Customs Must Verify Certificates Of Origin Before Denying Preferential Tariff Benefit: CESTAT Ahmedabad

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Ahmedabad on 31 August held that the Customs Department cannot deny preferential tariff benefit or invoke the extended limitation period against an importer merely on the suspicion that Certificates of Origin are fraudulent, without completing the prescribed verification process and establishing the importer's involvement in the alleged fraud.

A Bench comprising Judicial Member Somesh Arora and Technical Member A.K. Jyotishi allowed appeals filed by Imperial Fibres Pvt. Ltd. and its Director Varun Goyal against a Customs duty demand arising from imports of polyester knitted fabrics. The Tribunal observed:

“In view of foregoing, we find that both cause of delay in conducting verification, alleged fraud not having been established as well as on invocation of extended period, in the face of lack of knowledge of the importer coming repeatedly on record during investigation, the appeal deserves to be allowed on ground of limitation and non-application of Section 28(4), which has been invoked by the department. The demand, interest and penalties or extended period are therefore, not invokable. Appeals are allowed with consequential benefit to the litigating parties.”

The case arose from Imperial Fibres' imports of polyester knitted fabrics. The Directorate of Revenue Intelligence (DRI) received information that the company was importing the goods by declaring Malaysia as their country of origin, although they were allegedly coming from China. The Department alleged that the declaration enabled Imperial Fibres to claim preferential tariff treatment under Notification No. 46/2011-Cus.

During the investigation, the Malaysian authorities informed the Department that 15 Certificates of Origin were not authentic and that certificates bearing those reference numbers belonged to another company. Customs also relied on an alleged mismatch in the signatures appearing on the certificates and statements attributed to Varun Goyal.

The Tribunal, however, noted that the Department had verified only 15 of the 29 Certificates of Origin relied upon for the imports, while it confirmed the demand in respect of all 29 certificates. It also noted that Customs had taken samples of the imported polyester knitted fabric for testing, but no test reports were produced or supplied to establish that the goods were actually of Chinese origin.

The Department had relied on Rule 23 of the Rules of Origin, which deals with fraudulent acts involving Certificates of Origin, to contend that the prescribed verification requirements could be disregarded. The Tribunal rejected the argument and held that mere suspicion of fraud does not make the verification procedure irrelevant. The alleged fraud must itself be established by following the prescribed procedure.

Further, the Bench held that the response from the Malaysian authorities stating that the certificates were not authentic or had been issued to another company was insufficient by itself to establish fraud.

It said such material had to be supported and tested through proper authentication, supporting documents and expert examination, where necessary, while giving the affected party an opportunity to examine the material relied upon. It also stressed that documents obtained from a foreign jurisdiction must carry sufficient authenticity while preserving the affected party's right to defend itself.

On limitation, the Tribunal found no material establishing conscious knowledge, collusion, wilful misstatement or suppression of facts by Imperial Fibres to justify invoking Section 28(4) of the Customs Act. The provision permits the Department to recover duty beyond the normal limitation period where non-payment or short payment of duty results from fraud, collusion, wilful misstatement or suppression of facts.

It also took note of the delay in the verification exercise, which covered only 15 of the 29 Certificates of Origin relied upon for the demand.

Accordingly, CESTAT allowed both appeals and held that the duty demand, interest and penalties based on the extended limitation period were not sustainable.

For the Appellants: Shri Manish Saharan, Advocate

For the Revenue: Shri Girish Nair, Authorised Representative