Used Garments Confiscation Sustained for No DGFT Licence: CESTAT Chennai

Kayem Exim Private Limited Vs Eskay Enterprises (CESTAT Chennai)

The CESTAT Chennai disposed of four appeals filed by the importers against Orders-in-Appeal affirming adjudication orders relating to imports of used garments. The adjudicating authority had rejected the declared transaction value, enhanced the assessable value, confiscated the imported goods, and imposed redemption fine and penalties. The Department had appealed only against the quantum of redemption fine and penalty before the Commissioner (Appeals), while the importers filed cross-objections challenging the findings on valuation, confiscation and penalty. The Commissioner (Appeals) upheld the adjudication orders, leading to the present appeals.

The appellants imported old and worn clothing during July 2017 to May 2018, declaring the goods under CTH 6309 0000 and valuing them on the basis of supplier invoices. On examination, the consignments were found to contain mixed used garments. The adjudicating authority rejected the declared transaction value under Rule 12 of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 and redetermined the value under Rule 5 based on alleged contemporaneous imports. The goods were also treated as restricted imports under the Foreign Trade Policy for want of a DGFT licence and were confiscated under Sections 111(d) and 111(m) of the Customs Act, 1962, with redemption fine under Section 125 and penalties under Section 112(a).

The appellants contended that rejection of the declared transaction value was arbitrary and unsupported by evidence. They argued that the declared value was supported by invoices and import documents, no evidence showed payment of any additional consideration to the foreign suppliers, and the Department had failed to establish valid grounds for rejecting the transaction value under Rule 12. They also challenged reliance on alleged contemporaneous imports, contending that no supporting documents had been produced and that no comparison had been made regarding quality, quantity or commercial level. It was further submitted that the imported consignments consisted of mixed lots of used clothing varying in quality and condition, making adoption of a uniform value per kilogram contrary to the valuation rules. On confiscation and penalties, the appellants submitted that there was no misdeclaration, that the goods had been correctly declared as used clothing, and that the redemption fine and penalties were excessive.

The Department supported the impugned orders, arguing that the imported goods were restricted under the Foreign Trade Policy and liable to confiscation in the absence of a valid licence. It further contended that the declared value was unreasonably low, that enhancement was based on contemporaneous import data, and that the redemption fine and penalties were justified to discourage violations of the import policy.

On valuation, the Tribunal rejected the Department’s contention that acceptance of enhanced value at the time of clearance barred the importers from challenging it in appeal. Relying on Laxmi Colour Labs v. Collector of Customs, it held that there is no estoppel in taxation matters and that acceptance of enhanced value to secure clearance of goods does not prevent an importer from subsequently disputing the enhancement. The Tribunal further relied upon decisions holding that transaction value cannot be rejected merely because it appears lower than other imports and that enhancement based on contemporaneous imports requires proof that the goods are comparable in quality, quantity, condition, commercial level and other relevant characteristics.

Applying these principles, the Tribunal found that the Department had rejected the declared value primarily because it appeared lower than certain other imports without producing evidence establishing comparability or demonstrating that any additional consideration had passed from the importers to the suppliers. It also noted the absence of any market survey or study to verify the suspected value. Since the imported goods consisted of heterogeneous consignments of used garments varying in quality and condition, the Tribunal held that adoption of a uniform benchmark value without establishing comparability was contrary to the valuation rules. Accordingly, it set aside rejection of the declared transaction value and directed acceptance of the declared invoice value.

On confiscation, the Tribunal observed that the appellants did not dispute that the goods were second-hand garments and had not produced the licence required under the Foreign Trade Policy. It held that import without the requisite authorisation rendered the goods liable to confiscation under Section 111(d) of the Customs Act. However, since there was no evidence of misdeclaration regarding description, quantity or value, confiscation under Section 111(m) was held to be unsustainable.

