The Customs, Excise & Service Tax Appellate Tribunal has clarified that penalties under Section 112(b) of the Customs Act cannot be imposed without establishing the appellant’s actual knowledge or belief that the goods in question were liable for confiscation. This ruling reinforces the necessity of direct evidentiary linkage between the accused and illicit imports, rejecting reliance on third-party records and uncorroborated statements.
Background & Facts
The Dispute
The appellants, Metal Forger and Fabricators and Metal Kraft Engineers, are manufacturers of automobile components and agricultural equipment parts. Between 2008 and 2009, they supplied fabricated items - including columns, pre-engineered shed trusses, gentry, foundation plates, scaffolding, and MS scrap - to M/s New Tech Abrasive Ltd (NTAL), located within the Indore Special Economic Zone (SEZ). These supplies were made under ARE-1 certificates, duly acknowledged by Customs Officers at SEZ Pithampur.
Key Facts
- The appellants’ business involved fabrication and manufacturing, not trading in MS ingots or raw metal.
- NTAL was found to have clandestinely removed MS ingots from its SEZ premises without payment of customs duty.
- The Directorate General of Central Excise Intelligence (DGCEI) seized documents from NTAL’s premises, including ledger entries allegedly showing purchases by the appellants.
- On 19.07.2011, Nitin Bhide, Manager of Metal Forger and Fabricators, was questioned under Section 108 of the Customs Act.
- A show cause notice dated 24.08.2012 was issued to both appellants proposing penalty of Rs. 10 lakhs each under Section 112(b) for purchasing clandestinely removed goods.
- The appellants repeatedly requested copies of documents relied upon by the department, but only the statement of Nitin Bhide was provided; key ledger entries and supporting records were withheld.
- On 20.09.2013, Nitin Bhide filed an affidavit clarifying that:
- He never submitted NTAL’s ledger to the department.
- He never admitted to purchasing MS ingots from NTAL.
- His statement was recorded under duress and was distorted to falsely imply admission.
- He only confirmed seeing NTAL’s ledger after it was shown to him by DGCEI officials.
- The appellants submitted their purchase ledgers for 2008-09 and bank statements showing no transactions with NTAL for MS ingots.
- The appellants also submitted copies of ARE-1 certificates for their legitimate sales to NTAL.
Procedural History
- 2008-09: Appellants supplied fabricated goods to NTAL under ARE-1 certificates.
- 19.07.2011: Statement of Nitin Bhide recorded under Section 108 of the Customs Act.
- 24.08.2012: Show cause notice issued proposing penalty under Section 112(b).
- 25.09.2012 and 20.09.2012: Appellants requested documents accompanying the notice; none were provided.
- 19.09.2013: Appellants reiterated request for relied-upon documents.
- 20.09.2013: Affidavit filed by Nitin Bhide denying any admission of purchase.
- 31.07.2019: Commissioner of Customs, Indore, passed Order-in-Original imposing penalty of Rs. 10,00,000 on each appellant under Section 112(b).
- 2019: Customs Appeal Nos. 52747 and 52748 filed before CESTAT.
- 28.01.2026: Hearing held before CESTAT.
- 19.05.2026: Final Order passed.
The Parties' Positions
For the Appellants
- Denied any purchase of MS ingots from NTAL.
- Provided purchase ledgers and bank statements showing no such transactions.
- Argued that MS ingots were not used as inputs in their manufacturing process.
- Contended that the statement of Nitin Bhide was obtained under duress and was unreliable.
- Highlighted that the ledger relied upon by the department was seized from NTAL’s premises, not theirs, and was not corroborated by independent evidence.
- Asserted violation of natural justice due to non-supply of documents.
For the Respondent
- Relied on the seized ledger entries from NTAL and the statement of Nitin Bhide to allege purchase of illicit goods.
- Argued that the appellants’ involvement in the transaction rendered them liable under Section 112(b).
- Maintained that the penalty was justified and procedural requirements were met.
