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CASE NO.:

Appeal (civil) 4254-4260 of 2003

PETITIONER:

Commissioner of Customs, Mumbai

RESPONDENT:

M/s B.V. Jewels and Ors.

DATE OF JUDGMENT: 14/09/2004

BENCH:

S.N. VARIAVA & ARIJIT PASAYAT

JUDGMENT:

J U D G M E N T

ARIJIT PASAYAT,J.

Customs authorities question correctness of the judgment

rendered by the Customs Excise and Gold (Control) Appellate

Tribunal, West Regional Bench at Mumbai (hereinafter referred to

as the 'CEGAT') setting aside the order passed by the Commissioner

of Customs (Airport) confirming demand of duty and penalty.

Background facts in a nutshell are as follows:

Show cause notice was issued to the respondents alleging

shortage of gold and diamonds, capital goods and unauthorized

usage of capital goods. It is to be noted that the show cause

notice was issued on the basis of certain intelligence gathered

regarding infraction of various provisions of the Customs Act,

1962 (in short the 'Act') and Customs Rules, 1966 (in short the

'Rules'), the EXIM policy and violation of conditions of certain

Notifications on the basis of which the respondents had availed

benefits. The purported action was in terms of Sections 111(d),

111(j), 111(l), 111(o), 111(m), 112 (a), 112(b), 113(d), 113(i),

114(i) and 114(A) of the Act. The premises of the respondents

M/s. B.V. Jewels and M/s B.V. Star were searched. Both the units

were situated at plot No.55 of Santacruz Electronics Export

Processing Zone (in short 'SEEPZ'), Andheri East, Mumbai. Officers

of Customs visited the unit on 31.1.2000, recorded statements of

the Accounts Manager and stock taking was done. Verification

continued for several days. Partner Suresh Mehta joined the

verification on 3.2.2000. After completing verification it was

found that there was large scale evasion of duty, shortage of

stocks of certain items while excess stock was found in respect of

some other items. Additionally, it was found that there was

shortage of capital goods and unauthorized usage of capital goods.

The unaccounted diamonds, and capital goods were seized and show

cause notice was issued granting opportunity to the respondents to

have their say in the matter. The Commissioner considered the

show cause reply and after considering the materials brought on

record by departmental authorities and the reply furnished by the

respondents, passed the order to the following effect:

(1) The demand of duty of Rs.2,57,90,900/- under the proviso

to Section 28(2) of the Act on M/s B.V. Star was

confirmed. A similar amount was imposed as penalty under

Section 114(A) of the Act.

(2) 8604.5 gms. of gold and 844.16 cts. of diamonds valued at

Rs.62,86,823/- and capital goods of Rs.58,58,696/- were

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held to be liable for confiscation under Sections 111(d),

111(j), 111(o) of the Act.

(3) Confiscation of capital goods under seizure valued at

Rs.1,06,37,742/- found in the premises of M/s B.V. Jewels

along with motors, hand pieces and carbon brushes valued

at Rs.36,70,765/- under the aforesaid provisions were

directed to be confiscated. However, M/s B.V. Star was

given an option to clear the goods on demand of fine of

Rs.15,00,000/- in lieu of confiscation in terms of

Section 125(1) of the Act. It was clarified that the fine

in lieu of confiscation was to be in addition to any duty

payable in respect of such goods as prescribed under

Section 125(2) of the Act.

(4) Penalty of Rs.12,00,000/- was imposed on M/s B.V. Star

under Section 112(a).

(5) The demand of duty of Rs.12,94,12,122/- under the proviso

to Section 28 (2) of the Act on M/s B.V. Jewels was

confirmed. Similar amount was imposed as penalty in terms

of Section 114(A) of the Act.

(6) It was held that 73730 cts. of diamonds valued at

Rs.26,29,54,490/- and capital goods found missing valued

at Rs.58,54,698/- were liable for confiscation under

Sections 111(d), 111(j) and 111(o) of the Act. It was

noticed that these items were not available for

confiscation. 23 pieces of high value diamonds valued at

Rs.39,63,286/- under the aforesaid provisions were

directed for confiscation.

(7) Broken diamonds valued at Rs.6,91,139/- under Sections

111(o) and 119 of the Act was also directed for

confiscation. The redemption of seized goods on payment

of fine of Rs.70,000/- was allowed.

(8) Confiscation of diamonds and diamond studded in semi-

finished gold jewellery valued at Rs.4,03,72,667/- along

with inseparable gold weighing 6423.32 gms. valued at

Rs.26,81,736/- were directed to be confiscated.

Redemption fine of Rs.43,00,000/- was fixed. Unaccounted

diamonds valued at Rs.27,00,76,393/- was held to be

liable for confiscation but it was observed that these

were not available for confiscation.

(9) Penalty of Rs.5 crores was imposed on M/s B.V. Jewels

under Section 112(a) and 114(i) of the Act.

(10) Penalty of Rs.10,00,000/- was imposed each on Mr. Suresh

Mehta and Mr. Suken Mehta.

(11) Penalty of Rs.2,00,000/- was imposed on Mrs. Saroj Mehta,

Mrs. Sapna Mehta, Shivani Mehta, Mr. B.V. Shah, Mr.

Rajesh B. Shah and Mr. Bharat S. Shah.

(12) Penalty of Rs.1,00,000/- was imposed on Mr. Vijay Shah.

The order of the Commissioner was questioned in appeal before

CEGAT which by the impugned judgment set aside the same holding

that the accusations were not established. The shortage or excess

as claimed were not substantiated and various departmental

notifications were not properly construed by the Commissioner.

The order of the CEGAT is challenged in these appeals.