Regarding redemption fine and penalty, the Tribunal noted that the goods consisted of low-value used garments intended for resale in price-sensitive markets and that there was no evidence of deliberate misdeclaration, suppression or fraudulent intent. It further observed that the Department had not conducted any market survey to determine prevailing market value or profit margins. Holding that redemption fine should bear a reasonable nexus to the likely margin of profit and should not assume a punitive character, the Tribunal reduced the redemption fine to 10% of the declared invoice value. While recognising the absence of mens rea, it held that import of restricted goods without a valid licence nevertheless warranted penalty and accordingly fixed the penalty at 5% of the declared value.

The Tribunal therefore held that rejection of the declared transaction value and consequential enhancement were unsustainable, accepted the declared value, upheld confiscation only under Section 111(d), set aside confiscation under Section 111(m), reduced the redemption fine to 10% of the declared invoice value, upheld penalty at 5% of the declared value, modified the impugned orders accordingly, and partly allowed the appeals with consequential relief in accordance with law.

FULL TEXT OF THE CESTAT CHENNAI ORDER

The present batch of 4 appeals is filed by M/s. Kayen Exim Pvt. Ltd. and M/s. Eskay Enterprises (hereinafter referred to as “Appellant Nos. 1 & 2”) against the Orders-in-Appeal Nos. 190 to 324/2018 dated 23.05.2018 (hereinafter referred to as the “impugned orders”), whereby the appeals filed by the Department against the Orders-in-Original relating to import of used garments were rejected in Appeal. In the adjudication proceedings, the declared transaction value was rejected, the assessable value was enhanced, and the goods were confiscated with imposition of redemption fine and penalties. Aggrieved by the said orders, the Department had filed appeals before the Commissioner (Appeals) challenging the quantum of redemption fine and penalty, while the importers, as respondents, filed cross-objections contesting the findings on valuation, confiscation and penalty. The Commissioner (Appeals), however, upheld the Orders-in-Original and rejected the Department’s appeals.

1.2 The facts briefly stated are that the appellants are engaged in import and trading of worn clothing. During July 2017 to May 2018, they filed several Bills of Entry at Chennai declaring goods as “old and worn unmutilated clothing fumigated” under CTH 6309 0000 and declared value based on supplier invoices. On examination, the goods were found to be mixed used garments. The adjudicating authority rejected the declared value under Rule 12 of the Valuation Rules, 2007 and re-determined the value under Rule 5 based on alleged contemporaneous imports. The goods were also held to be restricted under the Foreign Trade Policy for want of DGFT licence and were confiscated under Sections 111(d) and 111(m), with an option for redemption under Section 125. Penalties were imposed under Section 112(a). The Commissioner (Appeals), by the impugned orders, upheld these findings.

3. Being aggrieved by the impugned appellate orders, the importers have filed the present appeals before this Tribunal. Since all the appeals arise out of a common set of facts and involve identical issues relating to valuation of imported used clothing, they are taken up together and disposed of by this common order. The details of the appeals filed are tabulated below: –

3. The Ld. Advocate Shri N. Viswanathan appeared on behalf of the Appellant and advanced detailed submissions in support of the Appeal and the Ld. Authorized Representative Ms. Rajini Menon appeared for the Revenue who has affirmed the findings in the impugned order.

4.1 The Ld. counsel submitted that the enhancement of value is arbitrary and contrary to the Customs Valuation Rules. It was contended that the declared transaction value was duly supported by invoices and import documents, and no evidence has been brought on record to show that the value was incorrect or that any additional consideration had flowed from the importer to the supplier. It was argued that rejection of transaction value under Rule 12 requires valid grounds supported by cogent evidence, which is absent in the present case. The reliance on alleged contemporaneous imports without producing supporting documents or establishing comparability in terms of quality, quantity and commercial level was also challenged.

