By TIOL News Service

MUMBAI, SEPT 28, 2015: IT is alleged that with a view to take advantage of ‘Target Plus Scheme', M/s. Adani Enterprises Ltd. (AEL) which was already in the business of import and export of Cut and Polished Diamonds [CPD], acquired 5 other Indian entities or signed MOUs with them to undertake the same business of import and export of cut and polished diamonds. It is further alleged that in addition to the 5 Indian Companies mentioned above, AEL also managed and controlled 45 legal entities overseas.

It is further alleged that AEL indulged in ‘circular trading' of diamonds by importing into India and exporting the same either after no processing or after insignificant processes. It is alleged that the diamonds were imported into private bonded warehouses, for which all the 6 Indian Companies including AEL had obtained bonded warehouse licences. It is alleged that after import, the goods were taken into private bonded warehouse and without processing the same were removed for export within 3-4 hours or the next day as the case may be.

It was, therefore, alleged that the claim of AEL, that processes such boiling, sieving, sorting and packing was done as claimed by AEL and other appellants was bogus and that the same diamonds, without processing, were exported out of India.

Relying on various statements it is concluded that there was no processing undertaken by the Indian Companies inside the bonded warehouse and hence, there was no value addition, meaning thereby, that the FOB value declared was inflated in respect of same set of diamonds which were imported into and exported from bonded warehouse, only to be re-imported and re-exported, in the name of different Indian entities to establish and artificially increase export turnover to obtain undue benefits under TPS.

The SCN dated 30.03.2007 inter alia alleged that the Indian entities had mis-declared the FOB value of export goods in contravention of the FTDR Act and the FTR Rules; that modus on the part of consortium amounts to "smuggling” as defined in Section 2(39) of the Act rendering the goods liable for confiscation and imposition of penalties u/s 114 of the Customs Act, 1962.

The Commissioner concluded - "Thus, the FOB value declared in the shipping bills by simply adding 5% or 10% of the CIF value is artificial and hence, the export value which is not a correct value has to be rejected under Section 14 of the Customs Act, 1962”.

In view of his findings, the Commissioner imposed following penalties u/s 114 of the Act:

All the above Companies and individuals penalised by the Commissioner are in appeal.

The department has also filed appeals in all cases on two grounds, the first being challenging the finding of the Commissioner with regard to Circular trading and second being for enhancement of penalties.

All the appeals were heard together in April, 2015.

In a detailed order pronounced recently, the CESTAT framed the following issues and answered them thus -

+ There is no manner of doubt that processes such as sieving, boiling and sorting were carried out by the Indian companies in the bonded warehouse. It is, therefore, not possible to hold no process at all was carried out by the Indian companies in the bonded warehouse.

+ A plain reading of para 4A.18 of FTP shows that it does not contain any condition, that the value addition must be as a result of any kind of manufacturing or specific processing activity in the bonded warehouse. In fact, it refers to import of cut and polished diamonds and to the export also of cut and polished diamonds. It is implied that para 4A.18 does not necessarily envisage any kind of manufacturing or processing activity to achieve value addition, because it does not refer to any new article at the time of export, different from the goods at the time of import. The sole objective is to earn foreign exchange by value addition, and subject to achieving this object, import and re-export out of bonded warehouse of the same item, namely; cut and polished diamonds is permitted.

+ Having regard to the plain language of para 4A.18 we are not persuaded to agree with the Commissioner that the simple processes carried out by the Indian companies cannot result in the value addition of 5% or more. No such co-relation between value addition and processing activity in the bonded warehouse is required under para 4A.18. Sieving, boiling and assorting of diamonds is a recognised activity of the diamond industry, as can be seen from the clarification contained in Circular No. 40/1999 dated 28.06.1999 issued by CBEC which was issued in the context of para 8.13 of the Import and Export Policy 1997-2002, which is parimateria to para 4A.18 of FTP 2004-09.

+ Commissioner has not relied upon any evidence to show that minimum value addition of 5% or more cannot be achieved by such processes. The show cause notice also does not refer to any evidence on this point. The question whether these simple processes can result in value addition of 5% or more is a matter of fact.

+ The Customs Officers in charge of the bonded warehouse on being satisfied, have also cancelled the bonds, which aspect has been completely overlooked by the Commissioner.

