The Chennai Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has held that proforma or parallel invoices, without independent evidence of additional payment or flow-back of consideration, cannot form the basis for alleging undervaluation of imported goods.
The bench of P. Dinesha (Judicial Member) and Vasa Seshagiri Rao (Technical Member) set aside customs duty demands aggregating to ₹32.52 crore, along with the consequential interest and penalties, after finding that the Department failed to establish undervaluation through legally admissible evidence.
The dispute arose from four show cause notices covering imports made between April 1999 and March 2004, where the Customs Department alleged that the importer had undervalued Far Infrared Bio-Ceramic healthcare products imported from Malaysia. According to the Department, the declared transaction values did not reflect the actual consideration paid and that imports were routed through intermediary Malaysian entities to suppress the identity of the real supplier and evade customs duty. The adjudicating authority accepted these allegations, confirmed differential customs duty of ₹32.52 crore, interest and penalties, while also ordering reclassification of certain imported products.
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The investigation was initiated by the Special Intelligence and Investigation Branch (SIIB), which claimed to have recovered correspondence, statements of accounts, purchase orders and alleged “parallel invoices” showing values substantially higher than those declared in the Bills of Entry. The Department argued that the Malaysian parent entity exercised financial and commercial control over the Indian importer and that payments exceeding the declared invoice values had been made through concealed arrangements.
The importer, however, consistently denied these allegations, maintaining that all imports were made on a principal-to-principal basis from independent overseas suppliers and that the invoice values represented the actual price paid. It further contended that the Department’s case rested on assumptions, conjectures and incomplete documents rather than legally admissible evidence proving any extra consideration.
Before examining the merits, the Tribunal rejected the Revenue’s preliminary objection that the importer could not challenge the substantive findings through cross-objections.
The Bench interpreted Section 129A(4) of the Customs Act to hold that once an appeal is filed, the respondent is entitled to challenge any part of the impugned order, and such cross-objections must be treated as an appeal itself. The Tribunal relied upon several earlier judicial precedents and ruled that cross-objections are not confined merely to answering the grounds raised in the Revenue’s appeal.
One of the Department’s central allegations was that the Malaysian company exercised effective administrative and financial control over the Indian importer.
The Tribunal found that although certain correspondence showed requests for financial statements and share-related documents, there was no evidence whatsoever that any shares were actually allotted or that the alleged investment proposal had materialised.
The Bench accepted the importer’s explanation that the communications merely related to an unsuccessful investment proposal which never culminated in acquisition of shares or management control. Consequently, the Tribunal held that the finding regarding administrative and financial control lacked evidentiary support.
The Tribunal devoted considerable attention to the Department’s reliance on so-called “parallel invoices.”
According to the Bench, the Department failed to establish that these documents represented actual commercial invoices or that any payments corresponding to those values were ever made.
The Tribunal observed that no banking evidence, remittance records or any proof of additional payment beyond the declared invoice value was produced. It further noted that the Department’s allegation that excess value had been settled through allotment of shares also collapsed because there was no evidence that any such allotment ever took place.
Relying on an earlier Tribunal decision, the Bench categorically held that proforma invoices, in the absence of corroborative evidence showing flow-back of consideration, cannot justify rejection of the declared transaction value or confirmation of customs duty demands.
The Department also attempted to invoke the “related party” provisions under the Customs Valuation Rules by relying upon family relationships between certain individuals connected with Malaysian companies.
The Tribunal rejected this approach, observing that the Customs Valuation Rules require satisfaction of specific statutory tests before parties can be treated as related.
The Bench held that merely because directors or shareholders happened to be family members did not automatically render separate corporate entities “related persons.” It further observed that there was no evidence that the alleged relationship influenced pricing, which is a mandatory requirement under the valuation rules. The Tribunal relied upon earlier judicial precedents recognising the independent legal personality of companies.
Another allegation concerned consultancy payments made to a Malaysian entity, which the Department claimed represented disguised consideration for imported goods.
The Tribunal disagreed, observing that even if questions existed regarding the legality of the consultancy agreement under FEMA or RBI regulations, those issues fell outside the scope of customs valuation.
Since the Department produced no evidence showing that consultancy payments were actually additional consideration for imported goods, the Tribunal held that such remittances could not be added to the assessable value merely on suspicion.
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