4.2 It was further submitted that the goods consisted of mixed lots of used clothing varying in quality, condition and usability, and therefore cannot be compared with other consignments for valuation purposes. The adoption of a uniform value per kilogram without examining the characteristics of each consignment was argued to be contrary to the valuation rules. The learned counsel also contended that the adjudicating authority failed to follow the mandatory sequential application of valuation methods and mechanically invoked Rule 5.

4.3 On confiscation and penalties, it was submitted that there was no misdeclaration as the goods were correctly declared as used clothing and the examination reports support the same. Even if treated as restricted, confiscation and penalties are not automatic and the redemption fine imposed is excessive and disproportionate.

5. The Ld. Authorized Representative appearing for the department supported the findings of the adjudicating authority and the Commissioner (Appeals). It was submitted that the goods imported by the appellants are restricted items under the Foreign Trade Policy and therefore their import without a valid license renders them liable for confiscation under the provisions of the Customs Act. The departmental representative further argued that the declared value of the goods was unreasonably low and did not reflect the prevailing market value of similar goods. According to the department, the enhancement of value was based on contemporaneous import data available with the department and was therefore justified. The learned Authorised Representative also contended that the redemption fine and penalty imposed in the present case are reasonable and necessary in order to discourage import of restricted goods in violation of policy restrictions.

6. Upon consideration of the rival submissions made by the appellants and the Revenue and on perusal of the records of the case, the following questions arise for determination in these appeals: –

i. Whether the rejection of the declared transaction value under Rule 12 of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 and the consequential re-determination of value under Rule 5 of the said Rules are legally sustainable.

ii. Whether the confiscation of the imported goods under Sections 111(d) and 111(m) of the Customs Act, 1962 is legally sustainable, and,

iii. Whether the redemption fine imposed under Section 125 and the penalties imposed under Section 112 of the Customs Act are sustainable and proportionate.

7. We now proceed to examine the above issues separately.

ISSUE NO. (i): Whether rejection of the declared transaction value and enhancement of value under the Customs Valuation Rules is sustainable

8.1 The Department has contended that the importers had accepted the enhancement of value at the time of clearance of the goods and, having done so, are precluded from challenging the same in appeal. It is argued that once the importer agrees to the enhanced value and clears the goods on that basis, the correctness of such value cannot be subsequently disputed.

8.2 The Ld. counsel for the appellants, however, submitted that the transaction value declared in the Bills of Entry represents the actual price paid to the overseas suppliers and that the Department has not produced any evidence to establish that the declared value is incorrect or that it does not reflect the true transaction value. It was further contended that the alleged acceptance of enhanced value was not voluntary but was made under compulsion to secure release of goods and to avoid demurrage and detention charges.

8.3 In this context, reliance has been placed by the Appellant on the judgment of the Hon’ble Supreme Court in Laxmi Colour Labs vs. Collector of Customs [1997 (90) ELT A183 (SC)], wherein it has been held that there is no estoppel in taxation matters and that acceptance of enhanced value or compliance with departmental directions at the time of clearance does not preclude the importer from subsequently challenging the same. Therefore, the Department’s contention that the appellants are barred from disputing the enhancement is legally untenable and cannot be sustained.

8.4 The appellants placed reliance upon the decision of the Tribunal in Crystal Dot Scan Pvt. Ltd. v. Commissioner of Customs – 2011 (263) E.L.T. 401 (Tri.-Bang.), wherein the Tribunal reiterated that transaction value cannot be rejected merely because the declared price appears lower than prices of other imports. The Tribunal observed: –

Transaction value cannot be rejected merely because the declared price appears low in comparison with other imports. Unless reliable evidence is produced to establish that the declared price is not genuine, the transaction value must be accepted.

