2025 (4) TMI 1547 - AT - Customs

Overvaluation of imported goods - deficiency in discharge of duties of customs - jurisdiction of adjudicating authorities and appellate bodies to determine the value of imported goods outside the statutory framework of assessment particularly for the purpose of confiscation under section 111(m) of the Customs Act 1962 when no duty shortfall or prohibition exists - HELD THAT - The scheme of valuation as set out in the extant Rules is for the price to be the transaction value and thereby the value for assessment where duties of customs are to be charged on the basis of value. The optimal description of acceptable price in rule 3 of Customs Valuation (Determination of Value of Imported Goods Rules) 2007 is also considered to be the default save for any additions pertaining to costs and services related to the imported goods warranted by rule 10 of Customs Valuation (Determination of Value of Imported Goods Rules) 2007 except in two specified and mutually exclusive circumstances viz. transaction between related parties with the relationship having influenced price or upon discard by recourse to rule 12 of Customs Valuation (Determination of Value of Imported Goods) Rules 2007 permitting substitution with surrogate value by sequential application of rule 4 to rule 9 therein as the gold standard of transaction value as the governing concept had been elevated to the substance itself in with amendment of 2007 to section 14 of Customs Act 1962. The re-determination by adoption of price truncated to the extent of unacceptable value addition in the document chain is tantamount to freezing the consideration chain at a stage prior to the last in the billing for the very goods under assessment; it is neither in accord with surrogate value drawn from other legitimate transactions permitted to be appropriated for re-assessment by recourse to rule 4 to rule 9 of Customs Valuation (Determination of Value of Imported Goods) Rules 2007 nor depressed / enhanced consideration for the goods under assessment permitted by rule 3 of Customs Valuation (Determination of Value of Imported Goods) Rules 2007. The transaction value in rule 4 therein is intended to be drawn from consignment of identical goods which goods under assessment is not and the price of goods under assessment is alterable only in the manner permitted in rule 3 of Customs Valuation (Determination of Value of Imported Goods) Rules 2007. Synthesis of the two has neither approval in law nor precedent of judicial determination. The grounds of appeal to the extent concerned with justifying non-applicability of the leading judgements on disputes about overvaluation before the Tribunal are not to be dignified by being even taken into consideration. To do so would be at the cost of judicial discipline and to the detriment of the responsibility assigned especially on valuation and classification to the Tribunal in the appellate hierarchy of national jurisdiction. The attempt by a subordinate executive authority to have the findings therein re-considered after the Central Government withdrew its appeal in one and lost its appeal in the other is not in keeping with the finality attributable to judicial determination. Conclusion - The scheme of valuation does not stand in support of the manner in which the value has been sought to be substituted in the notice. The facts evinced are not sufficient to tear down the weave of commercial engagement and for recourse thereby to discard of declared value. The mark-up is not of such unreasonable magnitude as to suggest that transaction should be penalized for obfuscation. Even without pressing into service the law as judicially determined on jurisdictional competence and on evidentiary value of documents for visiting penalties on the respondents under Customs Act 1962 and as found in the impugned order too the facts alone suffice to erase the proposals in the notice. Appeal dismissed.

Summary

The core legal questions considered in this judgment concern the scope and application of customs valuation principles under the Customs Act, 1962, specifically:

1. Whether the adjudicating authorities and appellate bodies have jurisdiction to determine the value of imported goods outside the statutory framework of assessment, particularly for the purpose of confiscation under section 111(m) of the Customs Act, 1962, when no duty shortfall or prohibition exists.

2. The legal validity of invoking surrogate valuation under the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007, especially rule 12 and related provisions, in the context of related-party transactions and alleged overvaluation.

3. The evidentiary standards and relevance of documentary and financial evidence, including bank documents and invoices, in establishing influence of relationship on transaction value for customs purposes.

4. The applicability and interpretation of 'relationship' under rule 2(2)(iv) of the Customs Valuation Rules and its impact on valuation and rejection of declared transaction value.

5. The extent to which penalties and confiscation can be imposed for alleged misdeclaration of value absent any short levy of duty or breach of prohibition.

6. The binding nature of judicial precedents, particularly decisions of the Tribunal and Supreme Court, on valuation and confiscation issues, and the limits of executive review or re-litigation of settled legal propositions.

7. The permissible scope of customs authorities' inquiry into commercial and business strategies underlying pricing in international transactions.

Issue-wise Detailed Analysis:

1. Jurisdiction to Determine Value for Confiscation Outside Assessment Framework

The Court examined the statutory scheme of the Customs Act, 1962, emphasizing that valuation and assessment of imported goods for customs duty is a structured process governed by sections 17, 18, 28, and related provisions. The adjudication of confiscation under section 111(m) is not an autonomous power divorced from the assessment framework but is contingent on breach of customs procedures or non-payment of duty. The Court relied on the binding precedent from the Tribunal in Knowledge Infrastructure Systems Private Limited v. Additional Director General, which held that confiscation under section 111 requires nexus with duty collection or prohibition enforcement.

The Court rejected the Revenue's proposition that value could be re-determined outside the assessment process to enable confiscation and penalties, noting that such elasticity is not supported by statute or judicial authority. The judgment underscores that once goods are cleared for home consumption with duties discharged, the customs jurisdiction over valuation for confiscation ceases.

