fraudulently amended shipping bills by forging the signatures of the Customs Superintendent and by appending their own stamp in the name of Customs Superintendent of ICD, TKD Delhi as if the said amendments had the approval of the Customs Authorities, Thus, I also hold that the Appellant is liable to penal action under Section 114AA of the Act as well."

However, the Court ultimately held that these findings could not be sustained due to procedural non-compliance regarding evidence admissibility.

Final determinations:

- The statements recorded under section 108 of the Customs Act without compliance with section 138B cannot be relied upon as evidence.

- The penalties imposed under sections 114(iii) and 114AA of the Customs Act on the appellant based solely on such inadmissible statements are set aside.

- The impugned order dismissing the appellant's appeals is set aside, and the appeals are allowed.