Pranav B Prem

The New Delhi Bench of the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) has held that no drawback shall be allowed where the amount of drawback exceeds the market value of the exported goods, as per Section 76(1)(b) of the Customs Act, 1962. The Tribunal clarified that while export benefits are calculated as a percentage of the FOB (Free on Board) or transaction value, they are not admissible if the resultant benefit exceeds the actual market price of the goods.

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The Bench comprising Dr. Rachna Gupta (Judicial Member) and P.V. Subba Rao (Technical Member) made this observation while allowing the appeal filed by M/s Modak Dyeing and Printing Co. Pvt. Ltd., challenging the orders passed by the Joint Commissioner and Commissioner (Appeals), which had rejected the declared export value, ordered revaluation of goods, and imposed penalties and redemption fine.

Background

The dispute arose from two shipping bills dated 31.08.2018 filed by the appellant for export of Girls Frocks Woven Made of Manmade Fibre. The declared total FOB value in the shipping bills was ₹4,10,52,321, working out to about ₹274.13 per piece. Upon receiving intelligence that the goods had been overvalued to claim inflated benefits under the Drawback, MEIS, ROSL, and IGST refund schemes, the Special Intelligence and Investigation Branch (SIIB) conducted an investigation.

Though the goods were allowed to be exported after the execution of a bond and furnishing of a bank guarantee, a market inquiry was conducted, which indicated that the market value of the goods ranged only between ₹45 to ₹65 per piece. A show cause notice was issued proposing rejection of the declared value under Rule 8 of the Customs Valuation (Determination of Value of Export Goods) Rules, 2007 and re-determination under Rule 6.

Orders of Lower Authorities

The Joint Commissioner, by order dated 08.10.2021, rejected the declared value under Rule 8 and re-determined the FOB value at ₹74,88,000. A redemption fine of ₹2 lakhs was imposed in lieu of confiscation under Section 125, along with penalties under Sections 114(iii) and 114AA. The Commissioner (Appeals) upheld this order.

Aggrieved, the assessee challenged these findings before CESTAT, arguing that the valuation process was flawed, that there was no basis to reject the transaction value, and that penalties were wrongly imposed. The appellant also highlighted the absence of any finding that the value declared in the shipping bills was not the actual transaction value.

CESTAT’s Findings

The Tribunal delved into the scheme of valuation under Section 14 of the Customs Act and clarified that while Customs officers may reject a declared transaction value and determine an alternative assessable value under the Valuation Rules, such re-determination does not alter the underlying transaction between the buyer and seller. The FOB value, being the transaction value, remains constant irrespective of any re-assessment for customs purposes. CESTAT noted that export benefits such as MEIS and Drawback are calculated as a percentage of the FOB value. It added that under Section 76(1)(b), where the amount of drawback exceeds the market price of the goods, such drawback cannot be allowed. However, if the drawback amount is less than the market price, it remains admissible.

The Tribunal observed that, in this case, there was no finding that the value declared in the shipping bills was not the transaction value. Consequently, invoking Section 113(i) to justify confiscation could not be sustained. CESTAT also noted that the redemption fine and penalties imposed could not be upheld in the absence of any valid ground for confiscation or evidence of deliberate overvaluation beyond the declared transaction value.

Clarification on Drawback vs Market Value

Importantly, the Tribunal emphasized that the market value of exported goods is not necessarily the same as their transaction (FOB) value. While benefits like drawback are granted on the FOB value, Section 76(1)(b) provides a statutory safeguard—ensuring that the drawback amount does not exceed the actual market price of the goods. This mechanism prevents exporters from obtaining disproportionate refunds by inflating transaction values.

The Bench clarified through examples that when the FOB value is so high that the benefit (say 15% of FOB) exceeds the goods' market value, drawback must be denied. For instance, if the market price is ₹100 and the FOB is ₹700, the drawback @15% would be ₹105, which exceeds the market price—hence, not allowable.

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Verdict

Setting aside the orders of the lower authorities, the Tribunal held that the redetermination of the FOB value, confiscation under Section 113(i), imposition of redemption fine under Section 125, and penalties under Sections 114 and 114AA were unsustainable. The appeal was accordingly allowed.

Appearance

Counsel for Appellant/Assessee: R.K. Hasija

Counsel for Respondent/Department: Rajesh Singh

Cause Title: M/s Modak Dyeing & Printing Co. Pvt. Ltd. V. Commissioner of Customs

Case No: Customs Appeal No. 53962 OF 2023

Coram: Dr. Rachna Gupta [Judicial Member], P.V. Subba Rao [Technical Member]