Diversion of Export Goods to Domestic Market Not Proven: CESTAT sets aside Excise & Customs Demands against SEZ Manufacturer [Read Order]

The Ahmedabad Bench of Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has held that the department failed to prove any diversion of export goods into the domestic market, leading to the setting aside of excise duty, customs duty, interest, and penalties earlier imposed on a Special Economic Zone (SEZ) manufacturer.

The appeals were filed by Western Impex and its partner, Bhavin R. Shah, which operates as a 100% Export Oriented Unit under permission granted by the Development Commissioner of the Kandla SEZ. The dispute arose from an export consignment covered under ARE-1, which was transported to JNPT for export but later returned to the factory.

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The department alleged that these goods had not been exported and were instead diverted into the domestic market, leading to confirmation of Central Excise duty of ₹6,12,156 under Section 11A(4) read with Section 3 of the Central Excise Act, 1944, an equivalent penalty under Section 11AC of the same Act, as well as Customs duty of ₹3,02,302 under Section 28(4) read with Section 72 of the Customs Act, 1962, and a penalty under Section 114A of the Customs Act, 1962.

Appearing through Advocate Manish Jain, the appellant contended that the goods had indeed been returned to the factory. The appellant submitted the lorry receipt for transportation of the goods, and a letter acknowledging cancellation of the ARE-1, which was recorded and signed by the jurisdictional Superintendent. It was argued that the department ignored these documents and based its case solely on an isolated statement recorded.

On behalf of the department, Himanshu Nachane argued that statements recorded under Section 108 of the Customs Act, 1962, indicated non-export of the goods and possible diversion. The department maintained that the intimation for cancellation of the ARE-1 was an afterthought, that the appellant failed to conclusively prove receipt of the goods back in the factory, and that misuse of the Export Oriented Unit scheme justified the duty and penalties confirmed by the adjudicating authority.

The Bench of Judicial Member Somesh Arora held that the department failed to establish diversion of the goods. The Tribunal observed that the cancellation letter, bearing acknowledgement by the jurisdictional Superintendent, was an official document, and if the department doubted its authenticity, it was duty-bound to verify it by recording the officer’s statement or producing evidence of forgery or manipulation.

The Tribunal noted that no such steps were taken. The absence of any stock discrepancy, the absence of any identified buyer of the alleged diverted goods, and the lack of any independent corroboration of clandestine removal further weakened the department’s case.

The Tribunal described the investigation as “half-hearted and haphazard” and held that documentary evidence involving departmental officers cannot be brushed aside merely on assumptions or later-recorded statements.

The bench, noting the decision in Abubakar Ismail Kapadia v. Commissioner of Central Excise & Service Tax (2019), said that once the assessee produces credible documentary evidence of return of the goods, the burden shifts to the department to establish diversion with concrete proof. In the absence of such proof, duty demands and penalties cannot survive.

Accordingly, CESTAT set aside the excise and customs duty demands, interest, and penalties in full and allowed all appeals with consequential relief.

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