Whether unawareness regarding 2 items being antique in the export consignment make them liable to confiscation and imposition of penalty?

PJ/Case Study/2012-13/74

Prepared by:CA Neetu Sukhwani &
Ranu Dhoot

Case study

Introduction:-

The appellant M/s Servewel Exports were engaged in export of antique items. In pursuant of the investigation and the search proceedings initiated against them it was alleged that the assessee had attempted to export antique items/ objects to USA and had also attempted to export “old & used household wooden furniture and articles with an intent to claim inadmissible Duty Drawback of Rs 50,111/- fraudulently by resorting to mis-declaration of the goods as “Indian Handicrafts/ Furniture Items” and as “Goods made in India not used after manufacture”. Further it was alleged that they had also resorted to un-authorized stuffing of the export cargo. Aggrieved with the order in original of the adjudicating authority, assessee filed the appeal to the Commissioner Appeals.

M/S Servewel Exports [OIA No. 07-09(OPD)Cus/JPR-II/2013 dated 30.08.2013]

Issue Involved:-

The following issue was made before the Commissioner Appeals:-
Whether unawareness regarding 2 items being antique in the export consignment make them liable to confiscation and imposition of penalty?

Brief facts:-

The issue was related to allegation of not following proper procedure for the stuffing of goods at the port and attempt to export antique items by mis-declaring them as handicraft items. The export consignment of the appellant valued at Rs 47,04,536/- pertaining to the shipping bill no. 000064 dated 09.05.2011 was seized on the grounds that proper procedure was not followed for stuffing. Furthermore, in order to ascertain whether the nature of goods was antique nature or otherwise, the inspection of the seized cargo was requested to be carried out by The Archeological Survey Of India, New Delhi wherein it was reported that out of 44 items examined by them, only two items at Serial no. 4 and 41 of the list were antique items. Apart from this, it was also alleged that the appellant have attempted to export the old and used goods by making mis-declaration in the shipping bill as “ Indian Handicrafts/ furniture items” and as “ Goods made in India not used after manufacture” with intent o claim inadmissible drawback of Rs. 50111/- which is not allowed on the used items. Accordingly, it was ordered for absolute confiscation of goods reported as antique items along with the confiscation of remaining goods and imposition of penalty on the appellant. Thereafter, the seized goods other than two antique items were provisionally released on 02.08.2011 after execution of the bond of the value of Rs. 47,04,536/- along with the bank guarantee of Rs. 11,76,150/- (being 25% of the value of goods).

Aggrieved with the impugned order, the assessee filed appeal before the Commissioner Appeals.

Appellant’s Contention:-The appellant submitted that the impugned Order-in-Original was wholly and totally erroneous and was liable to be set aside on following grounds:-

Balance of Convenience in favour of assessee:-It was submitted that the appellant were not aware that the two alleged items viz “Square carved Pillar base with socket at top made of sandstone” which had been confirmed as antique items in terms of section 2 of the Antiquity and Art Treasure Act, 1972, were antique. It was submitted that in the export consignment related to shipping bill no. 000064 dated 09.05.2011 and invoice no. SE/175/11 dated 06.05.2011; there were 22 different types of articles that were to be exported. The total quantity involved in that consignment were 675 pieces that were to be exported. Out of 675 pieces, only two pieces had been confirmed as antiques. Moreover, the items namely “Square carved Pillar base with socket at top made of sandstone” involved in the export consignment were total nine in numbers. All of the nine pieces of this item were similar in looks, but out of these nine pieces, only two had been declared as antiques. For a layman, all the nine pieces of this item were the same and from the appearance, one could not distinguish them as antique or otherwise. Even this fact had come into light from the report of Archeological Survey of India which is a specialized body for carrying out such examinations. For the appellant also, all the nine pieces of the “Square carved Pillar base with socket at top made of sandstone” were the same and no distinction was made by them. They were not aware that two pieces out of nine pieces with similar appearance were antiques. The genuineness of the appellant was further clarified by the fact that they have valued all the nine pieces of this item at same price of $10, rupee equivalent being Rs. 441.50. Thus, as per their invoice and shipping bill, the total value of two items declared as antique comes Rs. 883/- only.

