2015 (9) TMI 1370 - AT - Customs

Undue benefit of Target Plus Scheme (TPS) - Export of cut and polished diamonds (CPD) without value addition - warehousing of imported CPD - 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. - Rejection of declared FOB value of diamonds - Penalty u/s 114 - Misdeclaration - contravention of the provisions of Section 14 and Section 50 of the Act read with Section 11 of the Foreign Trade (Development & Regulation) Act, 1992 and Rule 11 & Rule 14 of the Foreign Trade (Regulation) Rules, 1993. Held that - 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 - if diamonds are segregated into a homogenous lot based on their size and quality, the value shall change even by employing simple labour intensive processes like sieving, boiling and assorting. The only piece of evidence we find on the relationship between the value addition and the process is in the form of representation made by Gem and Jewellery Export Promotion Council vide letter dated 23.10.2006 which relies on the same Circular of the CBEC while dealing with the various schemes in the Policy affecting the business of gem and jewellery including diamond industry. We are informed that 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. Section 14 of the Act provides that where duty is chargeable on ad valorem basis, the value shall be deemed to be the price at which such or like goods are ordinarily sold or offered for sale for delivery at the time and place of importation or exportation as the case may be in the course of international trade. There is no dispute about the CIF value declared by the Indian companies in the bills of entry. Rather such CIF value has been adopted by the Commissioner, to be the correct FOB value. We shall deal with this aspect later in detail when dealing with circular trading. Value addition is a concept under the Foreign Trade Policy (FTP). On the question of valuation, the Commissioner also records that evidences disclosed in the show-cause notice, there is an allegation that the FOB value declared is not genuine on account of control by AEL over all the overseas parties involved in the transactions as buyers or sellers of diamonds. Having recorded this objection, the Commissioner does not give any categorical finding thereon but instead treads into the question of circular trading. We therefore prefer to deal with this issue in the context of valuation and circular trading as the department has also heavily relied upon the allegations in the show cause notice on the inter relationship between AEL and other Indian companies as well as AEL and overseas entities. There is no allegation of common shareholding except for the subsidiaries. It is also not shown that AEL has the power to appoint Directors or control the composition of Board of Directors of companies in which its employees or its Directors are also partners or Directors. It is not shown that AEL holds sufficient shares or voting power to control the decisions of the entities in which its Directors are also Directors or in which its employees are also Directors or Partners. Mutuality of interest must be proved both ways. It is interest in the business of each other which proves that the parties are related. The inquiries made through the Indian High Commission, Singapore or Indian Consulate in Dubai have not brought out any such factual position on either shareholding pattern or control over the composition of the Board of Directors of the overseas entities except the two subsidiaries. As long as price of exports to independent parties in respect of whom there is no allegation of relationship is available, the same would apply to all other exports including those made to related persons. This is notwithstanding the fact that the department has failed to discharge the onus of proving relationship between AEL and overseas entities - 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. For the same reason, the judgment in Steel India Company vs. CCE, 2014 (12) TMI 1035 - CESTAT MUMBAI is of no assistance to the department. - 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. 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 CIG 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. Payment of commission would be relevant for calculating the value addition if and when the pending applications for grant of duty free scrip under TPS is taken up by the competent authority. - 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. The statement of these individuals are exculpatory, besides not being adversely implicated by others. In any case, we have set aside penalties on all concerned as aforesaid. - Decided in favour of assessee.

Summary

Issues Involved:
1. Whether the FOB value declared in the shipping bills for export of cut and polished diamonds by appellant companies is liable to be rejected on the ground that no processing activity to achieve value addition of 5% or 10% was undertaken by the Indian companies in the bonded warehouses.
2. Whether the Indian companies artificially inflated the export turnover to take benefit under the Target Plus Scheme (TPS) by resorting to circular trading/movement of the same set of diamonds between Indian companies and overseas entities which are allegedly interrelated.
3. The effect of the commissions paid by the Indian entities for exports and the arrangement of buyers credit by the Indian entities on either the FOB value declared in the shipping bills or on the charge of circular trading.
4. Whether the export goods can be held liable for confiscation under Section 113(i) of the Act and consequently whether the amounts of penalties imposed by the Commissioner are justified or are the same to be increased.

Issue-wise Detailed Analysis:

Issue No. I:
A. The Commissioner found that no processing was carried out by any of the six Indian companies to achieve value addition of 5% or 10%. He based this on the fact that exports often took place within 3-4 days of their imports. However, statements from Lumesh Sanghavi and others confirmed that processes such as sieving, boiling, and sorting were indeed carried out in the bonded warehouse.
B. The Tribunal held that the processes of sieving, boiling, and sorting were carried out by the Indian companies in the bonded warehouse, and thus, it was not possible to hold that no process at all was carried out.
C. The Tribunal noted that para 4A.18 of the FTP does not necessarily envisage any kind of manufacturing or processing activity to achieve value addition. 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.
D. The Tribunal found no evidence to support the Commissioner's finding that minimum value addition of 5% or more cannot be achieved by simple processes. It was noted that value addition is a concept under the Foreign Trade Policy (FTP) and the determination of value addition is a function of DGFT/licensing authorities.
E. The Tribunal held that the FOB value declared in the shipping bills is correct and found that the Commissioner's sole ground for rejecting the FOB value was not sustainable.

Issue No. II:
A. The allegations relating to circular trading were not confirmed by the Commissioner, who held that the defense to show that circular trading is not possible appears to be plausible.
B. The Tribunal found that the allegation of circular trading of diamonds was based on the same lot of diamonds being imported and exported multiple times. However, examination of the invoices showed that each consignment consisted of various lots of different descriptions, weight, value, and quality.
C. The Tribunal noted that identifying one or two lots from a consignment to say that the same set of diamonds had been traded again and again was a method unknown to law.
D. The Tribunal found that the defense to circular trading was not only plausible but incontrovertible, as the evidence provided by AEL showed that the sequence in the movement of the same alleged lot to prove circular trading did not exist.
E. The Tribunal also found that the charts recovered from the desktop of Vipul Desai did not prove circular trading and were merely a graphic representation of information.
F. The Tribunal held that the charge of circular trading failed.

Issue No. III:
A. The issue relating to payment of commission and fund flow through mechanisms such as buyers credit or LC discounting were connected to the charge of circular trading and to support the allegation of control by AEL.
B. The Tribunal found that payment of commission proved that the transactions of import and export of diamonds were genuine and on a principal-to-principal basis.
C. The Tribunal noted that there was no allegation that payment of commission or LC discounts or availing buyers credit violated any law of India.
D. The Tribunal found that the payment of commission would be relevant for calculating the value addition if and when the pending applications for grant of duty-free scrip under TPS are taken up by the competent authority.

Issue No. IV:
A. The Tribunal held that the declared FOB value is correct and set aside the confiscation of the export goods under Section 113(i) of the Act.
B. Consequently, the Tribunal also set aside the penalties imposed by the Commissioner under Section 114 of the Act.
C. The Tribunal noted that penalties had been imposed mechanically without ascertaining the role played by each individual and found no justification for the penalties imposed by the Commissioner.
D. The Tribunal set aside the penalties on all concerned.

Conclusion:
The Tribunal set aside the impugned order passed by the Commissioner and allowed the appeals filed by all the parties, dismissing the appeals filed by the Department. Consequential reliefs, if any, were allowed.