Supreme Court Upholds CESTAT Decision on Customs Valuation: Commissioner of Customs vs. Ganpati Overseas (2023)

Date of the Judgment: 06 October 2023
Citation: 2023 INSC 881
Judges: B.V. Nagarathna, J. and Ujjal Bhuyan, J.
Can customs authorities reject declared import values based on unverified export declarations from foreign countries? The Supreme Court recently addressed this question, ruling in favor of the importer, M/s Ganpati Overseas. The court found that the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) was right to overturn the customs department’s enhanced valuation of imported goods and the penalties imposed. This judgment highlights the importance of proper evidence and procedure in customs valuation cases.

Case Background

The case began with a show cause notice issued on December 17, 1999, by the Directorate of Revenue Intelligence (DRI) to M/s Ganpati Overseas. The DRI had received information that M/s Ganpati Overseas was importing tuners from Hong Kong at significantly under-invoiced prices, thereby evading customs duty. The DRI investigation revealed that M/s Ganpati Overseas, owned by Mr. Yashpal Sharma, had imported twenty consignments of tuners and saw filters from M/s Arise Enterprises, Hong Kong, owned by Mr. Suresh Chandra Sharma, a relative of Mr. Yashpal Sharma.

Mr. Suresh Chandra Sharma admitted in his statement that the prices in the invoices were deliberately lower than the actual prices to save on customs duty. He stated that the differential amount was collected from Mr. Yashpal Sharma during his visits to India. Mr. Yashpal Sharma also admitted to this arrangement in his statement. The DRI alleged that the actual market value of the tuners was much higher than the declared price, leading to an evasion of approximately Rs. 25 to 30 lakhs in customs duty. Mr. Yashpal Sharma was arrested on March 15, 1999, and later released on bail after depositing Rs. 30 lakhs.

The DRI also found that the prices of tuners in the export declarations filed by M/s Arise Enterprises with the Hong Kong Customs and Excise Department were much higher than the prices declared by M/s Ganpati Overseas in India. Based on these findings, the DRI proposed that the value of the imported goods should be determined using the export declarations. They also proposed confiscation of the goods and imposition of penalties.

Timeline:

Legal Framework

The core legal provisions in this case are:

• Section 14 of the Customs Act, 1962: This section deals with the valuation of goods for the purpose of assessment of customs duty. It states that the value of goods should be the price at which such or like goods are ordinarily sold or offered for sale at the time and place of importation.
• Customs Valuation (Determination of Price of Imported Goods) Rules, 1988: These rules provide the methodology for determining the value of imported goods.
  • Rule 3: Specifies that the value of imported goods shall be the transaction value. If the transaction value cannot be determined, the value shall be determined by proceeding sequentially through Rules 5 to 8.
  • Rule 4: Defines transaction value as the price actually paid or payable for the goods when sold for export to India.
  • Rule 8: This rule is a residual method used when the value of imported goods cannot be determined under other rules.
• Section 108 of the Customs Act, 1962: Empowers customs officers to summon persons to give evidence and produce documents.
• Section 24 of the Evidence Act, 1882: Deals with the admissibility of confessions, stating that a confession made by an accused due to inducement, threat, or promise is irrelevant in criminal proceedings.

The Supreme Court also considered the definition of “value” under Section 2(41) of the Customs Act, which links it to the valuation methods in Section 14.

Arguments

Appellant (Commissioner of Customs) Arguments:

• The customs department argued that the value of the imported goods was correctly determined under Rule 8 of the Customs Valuation Rules, based on the export declarations filed by the supplier in Hong Kong.
• The department contended that the invoices presented by M/s Ganpati Overseas did not reflect the genuine transaction value, as the prices were much lower than those in the export declarations.
• The department emphasized that the supplier and importer were related parties, and the subsequent filing of new export declarations was an afterthought to evade customs duty.
• The department relied on the statements of Mr. Suresh Chandra Sharma and Mr. Yashpal Sharma, recorded under Section 108 of the Customs Act, where they admitted to under-invoicing.

Respondent (M/s Ganpati Overseas) Arguments:

• M/s Ganpati Overseas argued that the price declared in the import invoice was correct, as the foreign supplier had withdrawn the initial export declarations and filed new ones matching the import prices.
• The respondent contended that the export declarations relied upon by the customs department were mere photocopies and not attested, thus lacking evidentiary value.
• M/s Ganpati Overseas asserted that the statements of Mr. Suresh Chandra Sharma and Mr. Yashpal Sharma were not voluntary, as they were obtained under coercion and were later retracted.
• The respondent argued that the customs department had bypassed Rules 5, 6, and 7 of the Customs Valuation Rules and directly invoked Rule 8 without any valid reason.
• The respondent submitted that there was no evidence of under-valuation, and the customs department had not gathered evidence of contemporaneous imports with higher prices.

Submissions [TABLE]

Issues Framed by the Supreme Court

The Supreme Court framed the following issue:

1. Whether the CESTAT was justified in holding that the enhancement of the value of the imported goods and the penalties imposed by the Commissioner of Customs could not be sustained and consequently in setting aside the same?

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Judgment

The Supreme Court upheld the CESTAT’s decision, emphasizing that the customs department had failed to prove under-valuation and had incorrectly applied the Customs Valuation Rules.