On the other hand, the total value of export consignment was Rs. 47,04,536/-. In other words, the value of items declared as antiques was not even 0.1% of the total export consignment. On the other hand, a single piece of antique item had actual value running from lacs to crores in the international market. No businessman would be foolish enough to value the antiques at the price of peanuts. All these factors were clear evidence of the fact that the appellant was unaware of the fact that the said items were antiques. Their genuineness was proven by the fact that they had nine similar items in the same consignment and all of them were valued at the same price. It was found worthwhile to mention here that the sandstone bases were valued at the lowest price in the entire consignments as the other items namely the wooden handicrafts were having the more value in the market. All these facts were sufficient enough to prove that the appellant were not aware that the said two items involved in their export cargo were antiques. Therefore, the allegation that they have knowingly attempted to export the antiques was baseless and was liable to be quashed. The appellant claimed that the appeal should therefore be allowed as this error had occurred accidently without any knowledge of the appellant.

It is further alleged in the impugned order that the items found as antiques were not supplied by M/s Anil Handicrafts or M/s Tulsi Handicrafts and M/s Ancient Indo Arts, who were Ahmedabad based traders and suppliers of export goods to the appellant. It was alleged that they had been shown the photographs of those items and it is being stated by these three traders that they have not supplied these items to the appellant. In this regard, the appellant submitted that all the goods involved in the said export consignment were purchased either from Jodhpur or from Ahmedabad. The appellant had submitted the original purchase invoices of all the goods to the investigating authorities. The appellant had given the list of all the 10 suppliers from whom the export goods were procured. The copies of bills were already with the investigation officers since 10.5.2011 when the first statement was tendered by the proprietors. In this respect, it was submitted that these bills had the details of the goods purchased by the appellant. But while passing the impugned order, these bills had not been analyzed and simply the statements given by these three traders had been accepted blindly without corroborating the same with the contents of the invoices raised by them. On analysis of these bills, it is ample clear that the description in the bills is self explanatory and does not require any proof that the export goods were procured via these bills.. As such, simply relying on the statements of the traders without corroborating the same is not sustainable. It has been held in the case of Tejwal Dyestuff Industries vs Commissioner of Central Excise, Ahmedabad reported at 2007 (216) ELT 310 (Tri.-Ahmedabad) that the investigations cannot be put to an end only on recording the statements of few persons. All the other facts should also be investigated. Thus, the impugned order confirming the demand based upon incomplete investigation is not viable.

The impugned order had also held that the goods attempted to be exported by the appellant were liable for confiscation. The two items declared as antiques and valued at Rs. 883/- had been held as liable for absolute confiscation and the remaining goods valued at Rs. 47,03,536/- had been held as liable for confiscation which may be redeemed on payment of redemption fine of Rs. 12,00,000/-. Regarding the antiques, the appellant had already made the submissions in the forgoing paras that they were unaware of the fact that these items were antiques. Regarding the remaining goods, it was submitted that these goods had been held as liable for confiscation merely for technical lapses. It was worthwhile to mention here that the shipping bill was filed with all the details of export cargo. The only mistake on part of the appellant was that they trusted their CHA blindly. They were assured that all the formalities had already been completed by the CHA. This was their only ignorance; but ignorance could not be considered as an offence so as to impose the penalty on them. It was submitted that they were not aware about the export procedure and formalities to be carried out by the CHA for export. As such, they did what the person from office of CHA has told them to do. They did enter the ICD, but their intention was not bad, they were under impression that all the formalities had been done by their CHA. However, it was only after that incident they came to know that the CHA had not followed the proper procedure related to export. However, they could not be penalized for the mistakes of the CHA. Further, the shipping bill was already prepared which showed that their intention was not bad, however, there were technical lapses in the procedure of export. However, confiscation could not be effected merely because of technical lapses when there was no malafide intention on part of exporter. The impugned order had failed to prove that there were any ill-intention on part of the appellant. The only allegation on the basis of which confiscation of remaining goods had been ordered for confiscation, was that those goods were used to conceal the antiques. This allegation was not sustainable on the basis of discussion already done in the forgoing paras which made it clear that the appellant themselves were not aware that their consignment have any antique item. As such, the question of concealing the same did not arise at all. Therefore, the allegation raised for confiscating the remaining consignment was not sustainable and was liable to be set aside.

