2025 (6) TMI 553 - AT - Customs

Levy of penalty u/s 114 of the Customs Act 1962 - evasion of customs duty - CD-ROMs under Duty Entitlement Pass Book (DEPB) Scheme by grossly overvaluing it with an intention to wrongly avail DEPB scrips - Reliability of statements recorded under section 108 of the Customs Act - HELD THAT - A perusal of the impugned order so far as it relates to the appellant shows that it has placed reliance upon the statements made by Raminder Mohan Singh Ratinder Pal Singh Bhatia and Davender Lal under section 108 of the Customs Act to conclude that the appellant was associated with the activities of Netcompware. The statements made under section 108 of the Customs Act cannot be relied upon if the procedure followed under section 138B of the Customs Act is not followed - Except for the statements made under section 108 of the Customs Act there is no other evidence which has been considered by the Commissioner in the impugned order for imposing penalty upon the appellant under section 114 of the Customs Act. As these statements cannot be relied upon the imposition of penalty upon the appellant under section 114 of the Customs Act cannot be sustained and is set aside. Conclusion - In the present case the goods had been exported and therefore the goods could not have been confiscated under section 113(d) of the Customs Act. Penalty under section 114 of the Customs Act can be levied only if the goods are held liable to confiscation under section 113 of the Customs Act. As the confiscation cannot be sustained penalty under section 114 of the Customs Act cannot also be sustained. The impugned order dated 31.01.2006 passed by the Commissioner in so far as it imposes penalty upon the appellant under section 114 of the Customs Act is set aside - the appeal is allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

(a) Whether the penalty of Rs. 10 lakhs imposed under section 114 of the Customs Act, 1962 upon the appellant is justified in the context of alleged involvement in overvaluation of exported CD-ROMs and misuse of DEPB scrips.

(b) Whether statements recorded under section 108 of the Customs Act can be relied upon as evidence without following the procedure prescribed under section 138B of the Customs Act.

(c) Whether the goods exported, having already been exported, can be confiscated under section 113(d) of the Customs Act, which pertains to goods attempted to be exported contrary to prohibition.

(d) Whether the Customs Valuation (Determination of Value of Export Goods) Rules, 2007 apply for re-determining the valuation of goods once exported.

(e) Whether the appellant was connected with the export of CD-ROMs by Netcompware Pvt. Ltd. and import of the same by Arvind International, as alleged by the department.

2. ISSUE-WISE DETAILED ANALYSIS

(a) Legitimacy of penalty imposed under section 114 of the Customs Act

The penalty was imposed on the basis that the appellant was involved in fraudulent overvaluation of CD-ROM exports to procure DEPB scrips wrongfully, which were then sold and used to evade customs duty. The Commissioner relied heavily on statements recorded under section 108 of the Customs Act to establish the appellant's connection with the exporters and importers involved.

Relevant legal framework and precedents: Section 114 of the Customs Act allows imposition of penalty if goods are liable to confiscation under section 113. The confiscation under section 113(d) applies to goods attempted to be exported contrary to prohibition. The Customs Valuation Rules govern valuation but apply to export goods as defined under the Act.

Court's interpretation and reasoning: The Court noted that the penalty under section 114 can only be imposed if confiscation under section 113 is sustainable. Since the goods had already been exported, confiscation under section 113(d), which applies to goods attempted to be exported contrary to prohibition, was not applicable. Therefore, the penalty could not be sustained on this ground.

Application of law to facts: The goods were exported and not merely attempted to be exported; hence, confiscation under section 113(d) was not legally tenable. Without confiscation, penalty under section 114 could not stand.

Conclusions: The penalty imposed under section 114 was set aside as the legal basis for confiscation was absent.

(b) Reliance on statements recorded under section 108 of the Customs Act without compliance with section 138B

Relevant legal framework and precedents: Section 108 empowers officers to record statements during inquiries. Section 138B mandates that such statements can be admitted as evidence only if the person making the statement is examined as a witness before the adjudicating authority, who must then form an opinion on admissibility, and the affected party must be given an opportunity to cross-examine the witness. Similar provisions exist under section 9D of the Central Excise Act.

Precedents include Tribunal decisions and High Court judgments emphasizing the mandatory nature of this procedure to avoid reliance on potentially coerced or compelled statements.

Court's interpretation and reasoning: The Court extensively reviewed the Tribunal's prior rulings, including the Drolia Electrosteel case, which held that statements recorded under section 108 without following the procedure under section 138B are inadmissible. The rationale is to prevent misuse of statements recorded under coercion and to ensure fairness by allowing cross-examination.

Key evidence and findings: The impugned order relied solely on statements by Raminder Mohan Singh, Ratinder Pal Singh Bhatia, and Davender Lal recorded under section 108. The Court found no evidence that the procedure under section 138B was followed to admit these statements as evidence.

Treatment of competing arguments: The appellant argued these statements were inadmissible and could not support penalty. The department contended the statements were sufficient. The Court rejected the department's position, emphasizing the mandatory compliance with section 138B.

Conclusions: The statements under section 108 were inadmissible due to non-compliance with section 138B, rendering the penalty unsustainable.

(c) Applicability of Customs Valuation Rules to re-determine valuation of exported goods

Relevant legal framework and precedents: Section 2(19) of the Customs Act defines "export goods." The Customs Valuation (Determination of Value of Export Goods) Rules, 2007, apply to valuation of export goods.

Court's interpretation and reasoning: The appellant contended that once goods are exported, they no longer fall within the definition of "export goods" for the purpose of valuation rules, and thus valuation cannot be re-determined post-export. The Court noted this submission but did not base its decision primarily on this point, as the penalty was set aside on other grounds.

Conclusions: The issue was raised but did not form a decisive basis for the Court's final ruling.

(d) Appellant's connection with export and import activities

Relevant legal framework and precedents: The department relied on statements under section 108 to establish the appellant's involvement in floating Netcompware Pvt. Ltd., facilitating exports and imports, and benefiting from the transactions.

Court's interpretation and reasoning: The Court found that the impugned order's conclusion on the appellant's involvement was based solely on inadmissible statements. No independent evidence was considered to establish the appellant's connection.

Application of law to facts: Without admissible evidence, the finding of involvement was unsustainable.

Conclusions: The appellant's alleged involvement was not legally established.

3. SIGNIFICANT HOLDINGS

"The statements made under section 108 of the Customs Act cannot be relied upon if the procedure followed under section 138B of the Customs Act is not followed."

"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."

"Penalty under section 114 of the Customs Act can be levied only if the goods are held liable to confiscation under section 113 of the Customs Act. As the confiscation cannot be sustained, penalty under section 114 of the Customs Act cannot also be sustained."

"The provisions of section 9D of the Central Excise Act and section 138B of the Customs Act have been held to be mandatory and failure to comply with the procedure would mean that no reliance can be placed on the statements recorded either under section 14D of the Central Excise Act or under section 108 of the Customs Act."

"The rationale behind the above precaution contained in clause (b) of Section 9D(1) is obvious. The statement, recorded during inquiry/investigation, by the Gazetted Central Excise Officer, has every chance of having been recorded under coercion or compulsion."

Final determinations:

(i) The penalty imposed under section 114 of the Customs Act is set aside for lack of legal basis in confiscation and inadmissibility of evidence.

(ii) Statements recorded under section 108 without compliance with section 138B are inadmissible and cannot support adverse findings.

(iii) Confiscation under section 113(d) cannot apply to goods already exported.