Customs Can’t Demand Duty Without Proving SEZ Unit Diverted Duty-Free Gold & Silver: CESTAT

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), New Delhi, has held that customs can’t demand duty without proving SEZ units diverted duty-free gold and silver. The bench of Justice Dilip Gupta (President) and P. Anjani Kumar (Technical Member) set aside a customs duty demand of ₹1.44 crore, confiscation of goods, and multiple penalties imposed holding that the Department failed to establish that duty-free imported gold and silver had been diverted into the domestic market or that the exporter had falsely claimed exports of jewellery without carrying out manufacturing activities. The case related to M/s Bharti Gems, a unit operating in the Jaipur Special Economic Zone (SEZ), which imported gold and silver without payment of customs duty under the SEZ scheme and exported jewellery products. Customs authorities alleged that the firm lacked the machinery, skilled workforce, and manufacturing facilities required to produce the quantity of jewellery claimed to have been exported. Based on these allegations, the Department concluded that the imported precious metals had been diverted into the Domestic Tariff Area (DTA) and that goods other than jewellery had been exported in their place. The Commissioner consequently confirmed a customs duty demand of ₹1,44,04,165 along with interest, ordered confiscation of seized silver jewellery, and imposed penalties on Bharti Gems, P P Jewellers, Its My Name Pvt. Ltd., and several individuals associated with the entities. One of the key grounds relied upon by the Commissioner was that Bharti Gems had exceeded the permissible import limits specified in its Bond-cum-Legal Undertaking (BLUT). However, the Tribunal noted that the Commissioner had considered only the original BLUT executed in 2010 and ignored a subsequent BLUT for ₹224.73 crore submitted in January 2016 and accepted by the competent SEZ authority. The Tribunal observed that once the competent authority had approved the undertaking, the SEZ unit was entitled to act on that approval. Any later objection regarding the signature of the authorised representative could not retrospectively invalidate activities carried out under an approved authorization. Accordingly, the Tribunal held that the finding that Bharti Gems exceeded its procurement limits was unsustainable. The Tribunal also disagreed with the Department's conclusion that the exporter lacked manufacturing facilities. According to the Department, the absence of chain-making machinery and the presence of only a few machines at the unit indicated that jewellery manufacturing was not taking place. However, the Tribunal accepted the exporter’s explanation that much of the jewellery, especially chains, was handmade. It observed that handmade jewellery production is a recognised industry practice and that the Commissioner had assumed, without expert evidence, that chain jewellery could only be manufactured using specialised machinery. The Tribunal further noted that Bharti Gems had maintained stock registers, purchase records of alloys and consumables, invoices, shipping documents and other manufacturing records, which were ignored by the adjudicating authority. A significant aspect of the ruling concerns the evidentiary value of statements recorded during investigation under Section 108 of the Customs Act. The Tribunal reiterated that statements recorded by customs officers cannot automatically be treated as evidence unless the mandatory procedure under Section 138B of the Customs Act is followed. It emphasized that such statements become relevant only after the person is examined as a witness before the adjudicating authority and the authority records a finding regarding admissibility. The Bench observed that this statutory requirement had not been complied with and therefore reliance on the statements of employees and workers was legally impermissible. It also noted that some of the statements had subsequently been retracted. The Commissioner had also relied upon data retrieved from the NSDL system to conclude that only eight kilograms of alloy had been procured, making it impossible to manufacture the quantity of jewellery claimed to have been exported. Rejecting this reasoning, the Tribunal held that electronic records available on the NSDL platform are not exhaustive statutory records and cannot override contemporaneous business documents maintained in the ordinary course of trade. Since Bharti Gems had produced stock registers, purchase records and other supporting documentation, the Department could not rely solely on NSDL data to allege non-manufacture. The Tribunal found no evidence supporting the allegation that imported duty-free gold and silver had been diverted into the domestic market. The adjudicating authority had argued that since export consignments were not physically examined by customs officials, it could not be verified whether jewellery was actually exported. The Tribunal rejected this reasoning, holding that the burden could not be shifted onto the exporter. If customs authorities chose not to examine the export consignments, the Department could not subsequently presume that some other goods had been exported. As a result, the finding that Bharti Gems diverted imported precious metals and evaded customs duty was held to be unsupported by evidence. The Tribunal also disagreed with the Commissioner's view that Bharti Gems merely provided manufacturing services to overseas entities rather than undertaking authorised manufacturing operations. It held that neither the SEZ Act nor the SEZ Rules prohibit procurement of raw materials free of cost from overseas entities. The legal framework does not render manufacturing activities invalid merely because the finished goods are produced pursuant to contractual arrangements. Consequently, the distinction drawn by the Department between “manufacture” and “manufacturing services” was described as artificial and unsupported by law. Having concluded that there was no diversion of imported goods, no customs duty evasion, and no evidence of wrongful exports, the Tribunal set aside the entire demand of ₹1.44 crore along with interest. It also quashed the confiscation of silver jewellery and cancelled penalties imposed under Sections 112, 114A and 114AA of the Customs Act on all appellants. Case Details Case Title: M/s P P Jewellers & Diamonds Pvt. Ltd. Versus Commissioner of Customs (Preventive) Citation: JURISHOUR-1529-CES-2026(DEL) Case No.: Customs Appeal No. 51904 of 2024 Date: 03/06/2026 Counsel For Appellant: Yuvraj Sharma, Ms. Bhumika Popli and Ms. Shruti Agarwal, advocates Counsel For Respondent: Bhagwat Dayal, authorized representatives Click Here To Read Order Read More: Service Tax Payable on Franchise Royalty Actually Received: CESTAT

Customs Can’t Demand Duty Without Proving SEZ Unit Diverted Duty-Free Gold & Silver: CESTAT

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