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Learned senior counsel appearing for the appellant submitted

that the show cause notice elaborately detailed the various

infractions. The Commissioner analysed the materials collected in

the background of the show cause reply furnished by the

respondents and came to hold that the accusations were

established. Accordingly, the directions as noted above were

given. Unfortunately, the CEGAT did not examine the materials in

their proper perspective. By abrupt conclusions without any

material to support them and/or without indicating reasons the

conclusions of the Commissioner were nullified. The judgment which

is the result of perfunctory manner of disposal by the CEGAT needs

to be set aside and the order of the Commissioner deserves to be

restored.

Learned counsel for the respondents on the other hand

submitted that the Commissioner had not analysed the show cause

reply, had acted on mere surmises and conjectures without keeping

in view the applicable provisions and the notifications and had

confirmed the demands proposed in terms of the show cause notice.

According to him, the CEGAT had analysed the issues in great

detail and arrived at the correct conclusions.

The various infractions for which duty and/or penalty were

imposed which were highlighted by the Customs Authorities are

essentially as follows:

In respect of M/s B.V. Star the allegations and levies were

as follows:

(1) Levy of duty on gold shortage of 8604.5 gms. valued at

Rs.34,66,889/-. The duty component is Rs.23,65,652/-.

(2) Duty on shortage of 844.16 cts. of diamonds valued at

Rs.26,92,014/-, the duty component on which was

Rs.11,84,372/-.

(3) Duty levied on missing capital goods which were imported

duty free the value of which was Rs.2,22,48,876/-. This

essentially related to three items i.e. (i) duty on

capital goods valued at Rs.1,06,37,742/- which were

imported by M/s B.V. Star were found to be in illegal

possession and usage of M/s B.V. Jewels; (ii) capital

goods valued at Rs.58,58,696/- which were not found in

the unit; and (iii) un-installed motors, hand pieces and

brushes valued at Rs.36,70,675/- for violation of the

notification No.196/87.

(4) Penalty of Rs.12 lakhs imposed under Section 112(a) of

the Act.

So far as issues relating to M/s B.V. Jewels are concerned, they

are as follows:

(1) Duty on shortage of 73730 cts. of diamonds valued at Rs.

26,29,54,490/-, the duty on which payable was

Rs.12,54,80,309/-.

(2) Broken diamonds of 1607.3 carats valued at Rs.6,91,139/-.

(3) Confiscation of high value diamonds valued at

Rs.39,63,286/-.

(4) Duty on unaccounted capital goods of Rs.58,54,698/-.

(5) Confiscation of 10631.39 carats of diamonds valued at

Rs.4,03,72,667/- that were unaccounted along with

6423.32 gms. of gold.

(6) Confiscation of unaccounted diamonds exported during

1998-99, 1999-2000 valued at Rs.27,00,76,393/-.

At this juncture, it would be necessary to note a few factual

aspects.

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The partners of M/s B.V. Star and M/s. B.V. Jewels are the same

except that M/s B.V. Jewels had an additional partner i.e. Mr.

Vijay Shah. Both the firms are gems and jewellery units set up in

SEEPZ and engaged in the manufacture and export of studded gold

jewellery. Originally B.V. Star was allotted a plot No.55 in the

Zone where they had constructed a building having four floors. In

1995 a request was made by B/s B.V. Star to the Development

Commissioner to permit M/s B.V. Jewels to shift their factory from

Gala to operate from Ist and 3rd floor of M/s B.V. Star's

building. Same was permitted. Accordingly, M/s B.V. Star operated

from the 2nd and 4th floors while M/s B.V. Jewels operated from the

other two floors. During stock taking, as noted above, the

Accounts Manager, Shri Ramesh Iyer informed the department

officials that partners Mr. Suresh Mehta and Mr. Suken Mehta had

kept some diamonds separately. On 3.2.2000, Suresh Mehta produced

3861.65 carats of diamonds the value of which varied between $40

to 50 per carat. By letter dated 3.2.2000 the physical stock of

gold and diamonds as per the inventory sheet prepared by the

departmental authorities was confirmed. It was specifically stated

that there was no separate stock of gold and diamonds of M/s B.V.

Star as it was included in the stock of M/s B.V. Jewels. The

seized stock of diamond and gold were revalued by an appraiser.

The conclusions of the Commissioner and the Tribunal need to

be noted.

First the case of M/s B.V. Star is dealt with. The issues

and seriatim are as follows:

(a) Duty on gold shortage of 8604.5 grams valued at Rs.34,66,889 is

Rs.23,65,652

(b) Duty on shortage of 844.16 cts. of diamonds valued at

Rs.26,92,014 is Rs. 11,84,372

As regards gold and diamond, Commissioner observed that the

unit's claim that their stock was mixed up with that of M/s. B.V.

Jewels was not accepted as there is no provision available in

Custom Notification or EXIM Policy whereby two units can have

joint stock of exempted material. Customs Notification 177/1994-

Cus at Para 7 (i) stipulates the goods imported by a unit in EPZ

can be transferred to other unit only with the prior permission of

Asstt. Commissioner of Customs of the Zone, which has not been

done. Diamonds are restricted for import and import without

licence allowed only to EPZ unit under EXIM Policy and as per Para

9.10 of Handbook of Procedures, goods are to be imported into

units' premises. Transfer of goods so imported, to any other unit

is in violation of EXIM Policy and Custom Notification. The claim

that the stock of gold, diamonds of M/s. B.V. Star is available

with M/s. B.V. Jewels was not accepted as detailed stock position

of M/s. B.V. Jewels indicated total shortage of 202 grams of gold

without considering stock of M/s. B.V. Star. Hence, Commissioner

confirmed the custom duty on gold and diamonds, which were found

short.

