The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Hyderabad, has held that purity markings on re-melted gold and uncorroborated statements subsequently retracted by their makers cannot, by themselves, establish that the gold was smuggled into India.
The Bench of Angad Prasad (Judicial Member) and A.K. Jyotishi (Technical Member) dismissed an appeal filed by the Customs Department against an order setting aside the confiscation of 1,998.780 grams of gold, a vehicle and packing material. The Tribunal also upheld the deletion of a penalty of ₹8 lakh imposed on the proprietor of a GST-registered gold bullion trading concern.
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The dispute arose after four persons carrying approximately 500 grams of gold each were intercepted by Customs officers at the Sullurpeta and Bollapalli toll plazas. Officers recovered a total of 1,998.780 grams of re-melted gold under two separate panchnamas.
The respondent claimed ownership of the gold and stated that he had purchased two kilograms of re-melted gold bullion on credit from a Chennai-based supplier under two tax invoices of ₹60 lakh each. He had entrusted the gold to four persons for transportation to Guntur.
Statements of the carriers were recorded under Section 108 of the Customs Act, 1962. According to the Department, the carriers initially admitted that the gold was of smuggled foreign origin. However, they subsequently retracted the statements through written representations, alleging that their signatures had been obtained under coercion on pre-typed documents.
The adjudicating authority ordered the absolute confiscation of the gold under Sections 111(d) and 111(o) of the Customs Act. It also confiscated the vehicle under Section 115(2), confiscated the packing material under Section 119 and imposed a penalty of ₹8 lakh on the respondent under Sections 112(a) and 112(b).
The Commissioner (Appeals) subsequently set aside the adjudication order in its entirety and granted consequential relief. The Customs Department challenged that decision before the Tribunal.
The Department argued that gold is a notified commodity under Section 123 of the Customs Act and that, once it was seized on a reasonable belief of smuggling, the burden fell upon the respondent to prove its lawful importation or acquisition.
According to the Department, the purity of the gold, its mode of concealment and transportation, the absence of invoices with the carriers and the initial admissions recorded under Section 108 provided sufficient grounds to believe that the gold was smuggled.
It further contended that statements recorded under Section 108 constitute substantive evidence and that their later retraction does not automatically erase the original admissions. The Department also argued that smuggling cases are governed by the standard of preponderance of probabilities and need not be proved with mathematical precision.
The respondent submitted that it was a case of a town seizure involving re-melted gold without any identifiable foreign refinery inscription, overseas mint mark or foreign serial number. It was argued that purity alone could not establish either foreign origin or illegal importation.
The respondent further contended that the statements relied upon by the Department were promptly retracted and were unsupported by any independent evidence relating to illegal importation, border crossing, a foreign supplier, hawala payments or a smuggling network.
It was also submitted that the lawful procurement of the gold stood established through contemporaneous tax invoices, the supplier’s confirmation, GST particulars and subsequent payment through banking channels.
Addressing the application of Section 123, the Tribunal observed that the reverse burden under the provision is not attracted merely because the seized commodity is gold. The statutory burden shifts only when the gold is seized under a reasonable belief that it is smuggled.
The Tribunal emphasised that “reasonable belief” cannot be equated with mere suspicion. Such belief must be based on objective material existing at the time of seizure and must have a rational connection with the conclusion that the particular goods were smuggled.
“Section 123 does not authorize the department to first seize any quantity of domestically circulating gold and thereafter call upon its possessor to disprove smuggling,” the Bench observed.
At the same time, the Tribunal clarified that the material available at the seizure stage need not conclusively establish confiscability. The belief may be based on surrounding circumstances, but it must be honest, bona fide and supported by relevant material.
In the present case, the seized gold consisted of re-melted or irregular pieces. The Department could not establish the presence of any recognised foreign refinery inscription, foreign serial number or overseas mint marking on the gold.
The Tribunal found that generic inscriptions such as “999/H 999 R” merely indicated the fineness or purity of the gold and did not identify its country or channel of origin. Gold of similar purity could also be produced through lawful domestic refining, re-melting or recycling.
“Purity, therefore, may be one circumstance, but cannot, without more, establish that the gold crossed the customs frontier unlawfully,” the Bench held.