8.5 The nature of the goods involved in the present case has also been addressed in the decision of the Tribunal in Prayas Woollens Pvt. Ltd. v. Commissioner of Customs – 2016 (332) E.L.T. 376 (Tri.-Mumbai), which was also relied upon by the appellants. The Tribunal observed that where goods consist of mixed consignments of second-hand garments or rags, the valuation cannot be based on generalized assumptions. The Tribunal held in Para 5 & 6 of the Order that: –

“5. We have carefully considered the submission made by both the sides. We find that though in the adjudication order the authority has relied upon the price of contemporaneous goods, but no any evidence in support of contemporaneous import was adduced. The goods imported by the appellant is rags which admittedly a residual product. The residual product cannot be of standard quality. As regards its characteristics, quality, size, shape, colour etc. it various from consignment to consignment.

6. Since no evidence was produced by the Revenue, enhancement of the price of the impugned goods appears to be without any basis. It is a trite law that for applying the price of contemporaneous goods, it is necessary to ascertain that the goods is of same character, quality, quantity, country of origin etc. and without ascertaining the same, the adoption of price of contemporaneous goods cannot be treated as price of contemporaneous goods. Due to the said deficiency in the whole proceeding, we are of the considered view that there is no sufficient basis for revenue to enhance the value of imported goods. We, therefore, modify the impugned order and allow the appeal.”

8.6 The appellants further relied upon the decision in BIL Power Ltd. v. Commissioner of Customs – 2017 (357) E.L.T. 956 (Tri.-Kolkata), wherein the Tribunal in Para 4.2 of the order held:

“………………….  Other factors like nature of contract with the seller, quantum of goods imported etc. are also relevant while applying DOV data to establish contemporariness of imports. There is no iota of evidence that appellant has repatriated any excess money to the foreign supplier over and above the invoice value. Under the existing factual matrix it cannot be held that relied upon documents of imports were of contemporary nature. Accordingly, enhancement of assessable value ordered by the Adjudicating authority is not sustainable and needs to be set aside.”

8.7 Applying the principles laid down in the above decisions to the facts of the present case, we find that the adjudicating authority has rejected the declared value primarily on the ground that it appeared lower than certain other imports. However, we find that that the impugned orders do not contain any detailed comparison demonstrating that the goods relied upon for valuation were identical or similar in terms of quality, condition or commercial level. Nor has the department produced any evidence to show that additional consideration has flowed from the importers to the suppliers. No record exists as to whether any market survey god conducted to appraise the value of consignments when the same was suspected.

8.8 It is also relevant to note that the goods imported by the appellants consist of mixed consignments of used garments which inherently vary in quality, condition and composition. In such circumstances, the adoption of a uniform benchmark value without establishing comparability is contrary to the scheme of the valuation rules.

8.9 In the absence of reliable evidence demonstrating that the declared value is incorrect, the rejection of the transaction value cannot be sustained. Consequently, the enhancement of value carried out in the impugned orders is liable to be set aside, and we accordingly set aside the same.

ISSUE NO. (ii): Whether confiscation of the imported goods is justified

9.1 The next issue concerns the confiscation of the imported goods under Sections 111(d) and 111(m) of the Customs Act, 1962. The adjudicating authority has held that the goods imported are second-hand garments, the import of which is restricted under the Foreign Trade Policy unless supported by a valid licence issued by the Director General of Foreign Trade. The appellants have not disputed that the goods are second-hand garments; however, they have contended that the goods were correctly declared in the Bills of Entry and that there was no deliberate attempt to violate the import policy.

9.2 The appellants have also relied upon CBEC Circular No. 22/2010-Cus dated 26.07.2010, which prescribes procedural requirements such as fumigation and compliance with health and safety regulations for import of worn clothing. While the said circular governs procedural compliance, it does not override the substantive requirement under the Foreign Trade Policy that import of second-hand goods, other than capital goods, is restricted and requires a valid license. In the present case, it is an admitted position that no such license was produced by the appellants.

9.3 In these circumstances, the import of the goods without the requisite authorization or license constitutes a violation of the import policy and renders the goods liable to confiscation under Section 111(d) of the Customs Act. However, in the absence of any evidence of misdeclaration with respect to description, quantity or value, confiscation under Section 111(m) is not sustainable. Accordingly, while the enhancement of value is set aside, the confiscation is upheld only under Section 111(d) of the Act.