CEGAT held that no stock taking report was prepared by

department and have accepted the unit's contention that while

stock taking, department mixed up all stock of diamond and gold

and that for working out excess or shortage, the stock position

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of both units have to be compared together. CEGAT further stated

that the expected recovery of 6812.36 grams of gold is not real

recovery and if percentage of recovery changes slightly, the

figure 6812.36 may be twice or thrice and if both stocks are

taken together, alleged shortage of 8604.50 grams of gold in

respect of M/s B.V. Star will not exist as total recovery will be

much more.

In respect of diamonds, CEGAT observed that while taking

stock, stock of both the units are mixed and the stock position

of both units are considered with physical records, there would

be shortage of 73 carats and observed to be marginal difference

since commencement of the units. CEGAT observed that Commissioner

has not dealt with this issue as department did not raise demand

on physical shortage of diamonds found in respect of M/s B.V.

Jewels.

) Duty foregone on missing capital goods which were imported

duty free by M/s B.V. Star valued at Rs.2,22,48,876/-

(i) Duty on Capital goods value at Rs.1,06,37,742/-

imported by M/s B.V. Star illegally under possession and

usage of M/s B.V. Jewels.

The Commissioner observed that as per records and as

confirmed by letter of Estate manager dealing with allocation of

space in SEEPZ dated 17.2.2000, the area allotted to M/s B.V.

Jewels is Ist and 3rd floor and to M/s B.V. Star is 2nd and 4th

floor of a self built factory constructed by M/s B.V. Star. The

unit's argument of having applied for permission obtaining oral

permission was discussed and rejected. It was observed that the

20 machines with accessories were found installed in premises

allotted to M/s B.V. Jewels and were in exclusive use of M/s B.V.

Jewels. The Administrative officer of SEEPZ vide note dated

11.5.2000 had clarified that the capital goods limit of M/s B.V.

Jewels had already been utilized and they were not entitled for

duty free import or procurement of capital goods by way of inter

unit transfer. Accordingly, the Commissioner observed that there

was a deliberate attempt of diversion of capital goods imported by

M/s B.V. Star to M/s B.V. Jewels, as the stipulated permission for

such inter unit transfer to be obtained from Development

Commissioner under para 9.16 (b) of EXIM Policy, from Asstt.

Commissioner of Customs vide Para 7(i) of Notification 177/94

Customs, had not been obtained by any of these units. The unit's

argument of working as one unit being sister concerns was

rejected, as vide Para 9.37 (x) of Handbook of Procedures of EXIM

policy. Units need to obtain specific permission from Development

Commissioner for merger.

CEGAT observed that the appellants have answered a CRA

objection in 1997 stating that M/s B.V. Star spared their

Machinery to M/s B.V. Jewels for effecting exports, and the

department closed the CRA objection. Thus not only were they aware

that M/s B.V. Star's Machinery was used by M/s B.V. Jewels in the

same Zone, but also were satisfied with the reply. Thus it is

not a case of transfer of machinery to M/s B.V. Jewels, but use of

machinery by M/s B.V. Jewels for manufacture of jewellery for

exports. Condition No 4 of Notification No.177/94 required

importer to execute a bond binding himself to bring such goods

into his unit and use them within the zone for the purpose

specified in the notification. Thus the said goods were brought

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into their units and those were used within the same zone for the

purpose of export. Further importer has to satisfy the

Development Commissioner that the goods so imported have been used

for that purpose. Notification No.177/94 Cus. gets violated only

if goods are to be transferred to another unit in the same zone.

In this case there is no transfer to another unit but use of

machinery by M/s B.V. Star for manufacture of jewellery for M/s

B.V. Jewels with the knowledge of department. Therefore question

of permission of Assistant Commissioner does not arise.

(ii) Confiscation of Capital goods valued at Rs.58,58,696/-

which are not found in the unit.

Commissioner noted that M/s B.V. Star had worked for a brief

period of 15 days or so where they exported only five consignments

during 6.5.1997 to 14.5.1997 and quantum of jewellery produced is

observed to be negligible, compared to quantum of capital goods

imported by the unit. Capital goods worth Rs.58,58,696/- were not

accounted for in the unit, and it cannot be considered as

consumed/worn out considering a negligible export effected. It was

accordingly held that the duty foregone at the time of clearance

is payable.

CEGAT observed that Notification No.196/87 Cus. Condition

xiv (b) (i) required importer to pay duty on consumable goods if

not used in connection with the manufacture of the jewellery in

the same zone. Since goods have been used in the same zone and

there is no condition that the goods should be used by the same

unit, there is no violation of condition of Notification.

(iii) Confiscation of un-installed motors/brushes/hand

pieces valued at Rs. 36,70,675/- for violation of

Notification 196/87 Cus.

Commissioner found that 238 pieces of Bench Motor, 79 hand

pieces, 500 carbon brushes were found in original packages having

remained unused and uninstalled for a period over six and half

years violating condition xiv(b)(i) contained in Notification

196/87 Cus., which stipulated that the equipment had to be

installed and used within a period of 1 year from the date of

importation.

CEGAT observed that condition xiv(b)(i) to Notification

196/87 as held by Commissioner is not applicable, but the

condition xiv (b) (ii) is applicable, which permits retention of

such goods within the zone in connection with the promotion of

export of gems and jewellery. The condition of retaining the

goods within the said zone for purpose of export is satisfied.

There is no violation of the Notification and therefore demand of

duty and confiscation of goods is not sustainable.

(d) Imposition of Penalty

The commissioner confirmed duty of Rs.2,57,90,900/- and

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imposed equivalent penalty apart from confiscating capital goods

installed in the premises of M/s. B.V. Jewels with an option to

redeem the same on payment of fine of Rs. 15,00,000/-.

CEGAT observed that as there was no shifting or transfer,

these goods were lying in plot No.55 only which is repeatedly

accepted as address for both units, and were not removed and use

of machinery by M/s B.V. Jewels was for purpose of manufacture.

Section 111(d)(j) & (o) invoked by Commissioner has not been

violated, and hence confiscation, imposition of redemption fine

and demand of duty are not warranted.