On the evidentiary value of the statements recorded under Section 108, the Tribunal acknowledged that such statements are admissible and may constitute relevant evidence. However, it rejected the Department’s argument that every Section 108 statement must be accepted as conclusive, irrespective of its retraction, the surrounding circumstances and the absence of corroboration.
The Bench observed that when a confession is retracted, the adjudicating authority must examine whether it was voluntary and seek assurance from independent circumstances.
The Department had not produced any independent evidence identifying the point or mode of illegal importation, a foreign seller, a smuggling carrier, border movement, a financial trail or the source of the alleged foreign-origin gold.
The Tribunal also noted that no cash allegedly meant for purchasing the gold was recovered. The allegations regarding substantial cash payments were unsupported by the seizure of cash, bags, withdrawal records or other contemporaneous evidence.
It consequently agreed with the Commissioner (Appeals) that the retracted statements, standing substantially alone, were insufficient to establish smuggling.
The Tribunal further placed importance on the close correspondence between the seized quantity of 1,998.780 grams and the aggregate quantity of 2,000 grams mentioned in the two tax invoices.
The Chennai supplier had confirmed the credit sale, and the respondent produced evidence showing that payment was subsequently made through banking channels. The Tribunal held that the absence of payment on the precise date of purchase could not invalidate an otherwise established credit transaction.
“Credit purchases are a recognized feature of commerce. What is material is whether the transaction was recorded in the books, confirmed by the supplier and ultimately discharged through an identifiable banking channel,” it observed.
The Bench held that the absence of physical invoices with the four carriers could justify an enquiry or temporary detention. However, it could not establish smuggling when ownership documents and invoices were produced shortly afterwards and were supported by the supplier’s records.
Similarly, the splitting of two kilograms of gold into four packets and entrusting them to four carriers might appear unusual, but suspicious conduct could only provide a starting point for investigation. It could not substitute evidence establishing foreign origin or illegal importation.
The Tribunal clarified that a possible domestic tax or regulatory irregularity is conceptually different from confiscability under Section 111 of the Customs Act.
It held that even if Section 123 was assumed to be applicable, the respondent had discharged the burden on the standard of preponderance of probabilities by producing tax invoices, supplier confirmation and banking evidence.
The Department, on the other hand, failed to rebut that documentary evidence through an effective investigation into the supplier’s stock, books of account, GST returns or procurement chain.
The Tribunal also found a violation of natural justice in the denial of an effective opportunity to cross-examine material witnesses whose statements were relied upon by the adjudicating authority.
Referring to the Supreme Court’s decision in Andaman Timber Industries v. CCE, it observed that where witness statements form the basis of an adverse order, denial of cross-examination amounts to a serious violation of natural justice.
The Tribunal added that Section 138B of the Customs Act prescribes the conditions under which a statement made before a gazetted Customs officer may be treated as relevant for proving the truth of its contents. Unless the exceptional statutory circumstances exist, the person whose statement is relied upon must ordinarily be examined during the adjudication proceedings and made available for cross-examination.
In the present matter, statements concerning the foreign origin, ownership and identity of the gold were material to the Department’s conclusions. The denial of cross-examination materially prejudiced the respondent and diminished the evidentiary value of those statements, the Tribunal found.
The Bench also relied upon its jurisdictional decision in Shri Kishore Kumar Gilda v. Commissioner of Customs, Vijayawada, in which it was held that purity markings, without proper recording of reasonable belief and independent evidence of smuggling, cannot sustain confiscation. That decision also recognised that retracted statements require dependable corroboration.
For confiscation under Sections 111(d) and 111(o), the Department was required to establish that the goods were imported or dealt with contrary to a provision or condition imposed under the Customs Act or another applicable law. No specific act of illegal importation or breach of a condition attached to lawful importation was established in the present case.
The Tribunal consequently held that the confiscation of the gold could not be sustained. Once the confiscation of the gold failed, the consequential confiscation of the vehicle and packing material also could not survive.
It further observed that penalties under Sections 112(a) and 112(b) require knowledge or reason to believe that the goods are liable to confiscation. Such knowledge could not be presumed when the foundational allegation of smuggling itself remained unestablished.
Finding no perversity, omission of material evidence or incorrect application of law in the Commissioner (Appeals)’ order, the Tribunal dismissed the Customs Department’s appeal.
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