The impugned order is further alleging that the appellant has mis-declared the “old and used household goods” as “Goods no used after manufacturing”. It was alleged that this mis-declaration has been done in order to avail the benefit of drawback which is not allowed on old and used items.
In this regard, it was submitted that the appellant had specifically instructed the CHA to file the free shipping bill. But it was mistake on part of the CHA who had filed the drawback shipping bill inspite of clear instruction by the appellant that the free shipping bill was to be filed. However, the impugned order has held that the CHA has not accepted this fact in his statement dated 18.5.2011. It is alleged that the CHA had stated in the statement that the shipping bill was filed on the basis of invoice provided by the exporter. In this regard, the appellant submitted that the invoice provided by them had genuine particulars; however, they had not mentioned on the invoice that the items were new, used or old. But they had verbally instructed the CHA to file the free shipping bill but this instruction was not adhered to and the drawback shipping bill was filed. This was not their mistake, as such, they could not be penalized for the same. Thus, the impugned order is not sustainable and is liable to be quashed.

Without prejudice to above, it was submitted that even if it is accepted for the sake of argument also that the drawback shipping bill was knowingly filed, then too, the allegation of fraudulent drawback claim was not sustainable as the items purchased by the appellant were not exported as such. In this regard, it was submitted that the items purchased from the market were subject to the process of polishing and under Foreign Trade Policy, the process of polishing amounts to manufacture. This was submitted in their reply to show cause notice but it was not been considered while passing the impugned order. It was further submitted that some of the goods of the export cargo were manufactured by them and remaining were purchased from market. However, the goods purchased from the market were subject to the “OLD LOOK POLISHING” and thereafter these were packed in their factory. As per EXIM Policy, the activity of “polishing” also amounts to manufacture. As per para 3.31 of EXIM Policy 1997-2002, the term manufacture is defined as follows:-

“3.31 "Manufacture" means to make, produce, fabricate, assemble, process or bring into existence, by hand or by machine, a new product having a distinctive name, character or use and shall include processes, such as refrigeration, repacking, polishing, labelling and segregation. Manufacture, for the purpose of this Policy, shall also include agriculture, aquaculture, animal husbandry, floriculture, horticulture, pisciculture, poultry, sericulture, viticulture and mining.”

In view of above definition given in the policy, it was requested to examine the export cargo in above context, i.e., whether the old handicraft/furniture articles are polished or not. It was also requested to allow them to participate in examination proceedings so that they may justify their case as stated above. However, this submission of their had not found any place in the impugned order in original. Thus, the order has turned out as a non speaking order which is not sustainable in the light of following decisions:-

·         Commissioner of Central Excise, Bangalore versus Srikumar Agencies [2008 (232) E.L.T. 577 (S.C.)]:-

“Appellate Tribunal’s order - Non-speaking order - Facts not analysed in detail in impugned order by Tribunal - Disposal of appeals by mere reference to decisions not proper way to deal with appeals - Applicability of decision cited by Revenue not considered - Appeals involving different goods - CESTAT ought to have examined cases individually and articles involved - Manner of disposal not proper - Impugned order set aside - Question referred to Larger Bench of Supreme Court not answered as matter remitted to CESTAT for fresh decision by appropriate Bench - Section 35C of Central Excise Act, 1944. - By clubbing all the cases together and without analyzing the special features of each case disposing of the appeals in the manner done was not proper. [para 6]”

·         CC Vs Essar Oil Limited [2010-TIOL-560-HC-AHM-CUS]:-

“CESTAT is required to pass reasoned speaking orders - while setting aside the order of the Commissioner the Tribunal has not recorded any finding as to in what manner the findings recorded by Commissioner are erroneous or as to why it was required to take a different view.
It is a matter of regret that the Tribunal still continues to ignore the same: Despite there a being plethora of precedents holding that an appellate authority is required to record facts, contentions as well as reasons for arriving at its conclusions, it is a matter of regret that the Tribunal still continues to ignore the same and pass orders like the present one without recording facts or reasons.