+ It would be unfair to reject the FOB value on a criteria which is not prescribed by law. As we have held, processing has been undertaken in respect of the export consignments. When neither Section 14 of the Act nor para 4A.18 of FTP requires the exporter to establish a relationship between processing and the FOB value declared in the shipping bill, which is to be independently determined, applying the tests under Section 14, the question of verification of the value addition, by the Customs officers at the time of export does not arise at all. This is more so since determination of value addition is within the jurisdiction of licensing authorities and not the Customs authorities under the provisions of FTP to which we have already adverted. We, therefore, find that the sole ground of the Commissioner to reject the FOB value, is that the value addition of 5% or more cannot be achieved only by carrying out simple processes, is not sustainable. We, therefore, hold that the FOB value declared is correct.

+ Department has failed in discharging the burden cast upon it to produce any tangible evidence in respect of the charge of over-valuation or circular trading.The declared FOB value is accepted to be the correct FOB value under Section 14 of the Act and to that extent the order of the Commissioner is set aside.

+ It is admitted by the department that consignments of diamonds physically came into India and were also sent outside India, and further it is also admitted by the department that in all cases the FOB value as shown in the export invoices have been duly realised. In other words, it is not alleged that these were paper transactions.

+ The allegation of circular trading of diamond is based on same lot of diamonds being imported and exported over a number of times during different periods. On examination of the invoices relating to import as well as export of cut and polished diamonds it is seen that each consignment consists of various lots of different descriptions, weight, value and quality. It is not the case of the department that all the lots have been imported under one invoice. The Bill of Entry under Section 46 or the shipping bill under Section 50 contains a declaration of the goods covered by the total quantity and value of the goods supported by the invoice, which covers the totality of all the lots constituting the consignment. Singling out one or two lots from a consignment to say that the same set of diamonds have been traded again and again is a misnomer.

+ It is therefore not possible to come to the conclusion that the appellant companies indulged in circular trading merely with reference to single lots (out of a consignment) which are said to be imported and exported during different periods.

+ None of the e-mails (which have been extracted in the show cause notice) show fund flow corresponding to the circular trading of the lots as alleged in the show-cause notice, meaning thereby the allegation of circular trading is unsupported by evidence of corresponding financial trail.Suspicion, howsoever strong, cannot take the place of evidence.

+ The stand of the department in the show-cause notice to be self-contradictory. If the same lot is circulated into India a number of times, it is only rational to take the CIF value only once for the same lot to support the allegation of circular trading. By not doing so, and by accepting the CIF value of each individual consignments of imported diamonds, the department has admitted each consignment to be different from the other, and not of the same goods, thereby militating against their own case of circular trading. The Indian companies contend and rightly so, that the implications of acceptance of CIF value means each time a new consignment has been imported unrelated to any other in the past or future, duly corroborated by remittance of foreign exchange through banks or authorised dealers equal to the value of the goods received in India. Correspondingly, in relation to exports, receipt of foreign exchange through banks and authorised dealers as proceeds of exports in compliance with the provisions of Foreign Exchange Management Act, 1999.

+ The charge of circular trading fails.

+ The issue relating to payment of commission and fund flow through mechanisms such as buyers credit or LC discounting are connected to the charge of circular trading and to support the allegation of control by AEL. We have for reasons recorded above, found both these charges to be unsustainable.

+ When we have held the declared FOB value to be correct and there is no circular trading, we need not go into these issues, more so, when in query from the Bench whether the payment of commission or LC discounts or availing buyers credit violated any law of India, both sides submitted that none of these actions are in breach of any of the laws for the time being force in India.

+ Having held that the declared FOB value is correct, we set aside the confiscation of the exports goods under Section 113 (i) of the Act, consequently, we also set aside the penalties imposed by the Commissioner in the impugned order under Section 114 of the Act.

+ Penalties have been mechanically imposed without ascertaining the role played by each of them.

+ We find that penalties have been imposed only because they "have allowed themselves to act at the behest of AEL and have performed acts which have rendered the export goods liable to confiscation. ...............” without ascribing acts of omission or commission under the Act to levy penalty on them. Section 114 of the Act does not create vicarious liability. It is an action in personam. It is, therefore, necessary to show how each of these individuals acted in a manner which resulted in mis-declaration of FOB value to render the goods liable to confiscation under Section 113(i). We find no justification has been provided by the Commissioner in the order.

Conclusion:

Order passed by the Commissioner is set aside and the appeals filed by the parties are allowed. Consequential reliefs are allowed. Appeals by Department dismissed.

(See 2015-TIOL-2043-CESTAT-MUM)