The New Delhi Bench of the Customs, Excise & Service Tax Appellate Tribunal (CESTAT) has held that an SEZ unit cannot be held to have exceeded its authorised procurement limit when it acted on a Bond cum Legal Undertaking that had in fact been accepted by the competent authority, and such approval cannot later be disregarded retrospectively to treat the unit’s activities as illegal or unauthorised. The CESTAT further laid down that statements recorded under section 108 of the Customs Act are not by themselves sufficient to establish the truth of their contents in adjudication unless the mandatory conditions of section 138B are satisfied.
The CESTAT also established that allegations of non-manufacture, diversion of duty-free goods, or export of goods in the guise of jewellery cannot be sustained on assumptions regarding machinery, on incomplete electronic data such as NSDL records alone, or on the fact that export consignments were not examined by customs authorities.
The Tribunal further held that the findings of duty evasion, diversion of duty-free imported goods into the domestic tariff area, and export of goods other than silver and gold jewellery were unsustainable. As a consequence, it ruled that the penalties imposed on Bharti Gems, PP Jewellers under sections 112(b)(ii) and 114A could not survive, and that the penalties imposed on the individual employees under sections 112(b)(ii) and 114AA also could not be sustained because the foundational finding of customs duty evasion had failed.
The Division Bench comprising Justice Dilip Gupta (President) and P. Anjani Kumar (Technical Member) observed that the Commissioner was not justified in concluding that Bharti Gems had exceeded the prescribed procurement limit by ignoring the subsequent Bond cum Legal Undertaking dated Jan 05, 2016. Since no objection was raised when that Bond cum Legal Undertaking was submitted and a Letter of Acceptance had been issued, the SEZ unit was entitled to act upon that approval, and activities carried out on that basis could not later be termed illegal or unauthorised. The Tribunal specifically noted that there was no finding that, even after taking this later Bond cum Legal Undertaking into account, the procurement limit had in fact been exceeded.
On the allegation that no manufacturing activity was carried out, the Tribunal held that statements recorded under section 108 of the Customs Act could not be relied upon unless the mandatory procedure under section 138B was followed. It explained that the maker of the statement had to be examined as a witness before the adjudicating authority, the adjudicating authority had to decide on admissibility in the interests of justice, and only thereafter could the statement be relied upon, with cross-examination rights following. The Tribunal also noted that the relevant statements had subsequently been retracted.
The Tribunal further observed that the Commissioner’s assumption that chain jewellery could only be manufactured by specialised machinery was unsustainable in the absence of expert opinion, especially when Bharti Gems had consistently stated that it primarily produced handmade jewellery. It also accepted the contention that NSDL records were not conclusive or exhaustive records of raw material procurement and that Bharti Gems had produced contemporaneous business records, including stock registers, alloy purchase ledgers, invoices and shipping documents, which could not be ignored without valid reasons.
The Tribunal also rejected the Commissioner’s inference that Bharti Gems had exported other goods in the guise of jewellery merely because export consignments were not examined by customs officers. It held that the onus could not be shifted onto the appellant to prove that the goods were examined, and the department could not rely on non-examination by its own officers to support the allegation of diversion into the domestic tariff area. The Tribunal additionally held that the distinction drawn by the Commissioner between “manufacture” and “manufacturing services” was artificial, since the SEZ framework did not prohibit procurement of raw material free of cost from overseas entities or render manufacturing non-compliant merely because it was carried out under contractual arrangements.
The Tribunal also found that merely because Amit Pal Singh was the authorised representative of Bharti Gems and was also associated with PP Jewellers, it did not follow that there was inter-mingling of finances or statutory benefits among Bharti Gems, PP Jewellers and Its My Name. It therefore did not accept the basis on which the Commissioner had sought to fasten joint and several liability on those entities.
Briefly, the appeals arose from an order by the Commissioner of Customs (Preventive), Jodhpur, who had confiscated seized silver jewellery under section 111(o) of the Customs Act, confirmed a customs duty demand of Rs. 1.44 crores with interest against Bharti Gems and PP Jewellers jointly and severally under section 28(4), and imposed penalties under sections 112(b)(ii), 114A and 114AA on the concerned entities and individuals. The appellants included Bharti Gems, PP Jewellers, Its My Name, and certain employees.
The department’s case was that Bharti Gems, an SEZ unit, had imported duty-free gold and silver, diverted the same into the domestic tariff area, and exported other goods in the guise of silver and gold jewellery on the allegation that it lacked adequate manufacturing facility and labour strength.
Bharti Gems was an exporter of silver and gold jewellery registered in SEZ-II, Jaipur. It had executed an initial Bond cum Legal Undertaking, and later submitted an additional Bond cum Legal Undertaking for Rs. 224.73 crores, which, according to the appellants, had been approved by the competent authority. The department nevertheless proceeded on the basis that Bharti Gems exceeded the permissible procurement limits, had no real manufacturing capability except possibly for silver bangles, and could not have manufactured the quantity and purity of jewellery claimed to have been exported, particularly in light of the alloy procurement data and the machinery available at the unit.