So far as M/S. B.V. JEWELS is concerned, the issues are as

follows:

(a) Duty on shortage of 73,730 Ct of diamonds valued at Rs.

26,29,54,490/- Duty of Rs. 12,54,80,309/-.

Commissioner observed that Custom Notification 177/94

Cus; Stipulates that the importer to dispose the diamonds

in a manner as specified in EXIM Policy as well as in the

Notification. Para 8.29 of the EXIM Policy stipulates that

the Exporter is required to achieve an additional value

addition of 5% over the imported value of cut and polished

diamonds. Para 8.34 of Hand book of Procedure of Exim

Policy stipulates that the invoice presented to the Customs

has to contain description of item, purity, Weight of gold,

wastage claimed thereof and the total weight including

wastage. Similarly in the case of studded jewellery, apart

from above details of precious metal, the Exporter has also

to indicate weight and the value of the diamonds. Para

8.35 of Handbook stipulates that the exports shall be

allowed by Customs Authorities provided endorsements made

on Shipping Bill and Invoice are correct and value addition

achieved is not below the minimum prescribed limit. It was

observed that as all details cannot be brought on the same

Invoice, Public Notice 20/96 contemplated that the

Exporters shall file 'Value Addition Statement'. Para 9.10

(d) of Handbook stipulates that the diamonds are to be

utilized within a period of two years from the date of

import, and remaining unutilized diamonds thereafter would

become dutiable. Hence the importers have to maintain the

record of consumption Bill of Entry wise, and the details

of Bill of Entry are to be shown in Export documents so as

to show consumption within prescribed time. Even the Bond

executed with Customs is debited and credited based on

import and export, and therefore import content in export

consignment has to be known, for which import value of the

diamonds studded in the jewellery exported has to be

furnished.

As regards Par 8.78 B of Handbook, Commissioner

observed that there is no amendment made with reference of

Para 8.34, 8.35 of handbook and 8.29 of EXIM Policy while

introducing this new Para. Therefore even with the new

provision the requirement of furnishing the import value of

the diamonds in an Export consignment cannot be dispensed

with. The Commissioner did not accept the argument, that

accounting of diamonds is not required to be done value

wise, observing that the diamonds are imported with value

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ranging from 25 US $ per carat to 3500 US$ per carat and

one cannot equate all such diamonds. In many cases of

import effected by the Unit, the difference in rate per

carat with reference to various lots of diamonds in single

invoice, is varying only in fraction of a dollar, and

argument of the unit about having variation in prices up to

30% within the diamonds of the same lot after assortment,

was not accepted. Commissioner relied on a specific Bill

of Entry No. 2977 cited by the unit, and brought out that

the difference within the lots of similar range of

diamonds is only a fraction of a dollar and rejected the

unit's arguments that the diamonds imported at the rate of

50 US dollar per carat can have rate varying from US $ 35

to 65. As an example Commissioner observed that against

1894 carats of diamonds valued at 75 US $ per carat

imported by the unit, the unit exported 29931 carats of

diamonds at this rate, whereby there was no account for

28037 carats and no explanation was provided by the unit.

Based on above method of verification of stock total

shortage of 73,730 carats of diamonds valued at

Rs.26,29,54,490/- was confirmed and duty demanded.

CEGAT observed that whenever diamond is valued,

different people will give different values and variation

may be large and that is why value of diamonds declared in

the Value Addition Statement can never be the same as

declared in the Bills of Entry and declaration of Bill of

Entry number in 'Value Addition Statement' is based only on

approximation. As no method of co-relating or accounting of

imported diamonds is specifically provided in the exemption

notification or in EXIM Policy, on representation from Gem

and Jewellery Export Council, Para 8.78 B was introduced in

EXIM Policy on 1.4.2000 prescribing the method of co-

relation with reference to total quantity of imports and

exports. It was specifically provided that under no

circumstances co-relation will be done consignment wise.

CEGAT referred the observation of Commissioner that

although the amendment was made effective after the

detection of the case, method adopted for cross checking

proper accounting of diamonds by the investigation does not

militate against the amendment. Commissioner by agreeing

that the amendment of Para 8.78 B is applicable to the

facts of the case, method adopted by the department for

co-relation was to be as per this para. Findings of the

Commissioner are not correct, as shortage of diamonds and

duty demanded is worked out by co-relating individual Bills

of Entry and wherever exact weight has not tallied

department has considered the shortage of diamonds and

demanded differential duty and that no demand of Customs

duty is made in the show cause notice on physical shortage

with reference to total quantity of exports and imports.

Unit's contention that diamonds after mixing and sorting

cannot be co-related with individual Bill of entry and

jewellery is made, was accepted. Shipping Bill was filed

along with Value Addition Statement, and the value of

diamonds indicated therein may not tally with rates

mentioned in the Bills of Entry and therefore only Bills of

Entry numbers showing values of imported diamonds closest

to value of diamonds used in export jewellery were

indicated in the relevant columns of 'Value Addition

Statement'. CEGAT held that the demand of duty on 73730

carats of diamonds found short was unsustainable and set

aside the same.

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CEGAT observed that the alleged shortages have arisen

due to wrong method of co-relation and are imaginary

shortages. In physical term shortage/excess by weight of

diamonds is insignificant. This fact stands compounded by

faulty documentation of search as there is no Panchanama

and some data given by an employee was adopted. There is

no admission of shortage by appellant and no incriminating

documents have been recovered, therefore, the shortage is

deemed and based on lack of co-relation of value/cartage of

diamonds.