2. Application of Customs Valuation Rules and Surrogate Value

The valuation framework under the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007, was analyzed in detail. The Court noted that the declared transaction value is the primary basis for assessment unless specific conditions under rule 3 or rule 12 warrant rejection and substitution with surrogate value derived sequentially from rules 4 to 9.

The adjudicating authority's rejection of declared values based on alleged related-party influence and invocation of surrogate value was scrutinized. The Court found that the notices failed to establish that the relationship between the importers and intermediary (M/s Global Supplies UAE FZE) influenced the price, an essential precondition for rejection under rule 12. The evidence was insufficient to justify discarding declared values or adopting surrogate values, especially given the lack of proof of 'flowback' benefits or price manipulation.

The Court emphasized that surrogate value cannot be arbitrarily fixed by truncating the consideration chain or by adopting prices paid by the intermediary to OEMs, as these constitute exports to the intermediary and are excluded under rule 9(2)(v). Such substitution is contrary to the statutory scheme and international valuation principles.

3. Evidentiary Value of Documentary and Financial Evidence

The Court addressed the evidentiary challenges posed by the Revenue's reliance on bank documents, invoices, and statements obtained during investigation. It reaffirmed the binding precedent from Commissioner of Customs (Import), NS-III, Raigad v. Adani Power Maharashtra Ltd, which mandates that documents introduced in adjudication must satisfy the provenance and certification requirements under section 138C of the Customs Act, 1962.

Documents lacking such certification or authenticity cannot sustain allegations of misdeclaration or support valuation adjustments. The Court found that the adjudicating authority rightly discarded such evidence, and the reviewing authority erred in attempting to revive it.

4. Interpretation of 'Relationship' under Customs Valuation Rules

The Court noted that while the existence of a relationship between the importers and the intermediary was undisputed, the notices did not specify the nature of the relationship as enumerated in rule 2(2) of the Valuation Rules, nor did they establish that such relationship influenced the transaction price.

The adjudicating authority's finding that the relationship was vague and did not affect price was upheld. The Court rejected the Revenue's contention that mere non-disclosure of relationship should lead to rejection of declared value, emphasizing that influence on price is the critical criterion.

5. Penalties and Confiscation in Absence of Duty Shortfall or Prohibition

The Court reiterated that confiscation and penalties under the Customs Act are punitive measures linked to non-compliance with customs laws, primarily for recovery of duties or enforcement of prohibitions. Mere overvaluation, without resulting in short levy or prohibited goods, does not justify confiscation or penalty.

The judgment highlights the policy rationale that customs duties are levies, not fines, and that the revenue's interest lies in correct duty collection rather than penalizing commercial margins or business strategies.

6. Binding Nature of Judicial Precedents and Limits on Executive Review

The Court underscored the binding effect of Tribunal and Supreme Court decisions on valuation and confiscation issues, particularly the rulings in Knowledge Infrastructure and Adani Power cases. Attempts by executive authorities to revisit or distinguish these precedents without new evidence or legal basis were rejected as undermining judicial discipline and inviting perpetual litigation.

The Court cautioned against executive agencies arrogating to themselves powers to reinterpret settled law or to disregard judicial findings on valuation and evidentiary standards.

7. Limits on Customs Authorities' Inquiry into Commercial Pricing and Business Strategy

The Court recognized the limited expertise and jurisdiction of customs authorities in matters of business strategy and international commercial pricing. It emphasized that valuation for customs duty is a legal fiction designed to ensure consistency and fairness in duty assessment, not a tool for second-guessing commercial decisions or ethical profit margins.

The judgment warns against customs authorities overstepping their mandate by delving into business arrangements beyond the statutory valuation framework, which risks arbitrary and unjustified penalties.

Significant Holdings:

"Confiscation under section 111 of Customs Act is not an end in itself but has to be in respect of dutiable or prohibited goods barring a few exceptions. Even in case of exception to prohibited/dutiable goods, it is breach of Customs Act which attract confiscation. For confiscation under section 111(m) ibid there is no judicial approval of proposition that goods be held liable for confiscation without nexus with collection of duty and enforcement of prohibitions or without breach of the machinery provisions for safeguard of revenue and prevention of smuggling."

"The scheme of valuation does not stand in support of the manner in which the value has been sought to be substituted in the notice. The facts evinced are not sufficient to tear down the weave of commercial engagement and for recourse, thereby, to discard of declared value."

"The adjudicating authority rightly discarded the proposals for re-determination of value and imposition of penalties, as the notices failed to establish that the relationship influenced the price, and the evidence relied upon lacked requisite authenticity and legal acceptability."

"Recourse to surrogate value by truncating the consideration chain or adopting the price paid by intermediary to original equipment manufacturers, which is excluded under rule 9(2)(v), is contrary to the statutory scheme and international valuation principles."

"The adjudicating authority and Tribunal are bound by judicial precedents and cannot disregard or seek to distinguish them without cogent legal basis, as such conduct undermines judicial discipline and impairs the finality of adjudications."

"Customs valuation is a legal fiction and not a mechanism to second-guess commercial pricing or business strategies; customs authorities have limited jurisdiction and expertise in these matters and must operate strictly within statutory confines."

In conclusion, the Court dismissed the appeals, affirming the adjudicating authority's order dropping proceedings for lack of legal and evidentiary basis to reject declared values or impose penalties. The judgment reinforces the primacy of the statutory valuation framework, the necessity of credible evidence, and the limited scope of customs authorities in valuation disputes, thereby upholding principles of fairness, legal certainty, and judicial discipline in customs law enforcement.