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• Commissioner of Customs, Calcutta Vs. South India Television (P) Ltd., (2007) 6 SCC 373:* The court followed this case to emphasize that the burden of proof lies on the department to prove under-valuation, and that the benefit of doubt must go to the importer if under-valuation is not supported by evidence.
• Surjit Singh Chhabra Vs. Union of India, 1997 (89) ELT -646 and K.I. Pavunny Vs. Assistant Collector, (1997) 3 SCC 721:* The court distinguished these cases, noting that while they held that retracted confessional statements could be relied upon if corroborated, the statements in this case were retracted and lacked corroboration.
• Rabindra Chandra Paul Vs. Commissioner of Customs, (2007) 3 SCC 93:* The court followed this case to emphasize the importance of transaction value and the sequential application of valuation rules, noting that the department had incorrectly bypassed Rules 5, 6, and 7.
• Eicher Tractors Limited Vs. Commissioner of Customs, (2001) 1 SCC 315 and Varsha Plastics Private Limited Vs. Union of India, 2009 (235) ELT 25 (SC):* The court followed these cases to reiterate that the primary basis for customs valuation is the transaction value and that the price paid in ordinary course of commerce should be taken as the value.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following factors:

• Lack of Evidentiary Value of Export Declarations: The court noted that the export declarations relied upon by the customs department were unattested photocopies and were later superseded by a second set of declarations. This undermined the department’s case.
• Retracted Statements: The court found that the statements of Mr. Suresh Chandra Sharma and Mr. Yashpal Sharma, which were used to allege under-invoicing, were retracted and could not be relied upon without corroborative evidence.
• Incorrect Application of Customs Valuation Rules: The court emphasized that the customs department had incorrectly invoked Rule 8 of the Customs Valuation Rules without attempting to determine the transaction value under Rules 5, 6, and 7.
• Burden of Proof: The court reiterated that the burden of proving under-valuation lies with the customs department, and that the benefit of doubt should be given to the importer if under-valuation is not supported by evidence.

Sentiment Analysis of Reasons Given by the Supreme Court

Fact:Law Ratio

The court’s reasoning was a mix of factual analysis (regarding the evidence presented) and legal interpretation (regarding the application of the Customs Act and Valuation Rules). The court emphasized that the factual evidence was insufficient to support the department’s claims, and that the legal procedures were not followed correctly.

Logical Reasoning

The Supreme Court’s decision was based on the principle that the customs department must follow the correct procedures and provide sufficient evidence to support its allegations. The court rejected the department’s reliance on flawed evidence and incorrect application of legal rules.

The court’s decision was based on the following points:

• The initial export declarations were unattested photocopies and were later superseded.
• The statements of Mr. Suresh Chandra Sharma and Mr. Yashpal Sharma were retracted.
• The customs department incorrectly invoked Rule 8 of the Customs Valuation Rules without attempting to determine the transaction value under Rules 5, 6, and 7.

The court quoted the following from the judgment:

• “We believe, CESTAT was justified in doing so.”
• “First and foremost, the export declarations relied upon by the appellant and earlier by the Directorate of Revenue Intelligence were unattested photocopies.”
• “In our view, no fault can be found with the approach of the CESTAT.”

Key Takeaways

• Burden of Proof: The customs department bears the burden of proving under-valuation. Mere suspicion or discrepancy in prices is not sufficient.
• Evidentiary Standards: Customs authorities must ensure that the documents they rely upon as evidence are properly authenticated. Unattested photocopies may not be sufficient.
• Voluntary Statements: Statements made under Section 108 of the Customs Act must be voluntary and cannot be relied upon if they are retracted or appear to be made under duress.
• Sequential Application of Valuation Rules: Customs authorities must follow the sequential order of rules for valuation as per the Customs Valuation Rules. They cannot directly invoke the residual method (Rule 8) without first attempting to determine the value under Rules 4, 5, 6, and 7.
• Transaction Value: The transaction value, as defined in Rule 4 of the Customs Valuation Rules, is the primary basis for customs valuation.

Potential Future Impact:

• This judgment reinforces the need for customs authorities to adhere to proper procedures and evidentiary standards.
• It provides clarity on the application of the Customs Valuation Rules, emphasizing the importance of transaction value and the sequential application of valuation methods.
• It serves as a reminder that the burden of proof lies with the customs department to prove under-valuation, and that the benefit of doubt should be given to the importer if the department fails to meet this burden.

Directions

No specific directions were given by the Supreme Court in this judgment.

Development of Law

The ratio decidendi of this case is that the customs department must follow the correct procedures and provide sufficient evidence to support its allegations of under-valuation. The judgment reinforces the importance of transaction value as the primary basis for customs valuation and the sequential application of valuation methods under the Customs Valuation Rules. It also clarifies that statements made under duress or coercion cannot be used against the person making the statement. This judgment does not change the existing law but clarifies its application in cases involving allegations of under-invoicing.

Conclusion

The Supreme Court dismissed the appeals filed by the Commissioner of Customs, upholding the CESTAT’s decision. The court found that the customs department had failed to prove under-valuation, had incorrectly applied the Customs Valuation Rules, and had relied on flawed evidence. This judgment reinforces the importance of proper procedures and evidentiary standards in customs valuation cases, ensuring that importers are not unfairly penalized based on insufficient evidence or incorrect application of law.

Categories

• Customs Law
• Import Valuation
• Supreme Court Judgments
• Tax Law