(b) Confiscation of broken diamonds of 1607.3 carats of value

Rs. 6,91,139/-

Commissioner rejected the unit's claim to consider

1607.30 carats of broken diamonds produced by Shri Suresh

Mehta on 07.02.2000 on the ground that the stock taking of

the unit was first conducted on 31.01.2000 and Shri Suresh

Mehta who was in New York came to SEEPZ specifically to

explain the stock and after his arrival in SEEPZ on

03.02.2000, he produced 3861.65 carats of diamonds valued

between 42 to 50 US $ per carat from his personal cupboard,

which also was taken into account for stock taking and

stock taking was concluded on 03.02.2000. Shri Suresh

Mehta confirmed in writing that the stocks found are as per

inventory prepared by the Customs staff and counter signed

by his employees. Thereafter as Shri Suresh Mehta

requested for valuation of diamonds by an expert, the

stock was kept in the safe of the unit and sealed by

Customs officials, and valuation was done on 07.02.2000.

The unit never indicated that they had any further stock of

diamonds in stock, in their several letters between

03.02.2000 to 07.02.2000. In the EPZ, there is no physical

control of goods by customs and all controls are accounts

based, and it is for the unit to produce material available

for verification at the time of stock taking, and

production of any exempt material after five days of

conclusion of stock taking has no relevance, as premises or

the persons working in the unit were not under the control

of the department. Records do not indicate the unit to

have so much broken diamonds, as between 01.10.1999 to

31.01.2000 quantity of diamonds that were broken for the

purpose of manufacturing was only 110.57 carats, as

indicated in Annexure 5 of Show Cause Notice. This

quantity, added to earlier reported stock of broken

diamonds, amounted to total stock of broken diamonds as

750.31 carats only, and the unit did not explain how they

could have the additional stock of 856.72 carats of broken

diamonds in their possession.

CEGAT observed that entire SEEPZ is a customs bonded

area, which is under the joint control of Customs and

Development Commissioner and exit or entry of vehicles and

persons is restricted through the main gate and subject to

security check. In fact all the physical stock available

was only produced commencing from 1.2.2000. It accepted the

contention of appellants before it that there is nothing

like broken diamonds and even such diamonds will continue

to be utilized depending on the requirement of the

particular purchase order and only when such broken pieces

cannot be utilized for any purchase order they are

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considered as broken diamonds and entered in the register.

Though Commissioner accepted the physical stock as

legitimate stock, he proceeded to confiscate the entire

broken diamonds. CEGAT set aside the demand based on above

conclusion.

) Confiscation of High Value diamonds valued at Rs.

39,63,286/-

On 07.02.2000, 27 seven pieces of high value diamonds

of which 23 pieces were in blister packing accompanied by

certificate issued by European Gemological laboratory and 4

pieces were in loose condition. It was claimed by the

assessee to have been legally imported stock which were

produced by the unit. Commissioner observed that, in case

of three Bills of Entry, the certificate numbers of

diamonds do not tally with the numbers mentioned in the

import invoices. In case of seven other diamonds, they

were imported with certificate Numbers of Gemological

Institute of America, whereas the certificates produced

were of European Gemological Laboratory. Seven diamonds

imported vide Bill of Entry No. 7602 dated 12.10.1998 were

neither exported nor found in stock. Same was in case of

03 heart shaped diamonds, imported vide Bill of Entry No.

3809 dated 22.01.1999. Commissioner did not agree with

unit's claim about certain quantity of diamonds against a

particular invoice, as the invoice had endorsement of

certificate number for seven diamonds whereas for others,

no number was mentioned. Claim that though invoice does

not mention invoice number, diamonds were having

certificate numbers. It was observed that, a supplier will

not supply some certified diamonds mentioning certificate

number only in respect of some diamonds and supply other

diamonds in the same consignment without indicating

certificate number. The Commissioner confiscated the 23

high value diamonds valued at 39,63,286/-, as the unit was

not able to prove beyond doubt that these diamonds were

imported legally. Import details of diamonds furnished

were not found to be in order and certificate numbers of

the said diamonds were not found mentioned in the import

documents. As diamonds were found to be in original

packing of foreign origin and no documentary proof for

legal import were produced, the goods were held liable for

confiscation.

CEGAT observed that weight and description of the

diamonds tallies with that of invoice. Seizure and

confiscation was not justified because supplier issued

invoice. Certificates are issued by another agency and

supplier in all cases may not indicate the certificate

numbers on the invoices and packing list. In respect of

some diamonds, where the clarity was highlighted to be not

tallying, CEGAT observed that there are different standards

for indicating the clarity as seen from the grading given

in U.K., USA. For example VS is standard adopted in U.K.

where as VS1 and VS2 are adopted by Gemological Institute

of America and therefore it is not correct to say that the

clarity does not tally. Accordingly, it set aside the

confiscation of 23 pieces of High Value Diamonds by

Commissioner.

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(d) Duty on unaccounted capital goods of value Rs.58,54,698/-

(duty of Rs. 39,31,813/-)

Commissioner found that goods valued at Rs.

58,34,698/- imported by M/s. B.V. Jewels was accepted by

the unit to have been sold to M/s. S.B.T. International

Ltd., based on alleged oral permission from the Development

Commissioner. The Development Commissioner vide letter

11.05.2000 confirmed that they neither received nor granted

any permission for inter unit transfer cum sale or de-

bonding of capital goods by M/s. B.V. Jewels. Commissioner

rejected their argument about notification No. 196/87, that

duty is payable only on capital goods, which are not proved

to the satisfaction of customs to have been installed, or

otherwise used in the zone. Para 3 (ii) of Notification

No.177/94, which rescinded notification No.196/87, clearly

stipulates that anything done under rescinded notification,

shall be deemed to have been done under corresponding

provision of Notification No. 177/94. The notification

stipulates permission of customs for inter unit transfer or

sale. Para 110 of EXIM policy 1992-97 stipulates that

imported goods were permitted to be given only with the

specific permission of Development Commissioner. The unit

failed to satisfy both the above said provisions of Customs

Notification and EXIM Policy and duty forgone at the time

of import of such goods amounting to Rs.39,31,813/- became

payable.