Relief Sought
The appellants sought quashing of the penalty order dated 31.07.2019, setting aside the penalty of Rs. 10,00,000 each, and a declaration that they were not liable under Section 112(b) of the Customs Act.
The Legal Issue
Can a penalty be imposed under Section 112(b) of the Customs Act against a party based solely on third-party records and an uncorroborated statement, where there is no evidence of actual knowledge or involvement in the clandestine importation of goods?
Arguments Presented
For the Appellant
The appellants relied on the requirement under Section 112(b) that two conditions must be satisfied: (i) acquiring possession or being concerned with goods liable for confiscation, and (ii) having knowledge or reason to believe such goods were liable for confiscation. They cited M/s Surya Wires Pvt. Ltd. v. Principal Commissioner, CGST, Raipur to argue that reliance on unverified third-party records without corroboration violates the principles of natural justice. They emphasized that their business records, bank statements, and manufacturing profile conclusively negated any purchase of MS ingots. The statement of Nitin Bhide was rendered inadmissible due to non-compliance with Section 138B, which mandates recording statements in the presence of a legal representative and with safeguards against coercion.
For the Respondent
The department contended that the seized ledger entries from NTAL, coupled with the statement of Nitin Bhide, formed sufficient basis to infer the appellants’ involvement. It argued that the appellants’ failure to explain the presence of their names in NTAL’s records justified the penalty. The department did not produce any independent evidence linking the appellants to the illicit movement of MS ingots, nor did it establish how the appellants could have known the goods were smuggled.
The Court's Analysis
The Tribunal examined the statutory framework of Section 112(b), which requires both conduct and knowledge. The Court held that mere association with a third party involved in smuggling does not attract liability unless the accused had actual knowledge or reason to believe the goods were illicit.
"The impugned order does not provide any basis to assume that the appellants had any knowledge that the goods were liable to confiscation under Section 111(m) of the Customs Act."
The Court noted that the ledger entries relied upon were seized from NTAL’s premises and were not maintained by the appellants. No independent evidence - such as invoices, payment records, or delivery receipts - linked the appellants to the purchase of MS ingots. The statement of Nitin Bhide, which was the sole basis for the department’s case, was obtained without following the mandatory procedure under Section 138B, rendering it legally inadmissible.
The Tribunal further observed that the appellants’ business model, production records, and financial transactions were entirely inconsistent with the allegation of trading in MS ingots. The department failed to establish any nexus between the appellants and the clandestine removal of goods. The imposition of penalty without satisfying the dual requirements of conduct and knowledge was held to be legally unsustainable.
The Verdict
The appellants succeeded. The CESTAT set aside the penalty order dated 31.07.2019 in its entirety. The penalty of Rs. 10,00,000 imposed on each appellant under Section 112(b) of the Customs Act was quashed. No further penalty, interest, or costs were directed. The appeals were allowed with no order as to costs.
What This Means For Similar Cases
Knowledge Must Be Proven, Not Presumed
- Practitioners must challenge penalty orders under Section 112(b) where the department relies on third-party records without independent corroboration.
- The burden of proving knowledge lies squarely on the department; it cannot be inferred from mere association or presence in a third party’s ledger.
- Absence of purchase records, bank transactions, or input usage in manufacturing must be highlighted as conclusive evidence of non-involvement.
Non-Compliance with Section 138B Renders Statements Inadmissible
- Statements recorded under Section 108 without compliance with Section 138B (e.g., absence of legal representative, coercion, lack of recording safeguards) are legally invalid.
- Any penalty based on such statements is liable to be set aside.
- Advocates should routinely file objections to reliance on Section 108 statements unless the procedural safeguards under Section 138B are demonstrated.
Natural Justice Requires Disclosure of Relied-Upon Documents
- Failure to provide documents accompanying a show cause notice violates the right to fair hearing.
- Appellants must be given full opportunity to rebut evidence; withholding key documents invalidates the entire proceeding.
- This principle applies equally to customs, GST, and excise proceedings.
