The Customs, Excise & Service Tax Appellate Tribunal (CESTAT), Allahabad Regional Bench, has set aside a customs demand against an exporter after finding that the departmente’s case concerning 63 shipping bills was based entirely on an earlier investigation relating to 35 different shipping bills, which had already been rejected by the Tribunal.

The bench of P. K. Choudhary (Judicial Member) and K. Anpazhakan (Technical Member) has observed that once the foundational investigation concerning the 35 shipping bills had failed, the Revenue could not sustain the subsequent proceedings merely by assuming that the same alleged modus operandi applied to the 63 shipping bills. CESTAT consequently set aside the demand and allowed the appeal with consequential relief.

The dispute concerned a proprietorship firm engaged in the export of readymade garments. In January and February 2017, the exporter filed 63 shipping bills involving an FOB value of about ₹333.73 crore under the drawback scheme.

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The Customs Department subsequently issued a show cause notice dated January 13, 2022, proposing confiscation of the exported goods, rejection of the declared FOB value, denial of alleged inadmissible duty drawback of ₹3.20 crore and ROSL of about ₹65.45 lakh, besides penalties under Sections 114 and 114AA of the Customs Act, 1962.

The allegations stemmed from an earlier DRI investigation into 35 shipping bills filed in March 2017. The Department alleged that the exporter had over-invoiced the garments with an intention to avail inadmissible drawback.

Following physical examination and market enquiries, Customs authorities alleged that the exported garments were of inferior quality compared with their declared values. The goods were consequently seized on the allegation that they were liable for confiscation under Section 113 of the Customs Act.

The show cause notice relating to the 63 shipping bills was adjudicated by the Principal Commissioner of Customs, Noida, through an order dated December 2, 2022.

The adjudicating authority relied upon the earlier investigation concerning the 35 March 2017 shipping bills. The reasoning was that the goods covered by the 63 shipping bills were similar, the suppliers and buyers were the same, and 11 goods were common to both sets of exports.

On this basis, the Department concluded that the alleged modus operandi used for the March 2017 exports was also applicable to the January and February 2017 shipments.

The exporter challenged the adjudication order before the Commissioner (Appeals).

The Commissioner (Appeals), however, initially held that the appeal was time-barred despite the delay being only 17 days. The exporter had explained the delay by citing the shifting of its counsel’s office.

The Tribunal noted that the Commissioner (Appeals) ultimately proceeded to examine the matter on merits, indicating that the delay had effectively been condoned.

Another issue concerned the mandatory pre-deposit.

The Commissioner (Appeals) had held that 7.5% of the drawback amount was required to be deposited even though the exporter had never actually received the drawback. CESTAT disagreed with this approach.

The Tribunal categorically held that where the drawback amount had never been received by the exporter, there was no requirement to make a 7.5% pre-deposit of that amount.

The decisive factor in the present proceedings was an earlier CESTAT decision concerning the 35 shipping bills filed in March 2017.

During the pendency of the present appeal, CESTAT had decided Customs Appeal No. 70395 of 2023 through Final Order Nos. 70174-70175 of 2025.

In that case, the Tribunal had rejected the Department’s allegation of over-invoicing after examining the evidence relied upon by Customs.

A significant factor was that the exporter had received foreign remittances equivalent to the declared FOB value of the exported goods. The Department had failed to establish any flow-back of money between the exporter and foreign buyers or any transaction other than payment of the declared FOB value.

The Department had relied upon costing prepared by a couple of garment manufacturers to determine the value of the exported goods.

However, CESTAT found that this approach could not by itself establish overvaluation.

The Tribunal noted that the market price of a product does not necessarily correspond to its manufacturing cost. Market prices may be substantially higher than the cost arrived at through costing exercises.

The earlier Tribunal order also observed that where value is required to be determined under the computed value method, due consideration should be given to a cost certificate issued by a Cost Accountant, Chartered Accountant or Government-approved valuer.

In the case before it, the Department had not obtained such a certificate and instead relied upon costing supplied by manufacturers without adequately considering factors such as the actual cost of raw materials.

CESTAT consequently held that the costing relied upon by the Department did not have sufficient evidentiary value for determining the cost of the exported goods.

The Tribunal also placed considerable importance on the fact that the exporter had received remittances equivalent to the declared FOB value.

The Department had not established any flow-back of money from the foreign buyers to the exporter or vice versa.

CESTAT relied upon the principle that where foreign remittances corresponding to the declared FOB value have been received and there is no evidence of any additional financial arrangement or flow-back, the declared FOB value cannot be rejected merely on the basis of an unsupported allegation of overvaluation.

The earlier proceedings therefore concluded that there was no established case of over-invoicing.

CESTAT specifically observed that the show cause notice and adjudication order concerning the 63 shipping bills were based on the DRI investigation conducted in relation to the 35 shipping bills filed in March 2017. No independent enquiry had been undertaken in respect of the January and February 2017 exports.

Although the Department sought to establish a common modus operandi on the basis of similarities between the shipments, the Tribunal found that the entire foundation of the Revenue’s case rested upon an investigation that had already failed before CESTAT.

The Tribunal held that the earlier decision concerning the 35 shipping bills directly affected the present proceedings.

Since the department had relied upon the earlier investigation as the foundation for the allegations concerning the 63 shipping bills, and that earlier case had already been rejected, CESTAT concluded that the basis for the present demand no longer survived.

The Tribunal observed that once the appeal relating to the 35 shipping bills had been allowed, the entire case set up by the department in the present appeal could not survive.

The CESTAT held that the demand confirmed through the impugned order was legally unsustainable.

The Tribunal therefore set aside the impugned Order-in-Appeal and allowed the appeal with consequential relief, if any, in accordance with law.

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