CEGAT observed that Notification 196/87-CUS provides

that importer has to pay on demand an amount equal to the

duty when capital goods are not proved to the satisfaction

to have been installed or otherwise used within the same

Zone. Since in this case capital goods were installed or

used within the same Zone, the Notification does not

permit the demand of customs duty. CEGAT further observed

that in respect of notification 177/94-CUS, condition 4 of

para 1 required the importer to execute a bond, to bring

the said goods to his unit and to be used within the said

Zone. As the goods had been brought into their unit and

goods were being used in the same Zone, the notification

does not permit demand of Customs duty so long as goods

remain within the said Zone and are used for the purpose of

exports.

(e) Confiscation of 10631.39 carats of diamonds valued at Rs.

4,03,72,667/- that were unaccounted along with 6423.32 of

gold.

Commissioner observed the unit was in possession of

10631.39 carats of diamonds for which no evidence of legal

acquisition existed or was produced. Part of diamonds was

claimed to have been studded in jewellery in finished and

semi finished form. The contention that no Panchanama was

drawn for seizure of such goods was false as the same were

seized under Panchanama dated 26.02.2000, copy of which was

received by M/s. B.V. Jewels. There was large scale export

of substituted diamonds and these diamonds also would have

been exported in similar fashion and these being un-

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authorised goods brought in SEEPZ, a Customs Area, such

articles were liable for confiscation under Section 113 (d)

of Customs Act, 1962.

CEGAT observed that these diamonds were considered as

excess, because value given in respect of the quantity was

not tallying with Bills of Entry in possession of the

units. CEGAT accepted the unit's submission that value

taken in inventory sheets is different from the value taken

by the assessor, and as the entire stock was seized from

"work in progress" of 'setting department', 'quality

control department' after sorting and mixing, these

diamonds lost their identity with reference to a particular

Bill of Entry and values indicated in 'valuation report'

may or may not tally with rate indicated in the Bill of

Entry. The excess quantity was observed as legitimately

imported and the confiscation was set aside.

(f) Confiscation of unaccounted diamonds exported during 1998-

99, 1999-2000 valued at Rs. 27,00,76,393/-.

Commissioner observed that M/s. B.V. Jewels exported

jewellery studded with diamonds valued at Rs.27,00,76,393/-

for which no documentary evidence about legal possession

was produced. The corresponding quantity of diamonds were

found short in stock and exports effected using unaccounted

diamonds by mis-declaring the source of procurement was an

act to cover up un-authorised removal of duty free imported

diamonds from SEEPZ.

CEGAT observed that the co-relation, which was done

with each shipping bill and Bill of Entry, is not correct

and was set aside as above. It was concluded that since

method adopted was not correct, there was no unaccounted

stock of diamonds and hence question of confiscation does

not arise.

We shall deal with the correctness of the conclusions of the

Commissioner vis-`-vis those of CEGAT in respect of each issue

hereinafter.

So far as the shortage of gold and diamond is concerned, the

Commissioner found as a matter of fact on the basis of statements

recorded of employees that the stock of M/s B.V. Star was mixed up

with that of M/s B.V. Jewels. Customs Notification No.177/1994-Cus

clearly stipulates that goods imported by a unit in SEEPZ can be

transferred to another unit only with the prior permission of the

concerned Assistant Commissioner of the Zone. The EXIM policy as

well as para 9.10 of Handbook of Procedures makes the position

clear that goods are to be imported into the importer unit's

premises. It was, therefore, not permissible for M/s B.V. Star to

claim that the goods imported by it were mixed up with the stock

of M/s B.V. Jewels. CEGAT has proceeded on entirely erroneous

premises that it is the department which mixed up the stock in

working out the excess or shortage. So far as the expected

recovery of 6812.36 grams of gold is concerned, learned counsel

for the respondents submitted that the position of expected

recovery as worked out by the department is artificial and

hypothetical. There was no material brought on record to show that

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the expected recovery would be the actual. It is to be noticed as

submitted by learned counsel for the appellant that the expected

recovery was worked out on the basis of the figures supplied by

the concerned respondents and the average has been worked out. It

is of relevance to note that the assessee's employees who are

accustomed with the process of recovery have accepted the figure

worked out by the departmental authorities.

So far as the shortage of diamond is concerned, it is to be

noted that there was practically no manufacturing activity carried

out by M/s B.V. Star and, therefore, the question of any staff

being there does not arise.

Shortage of diamond was worked out at 844.16 carats. It is

to be noted that the mixing up of stock of two units is not

legally permissible. CEGAT has recorded a very confused finding

that if the stock position of both the units varies there shall be

marginal difference, overlooking the fact that mixing was not done

by the department as concluded by it; but by the concerned

respondents. It was for them to explain the stock position. The

department has worked out the details with reference to the

official records. It was for the concerned respondents-assessees

to reconcile the figures. To put it plainly what was required to

explain is as follows:

Opening stock as on 1.4.1998, receipts by way of imports are

to be added to it to work out the availability of stock from which

the outgoings were to be for exports, and the balance has to be

the stock as per the records. It has to tally with the physical

stock. If it does not tally, the concerned assessee has to explain

as to why the discrepancy arose. The department has worked out the

details on that basis. Therefore, the duty as levied on the

shortage of gold and diamond was rightly worked out by the

Commissioner. CEGAT without considering the factual position on

the basis of some abrupt conclusions which are also not

supportable factually held that there is no discrepancy. The duty

as levied by the Commissioner on the shortage of gold and diamond

needs to be confirmed, and we direct accordingly.