·         State of Himachal Pradesh Vs Sardara Singh [2008-TIOL-160-SC-NDPS]:-

Even High Courts are required to pass speaking reasoned orders - The "inscrutable face of a sphinx" is ordinarily incongruous with a judicial or quasi-judicial performance. The manner in which appeal against acquittal has been dealt with by the High Court leaves much to be desired. Reasons introduce clarity in an order. On plainest consideration of justice, the High Court ought to have set forth its reasons, howsoever brief, in its order indicative of an application of its mind, all the more when its order is amenable to further avenue of challenge. The absence of reasons has rendered the High Court order not sustainable. The requirement of indicating reasons in such cases has been judicially recognized as imperative. Judicial discipline to abide by declaration of law by this Court, cannot be forsaken, under any pretext by any authority or Court, be it even the Highest Court in a State, oblivious to Article 141 of the Constitution of India. Reasons are live links between the mind of the decision taker to the controversy in question and the decision or conclusion arrived at. Reasons substitute subjectivity by objectivity. The emphasis on recording reasons is that if the decision reveals the "inscrutable face of the sphinx", it can, by its silence, render it virtually impossible for the Courts to perform their appellate function or exercise the power of judicial review in adjudging the validity of the decision. Right to reason is an indispensable part of a sound judicial system, reasons at least sufficient to indicate an application of mind to the matter before Court. Another rationale is that the affected party can know why the decision has gone against him. One of the salutary requirements of natural justice is spelling out reasons for the order made, in other words, a speaking out. The "inscrutable face of a sphinx" is ordinarily incongruous with a judicial or quasi-judicial performance: SUPREME COURT;

The analysis of these decisions made it clear that the order passed without giving reasons for the same was not justified in the eyes of law. In the case of appellant also, no reasons had not also been assigned why the above referred submission that the items were polished after purchase, thereafter those were packed for export. Therefore, the benefit of above referred decisions was extendable to them .

In continuation to above it was submitted that as per rule 2(e) of the Customs and Central Excise Duties Drawback Rules, 1995, the term manufacture is defined as follows:-

(e) "manufacture" includes processing of or any other operation carried out in goods, and the term manufacturer shall be constructed accordingly.

Thus, every operation carried out in goods is termed as ‘manufacture’ for the purpose of these rules. The process of polishing is also an operation carried out in the goods which give them the antique look for which the Indian Handicraft is known in the international market. Thus, reading the above definition alongwith that prescribed in the EXIM Policy, it was clear that the process of polishing would also be termed as ‘manufacture’ and accordingly, drawback was still allowable on the same. Therefore, the allegation of mis-declaration was not sustainable even if the error had occurred on part of the CHA. As such, the contention of the impugned order was not tenable.
All the above facts prove the genuineness of the case. The confiscation and penalty have been ordered for the irregularity conducted at the end of CHA as the appellant was ignorant of the export procedure. However, the ignorance could not be equated to an offence so as to attract the penalty under the provisions of Customs Act, 1962. This had been held in the following case:-

·         M/s IDBI Bank Ltd Vs CC, New Delhi [2012-TIOL-20-CESTAT-DEL]

Customs– Penalty under Section 114 of the Customs Act, 1962 imposed on Bank and the employee of the Bank for carelessness in accepting the currency declaration form (CDF), in connection with the case of claiming export benefits fraudulently using fake CDFs – The finding against the employee is one of carelessness and failure to perform his duties - These might constitute facts to institute departmental proceedings against him, but these facts are not adequate to constitute an offence under section 114of the CustomsAct – Penalties on Bank and the employee set aside. - Appeals allowed :DELHI CESTAT

In the light of above decision, for imposing the penalty under the provisions of Customs Act, 1962; the situation should indicate that the person had done “an offence” rather than mere ignorance or negligence on his part. In the instant case, the appellant was ignorant about the export procedure. All the irregularity was conducted on part of the appellant. As such, their ignorance cannot be constituted as an offence so as to impose such a huge amount of penalty. The impugned order is therefore not justified and is liable to be set aside.

