14 September 2004
Supreme Court
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COMMNR. OF CUSTOMS, MUMBAI Vs M/S. B.V. JEWELS AND ORS.'

Bench: S.N. VARIAVA,ARIJIT PASAYAT
Case number: C.A. No.-004254-004260 / 2003
Diary number: 8306 / 2003
Advocates: B. KRISHNA PRASAD Vs RAJESH KUMAR


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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.