Next item relates to the missing capital goods. In this case

the stand of both M/s B.V. Star and M/s B.V. Jewels was that the

capital goods imported duty free by M/s B.V. Star was installed in

the premises allotted to M/s B.V. Jewels and were in exclusive use

of the latter. The Administrative Officer of SEEPZ vide his letter

dated 11.5.2000 had clarified that the capital goods limit of M/s

B.V. Jewels had already been utilized and they were not entitled

to import any duty free capital goods. It was also not permissible

for it to procure capital goods by way of inter unit transfer.

Therefore, the diversion of capital goods imported by M/s B.V.

Star to M/s B.V. Jewels is clearly impermissible.

CEGAT proceeded on the basis as if there is no transfer and

mere usage and there is no violation. This is clearly contrary to

para 9.16 (b) of EXIM policy, in the absence of stipulated

permission and also in terms of condition No.7(i) of Notification

No.177/94-Customs. Permissible transfer has to be in the mode

noted at para 9.16 of EXIM policy which relates to inter unit

transfer. It is not that only in the case of transfer permission

is necessary. Usage also would be covered because for duty free

import the pre-requisite is that it must be used in the premises

of the unit. Notification 196/87-Customs makes the position clear.

The goods imported were to be used by the imported unit.

Permitting another unit to use it is clearly in violation of the

stipulations in the notification which clearly mandate use by the

imported unit only, except with the requisite permission

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stipulated which in the instant case was not there. Therefore, the

duty on capital goods imported by M/s B.V. Star and under

possession and usage of M/s B.V. Jewels as ordered by Commissioner

needs confirmation which we direct.

So far as the confiscation of capital goods valued at

Rs.58,58,696/- is concerned, the Commissioner found that M/s B.V.

Star had worked for a brief period of two weeks during the period

from 6.5.1997 to 14.5.1997. Five consignments were exported and

the quantum of jewellery produced was quite negligible compared to

the quantum of capital goods imported by the unit. As laid in para

9.10(b) of the EXIM policy and in terms of para 7(i) of the

Notification 177/94-Cus dated 21.10.1994, the transfer from one

unit to another unit had to be preceded by permission from the

Development Commissioner and proper accounting in the registers

prescribed by the department. In the instant case neither M/s B.V.

Star nor M/s B.V. Jewels had obtained any permission from

Development Commissioner or the Assistant Commissioner (Customs).

Stand that both the units being sister concerns and promoted

by same partners and was practically using as one unit is clearly

untenable. Even for merger of two or more units in terms of para

9.37(x) of Handbook of Procedures of EXIM policy 1997-2002,

specific permission from the Development Commissioner is required

to be obtained. Prior to delegation of powers to the Development

Commissioner the powers were vested with the SEEPZ Board. As the

manufacturing activity of M/s B.V. Star is admittedly negligible

it could not have held by CEGAT that the goods have been consumed

or worn out during manufacture of jewellery by M/s B.V. Star. As

the consumption and utilization of capital goods valued at

Rs.58,58,696/- has not been properly accounted for and these goods

were found short while working out the details, the duty foregone

at the time of clearance of the goods is clearly leviable. The

confirmation of demand by the Commissioner as was done is in

order.

So far as the missing installed motors, brushes, hand pieces

are concerned, these were found to be in the original packings and

were cleared by bills of entry Nos. 3126 and 7382 dated 8.7.1993

and 19.6.1993 respectively. Evidently, the goods remained unused

and uninstalled for a period of six and a half years. According

to the Commissioner this was in clear violation of conditions

xiv(b)(i) of Notification 196/87-Cus dated 5.5.1987.

Learned counsel for the respondents submitted that in the

present case as rightly observed by CEGAT, condition xiv(b)(i) is

not applicable and it is a case where condition xiv(b)(ii) is

applicable. The CEGAT observed that retention of the goods within

the Zone in connection with the promotion of export of gems and

jewellery is permissible. For retaining the goods within the same

zone a satisfaction is required to be recorded that the same was

for the purpose of export.

Clause xiv(b) in its entirety reads as follows:

"the importer shall pay, on demand, an

amount equal to the duty leviable:

(b) on goods, other than capital goods

as are not proved to the satisfaction of the

Assistant Collector of Customs to have been:

(i) used in connection with the

manufacture or packaging of gem and jewellery

within the said Zone for export out of India or

for the promotion of export of such goods or

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re-exported within a period of one year from

the date of importation thereof or within such

extended period as the Assistant Collector of

Customs may, on being satisfied that there is

sufficient cause for not using them or for not

re-exporting them within the said period allow;

(ii) retained within the said Zone in

connection with the promotion of exports of gem

and jewellery.

Undisputedly, clause (b)(i) has not been complied with

because the articles have not been used in connection with

manufacture or packaging of gems and jewellery within the Zone for

export out of India or for the promotion of export of such goods

or re-export. The time limit of one year period is fixed.

According to learned counsel for the respondents-assessees the

articles can be retained within the Zone in connection with the

promotion of exports. The Assistant Collector of Customs has to be

satisfied that the retention of goods within the Zone was in

connection with the promotion of exports of gem and jewellery. No

material was placed before the Commissioner though it was clearly

indicated in the show cause notice as to how the retention of the

goods was in connection with the promotion of exports. On a bare

reading of the details of the goods in respect of which the demand

was confirmed, goes to show that it has nothing to do with the

promotion of exports of gem and jewellery. The vital requirement

is that the retention should be in connection with "the promotion

of exports". The burden lay on the assessee to establish that the

condition was satisfied. No material whatsoever was placed before

the Commissioner to satisfy the requirement. CEGAT was therefore

not justified in annulling the demand. The demand as confirmed by

the Commissioner stands revived.

So far as the working out of shortage/excess are concerned

we shall deal with the case of M/s B.V. Star and M/s B.V. Jewels

together.