Financial Hardship:- They also submitted that the appellant was a sole proprietorship concern and its profit had been declined tremendously after the said mishap occurred of seizure of the goods liable for export and their subsequent confiscation for no fault of the appellant. The appellant submitted that the operations of the firm had been almost stopped which is evident from the comparision of sales and net profit for the preceding financial year 2011-12 and that of the financial year 2012-13. A comparative analysis of the same is produced below for the sake of convenient reference:-

Particulars	2011-12	2012-13
Sales 1. Domestic 2. Export	Rs. 4,44,500/- Rs. 1,04,19,941.50/-	Rs. 2,71,000/- NIL
Net Profit	Rs.3,54,504/-	Rs. 29,528/-

The above table clearly depicts the steep decline in the operations of the concern and so pre-depositing such a huge demand of Rs. 10,02,500/- would impose unnecessary financial burden on the appellant, when the appeal was strongly in favor of the appellant. In view of the above findings, there was no doubt regarding the fact that it was not at all possible for the appellant to pre-deposit such a huge amount and so the stay application should be allowed, keeping in mind the fact that a bank guarantee of Rs. 11,76,150/- (being 25% of the value of goods) already stood furnished by the appellant. Therefore, they claimed that the appeal should be heard on the merits itself. A copy of the above referred profit and loss accounts was also enclosed.

Quantification of Penalty not justifiable:- Appellant also submitted that even if the allegations leveled against them are accepted for the sake of argument only, then also, they could be penalized only up to the amount of undue benefit availed by them on account of mis-declaration of the said goods liable to be exported. The impugned order imposed the total penalty of Rs. 10,02,500/- [Rs. 2500/- u/s 114(i) + Rs. 5 lacs u/s 114(iii) + Rs. 5 lacs u/s 114AA of the Customs Act]. On the basis of submissions made in forgoing paras, it was ample clear that no penalty was imposable in the instant case. However, even if it is accepted for the sake of argument also that the penalty is imposable, then too, the amount of penalty could not exceed the benefit to be derived by them. In the instant case, even if all the allegations of the impugned order are accepted as true, then the total benefit available to the appellant will total to Rs. 50994/- (being drawback of Rs. 50111 + Rs. 883/- being the value of antiques). Thus, in any case the penalty could not exceed Rs. 50994/-. On the other hand, the impugned order has imposed the penalty of more than Rs. 10 lacs which was quite unjustified.

Reasoning of the Commissioner (Appeals):- The learned Commissioner Appeals held that it was not in dispute that out of 675 items of export consignment presented to be exported, only two “pillar base stones” were items of antique as per the Archeological Survey of India, New Delhi value of which was set out to b Rs. 883/-. As such the adjucating authority had rightly confiscated those two pillar base stones under section 113(d) of the Customs Act, 1962 as export of antiques is prohibited under section 11 ibid read with section 3 and 5 of Antiquity and Art Treasure Act, 1972. Thus the two antiques became prohibited for export and hence liable for confiscation and also made the exporter liable to pay penalty under section 114(i) of the Customs Act.
The issue whether all other export consignments with declared value of Rs. 47,03,536/- were used to conceal those two antique pillar base stones valued at 883/- and were therefore liable for confiscation under Section 119 of the Customs Act 1962. The appellant had contended that it was quite not possible that meager priced goods could not be concealed in a very high value goods and it all occurred accidently without their knowledge. Hon’ble judge found force in the contention of the appellants that small priced goods could not be concealed in the very high priced goods. In the case all other 673 items of export consignments valued at Rs. 47,03,536/- could not be used to conceal two pillar base stones valued at only Rs.883/-. Moreover the two pieces found to be antiques were also similar to other pillar base stones. If the subject items were of very rare type of antiques, then it could have been argued that the entire consignment was used to conceal these items, but there was no such finding by the ASI. Even the circumstances did not indicate so. Therefore no justification in confiscation of other cargo under section 119 ibid was found.