Issue No. (iii): Whether redemption fine and penalties are proportionate

10.1 The final issue concerns the redemption fine imposed under Section 125 and the penalties imposed under Section 112 of the Customs Act. In the present case the goods consist of used garments imported in mixed lots intended for resale in low-value markets. Further, the goods were declared as used garments and there is no evidence of deliberate misdeclaration, suppression of facts or fraudulent intent on the part of the appellants as seen from the Examination report recorded in the Para 4 of the relevant Orders in Original.

10.2 The appellants relied upon the decision of the Tribunal in Dharshan Singh & Company v. Commissioner of Customs – 2015 (316) E.L.T. 279 (Tri.-Del.), wherein it was held: –

Redemption fine should correspond broadly to the margin of profit available to the importer and should not be fixed arbitrarily without evidence.

10.3 Similarly, reliance was placed on Commissioner of Customs v. K. M. Cherian – 2014 (312) E.L.T. 663 (Tri.-Chennai) where the Tribunal observed that redemption fine must be reasonable and proportionate to the circumstances of the case.

10.4 We have carefully considered the submissions made by both sides and perused the records. While the import of second-hand garments without the requisite licence renders the goods liable for confiscation under Section 111(d) of the Customs Act, the absence of any deliberate misdeclaration or intent to evade duty is a significant mitigating factor. It is also noted from the Grounds of Appeal that the imported goods consist of low-value used clothing intended for resale in economically weaker segments, particularly in markets such as the North-Eastern region, where such goods cater to the needs of underprivileged sections of society. This aspect weighs with us while arriving at a just and equitable determination of the quantum of redemption fine. Further, we find that the appeal records do not indicate that any market survey or study was conducted in the presence of the importer to ascertain the prevailing market value of the goods or ascertain the margin of profit available in such trade.

10.5 We also find that the nature of the trade in used clothing, being highly heterogeneous and catering to price-sensitive segments, inherently involves limited and uncertain profit margins. The socially sensitive end-use of such goods, coupled with the absence of any reliable market study or evidence of higher realizable value, cannot be ignored while determining the quantum of fine. It is well settled that redemption fine should bear a reasonable nexus to the margin of profit and should not assume a punitive character. In the absence of any evidence indicating substantial profit or undervaluation, fixation of redemption fine at a higher percentage is not justified. Accordingly, we hold that redemption fine at 10% of the declared Invoice value would be fair, reasonable and proportionate to the facts and circumstances of the case.

10.6 As regards penalty under Section 112 of the Customs Act, though there is no evidence of mens rea or deliberate violation, the import of restricted goods without a valid license constitutes a contravention of statutory provisions under Foreign Trade Policy. Such non-compliance cannot be ignored and warrants imposition of penalty, albeit at a moderate level. Taking into account the overall facts and circumstances, including the nature of goods, the absence of any fraudulent intent, and the considerations discussed above, we are of the view that penalty at 5% of the declared value would be appropriate, as it would serve as a measured deterrent against improper import without authorization while avoiding imposition of excessive or harsh penalties. Ordered accordingly.

11. In view of the foregoing, we hold that the rejection of the declared transaction value and the consequent enhancement are unsustainable and are accordingly set aside, with the declared value ordered to be accepted. However, as the imported goods are admittedly second-hand garments falling under the restricted category and no DGFT licence has been produced, confiscation under Section 111(d) of the Customs Act, 1962 is upheld, while confiscation under Section 111(m) is set aside. Taking into account the nature of the goods, limited profit margins and absence of mens rea, the redemption fine is reduced to 10% of the declared value and the penalties imposed is upheld at 5% of the declared value. The impugned Orders-in-Appeal are modified accordingly, and the appeals are partly allowed with consequential relief, if any, in accordance with law.

(Order pronounced in open court on 02.06.2026)