The Departmental authorities placed reliance on clauses 8.34

and 8.35 of EXIM Policy Handbook to contend that the details

should be as noted in the shipping bills and invoices in the

background of conditions of export.

Learned counsel for the assessees-respondents, however,

relied on para 8.78 B which reads as follows:

"8.78 B- For the purpose of monitoring in

case of gem and jewellery units at the time of

scrutiny at any point of time the unit shall be

able to account for by way of fulfillment of

export obligation and realization of prescribed

NFEP, the entire quantity of imports as might

have been made by the units. The exporter shall

also account for the total quantity of imports

by way of total quantity of exports and the

balance stocks including broken diamonds and

other gemstones. However at no point of time

the unit shall be required to co-relate every

export consignment with the corresponding

import consignment."

Paras 8.34 and 8.35 operate in a field different from para

8.78 B. The exercise to be undertaken so far as the requirements

of 8.78 B are concerned, relate to a stage when the exporter is

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required to account for the total quantity of imports and the

comparison has to be made with total quantity of exports and the

balance stock including broken diamonds and other gemstones.

Paragraphs 8.34 and 8.35 operated at the time of export when

the bills have to be verified in the prescribed manner. That is a

stage different from one contemplated in para 8.78 B.

Paras 8.34 and 8.35 read as follows:

"8.34- At the time of export of jewellery, the

shipping bill and the invoice presented to the

customs authorities shall contain the

description of the item, its purity, weight of

gold/silver/platinum content, wastage claimed

thereon, total weight of gold/silver/platinum

content plus wastage claimed and its equivalent

quantity in terms of 0.995/0.999 fineness for

gold/silver and in terms of 0.9999 fineness for

platinum and its value, fob value of exports and

value addition achieved. If the purity of

gold/silver/platinum used is the same in respect

of all or some of the items made out from each

of these metals for export, the exporter may

give the total weight of gold/silver/platinum

and other details of such similar items which

are of the same purity. In case of studded

items, the shipping bill shall also contain the

description, weight and value of the

precious/semi-precious stones/diamonds/pearls

used in manufacture, and the weight/value of any

other precious metal used for alloying the

gold/silver.

8.35-The exports shall be allowed by the customs

authorities provided the endorsement made on the

shipping bill and the invoice are correct and

the value addition achieved is not below the

minimum prescribed in the policy".

The Departmental authorities have adopted the view that the

working out of the details are to be done in terms of paras 834

and 8.35 and not in the line of 8.78 B. That is clearly erroneous.

As the stages of adopting provisions referred to above stand

on a different footing the relevant provisions have to be applied

at the stages they are intended to be applied. The Commissioner

seems to have not taken note of para 8.78 B. However, the

respondents have the obligation to otherwise reconcile the stock.

They cannot claim immunity from verification of stocks and its

obligation for reconciliation of differences, if any. By way of

illustration it may be indicated that Manufacture and Other

Operations in Warehouses Regulations 1966 throws beacon light in

this regard, more particularly Regulations 9 & 10 thereof. Power

of the departmental authorities to verify the records to find out

whether imports and exports have been properly recorded cannot be

denied. Such verification shall not be only for the purpose of

finding out the compliance of paragraphs 8.34 and 8.35 and 8.78 B

but the same shall be to test the correctness of the accounts

maintained. Therefore, it would be appropriate to direct the CEGAT

to work out the details so far as the alleged shortage of 73,730

carats of diamonds valued at Rs.26,29,54,490 are concerned.

We may note that in the case of high value diamonds

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undisputedly certain diamonds along with connected records were

produced by partner Suresh Mehta some days after the verification

started. According to the department the production of such

valuable articles at a later point of time clearly shows that an

attempt has been made to substitute the actual diamonds with items

which were not covered by the import documents. Similar is the

position relating to confiscation of 10631.39 carats of diamonds

and alleged unaccounted gold and diamonds.

The Tribunal shall permit the respondents-assessees to

produce the original records which shall be verified by it.

Definite stand of the department as to how there are suppressions

resulting in either excess or shortage of gold shall be

considered. CEGAT shall consider the basic features to work out

the details and find out whether there is any excess or shortage

as alleged by the departmental authorities. If after considering

the explanation of the respondents-assessees and that of the

departmental authorities already on record it finds that the plea

of the concerned assesses, is without substance it shall work out

the suppression, if any, and the duty payable. The quantum of

penalty would be equal to the sum of duty leviable in terms of

confirmation of Commissioner's order as done by us supra. The

penalty to that extent stands confirmed. The balance of penalty,

if any, would depend upon re-examination by CEGAT as directed

supra.

Respondents also urged before us that the demands raised

were clearly barred by limitation and though the plea of

limitation was specifically raised the same was not considered by

the Commissioner and since the CEGAT accepted the plea of the

respondents on merits it did not refer to that plea.

We find that reference was made by departmental authorities

to the proviso appended to sub-section (2) of Section 28 of the

Act. No plea about its non-applicability was taken in the grounds

of appeal before the CEGAT and though it was vehemently urged that

the point was specifically taken before the Tribunal, we find no

mention thereof in the CEGAT's order. The matter can be looked at

from another angle. If, in reality, the CEGAT found that the

action taken by the departmental authorities was beyond the period

of limitation, it could have disposed of the appeals before it

only on that ground without examining the merits. On the contrary,

in the absence of any specific plea in the grounds of appeal, the

point does not seem to have been urged before the CEGAT,

particularly, in view of the consideration of the merits and non-

consideration of the question of limitation. That being so we find

no substance in the plea of learned counsel for the respondents

that the action taken by authorities was beyond the period of

limitation. Even otherwise, the proviso to sub-section (2) of

Section 28 is clearly applicable as the materials clearly indicate

non levy and short levy on account of mis-representation of facts

by the respondents.

The appeals are allowed to the extent indicated. There will

be no order as to costs.