There was an allegation that export consignments were being stuffed in the ICD at night without permission of the Custom Officers. This fact was not in dispute, as it was detected by the P&I team of Custom officers who visited the ICD Rajsico at night and noticed that container was being stuffed in the presence of Mr. Aziz Khan and Mohd. Firoz Khan, both sons of Mohd. Zaman Khan, owner of appellant firm and Shri Mohit Charan representative of the CHA. It is thus established that export consignments were being stuffed without permission from Customs and without their supervision, in connivance with CHA and even the Custodian. As such, it was clear case of violation of provision of Section 34 ibid that export goods were being loaded in container without the supervision of the Customs Officer. This rendered goods liable to be confiscated under section 113(f) of the Customs Act. Further it was seen that the Shipping bill was wrongly filed claiming drawback and export goods were wrongly declared as “not used after manufacture” where as they were old & used. No evidence had been given by the appellant regarding the same except stating that even polishing cannot change the character of old and used item into a new one, therefore it got established that it was an attempt to fraudulently avail of drawback in violation of Section 75 of the Customs Act, 1962. In view of the above though the export goods were not liable to confiscation under Section 19 of the Customs Act, but were liable to confiscation under Section 113(ii) ibid. However considering all the circumstances, Hon’ble judge were of the view that redemption fine of Rs. 1200000/- imposed under Section 125 was too high, therefore reduced it to Rs. 500000/- only.

As regarding penalty of Rs. 2500/- u/s 114(ii), Rs. 5 lacs u/s 114AA of the Customs Act, 1962 upon the exporting firm M/s Servewel, it was found that the adjucating authority had rightly imposed the penalty of Rs. 2500/- u/s 114(i) ibid as there was an attempt to export prohibited goods, i.e. two pillar base stones found to be as antiques. However as discussed in preceding paras the other goods valued at Rs. 47,03,536/- were not used to conceal the two antique stones ,therefore were not liable to confiscation u/s 119. Accordingly the penalty of Rs 5 lacs imposed u/s 114(iii) was set aside. However, penalty u/s 114AA ibid was warranted as the appellant firm had mis-declared the material particulars of the goods in the documents with an intention to avail drawback of Rs. 50,111/-. However the penalty under this section was reduced to Rs. 1 lac only.

The appellant had also contended during the course of hearing that the car and trucks which were not connected were also liable for confiscation u/s 115 of the Customs Act, 1962. The adjucating authority had confiscated two trucks involved in carrying export papers and export documents and two trucks used for entry of export in customs bonded area and unauthorized facilitation of stuffing of export cargo in container at ICD Rajsico without the permission of customs authority in violation of Section 34 ibid. It was seen that the car was not used for transporting the goods which were liable to confiscation; therefore such vehicle was not liable to be confiscated as per Section 115 of the Act. Accordingly the confiscation of the car was set aside. However, the two trucks had been used for carrying the consignments into the custom area, in violation of the provisions of Custom Act, therefore they were liable to confiscation. However, in absence of positive act or knowledge of the owner of the trucks, redemption fine in respect of both the trucks was reduced to Rs 2500/- each.

Decision:-Appeal partly allowed.

Conclusion:-The analogy that can be drawn from this case is that confiscating the entire export consignment is not proper when out of 44 items only 2 items were declared as antiques by the ASI and were consequently prohibited from export. It was observed that as the said 2 items were priced reasonably as against the value of antiques and the fact that there were other high priced items in the export consignment, it appeared that the appellant bonafidely proposed to export the items and was not aware of the 2 items being antiques. Consequently, the penalties and redemption fine on goods other than those declared as antiques were reduced. However, the 2 items being antique in nature were confiscated absolutely. Therefore, the appeal was allowed partly by reducing the penalty amount and the redemption fine.

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