Aadrikaa Legal Services (ALS) – IDT Tax I Arbitration I Litigation
Date: 20.05.2026
CESTAT Delhi Overturns Rs. 10 Lakh Customs Penalty Due to Lack of Evidence and Procedural Compliance
This Short Article has been prepared & written by Advocate Ravi Shekhar Jha-Delhi High Court, New Delhi. The views expressed are based on his interpretation of the law. He can be reached at his email id intelconsul@gmail.com .
The Customs, Excise & Service Tax Appellate Tribunal (CESTAT), New Delhi, recently delivered a significant order in favor of M/s. Rathi Iron & Steel Ind. Ltd., setting aside a penalty of Rs. 10 lakhs imposed under section 112(b) of the Customs Act, 1962. This article provides a comprehensive overview of the case, the legal arguments, and the Tribunal’s reasoning, offering valuable insights for businesses and legal professionals.
Background of the Case
Rathi Iron & Steel Ind. Ltd., a manufacturer of M.S. Bars and Rods, was registered with the Central Excise Department and later merged with M/s. Jaideep Ispat & Alloys Pvt. Ltd. The case originated from an investigation by the Directorate General of Central Excise Intelligence (DGCEI) against M/s. New Tech Abrasives Ltd. (NTAL), a Special Economic Zone (SEZ) unit, for alleged clandestine removal of M.S. Ingots without customs permission or duty payment.
During searches at NTAL and related premises, authorities recovered documents and computer data. Statements from transporters and buyers suggested that M.S. Ingots were removed at night and delivered to several entities, including Rathi Iron & Steel. Based on these findings, a show cause notice was issued to NTAL and others, including Rathi Iron & Steel, alleging clandestine purchase of ingots and proposing penalties.
Key Allegations and Proceedings
- Allegations: The show cause notice accused Rathi Iron & Steel of purchasing M.S. Ingots illicitly removed from the SEZ by NTAL, making them liable for penalty under section 112(b) of the Customs Act.
- Evidence: The case against Rathi Iron & Steel relied solely on statements from three transporters, which were general, uncorroborated, and did not specify quantity, value, or dates of alleged purchases. No incriminating documents or records were found at the appellant’s premises, nor were statements from its directors or employees recorded.
- Appellant’s Defense: Rathi Iron & Steel categorically denied the allegations, highlighting the lack of direct evidence and the reliance on third-party statements. They argued that the legal requirements for imposing a penalty under section 112(b) were not met.
Legal Arguments
For the Appellant
- Reliability of Evidence: The transporter statements were vague, identical, and appeared dictated. The procedure under section 138B of the Customs Act, which governs the admissibility of such statements, was not followed.
- Lack of Direct Evidence: No documents, ledgers, invoices, or transport records linked the appellant to the alleged clandestine goods.
- Legal Requirements Not Met: Section 112(b) requires proof that the accused acquired or dealt with goods liable for confiscation and had knowledge or reason to believe so. Neither condition was satisfied.
- No Confiscation Proposed: The show cause notice did not propose confiscation of goods under section 111, a prerequisite for penalty under section 112.
For the Department
The department maintained that the penalty was justified based on the investigation and statements, supporting the Commissioner’s order.
Tribunal’s Findings and Decision
The Tribunal thoroughly examined the evidence and legal provisions:
- Admissibility of Statements: The Tribunal noted that statements under section 108 are relevant only if the procedure under section 138B is followed, which was not done in this case.
- Conditions for Penalty: Both possession/dealing with confiscable goods and knowledge thereof are mandatory for penalty under section 112(b). The Tribunal found no evidence that Rathi Iron & Steel dealt with the goods or had knowledge of their illicit nature.
- Absence of Evidence: No direct or documentary evidence linked the appellant to the alleged offense. The show cause notice lacked specifics regarding the appellant’s involvement.
Final Order: The Tribunal set aside the penalty, holding that the conditions for imposing penalty under section 112(b) were not met. The appeal was allowed in favor of Rathi Iron & Steel Ind. Ltd.
Key Takeaways for Businesses
- Importance of Direct Evidence: Penalties under customs law require clear, direct evidence of involvement and knowledge.
- Procedural Safeguards: Authorities must follow proper procedures, especially regarding the admissibility of statements.
- Legal Recourse: Entities facing penalties should scrutinize the evidence and procedural compliance, as appellate remedies can yield relief if due process is not followed.
Conclusion
The CESTAT’s decision in the Rathi Iron & Steel case underscores the necessity of robust evidence and adherence to legal procedures in customs enforcement. It serves as a reminder that penalties cannot be imposed on mere suspicion or uncorroborated statements, safeguarding the rights of businesses against arbitrary action.
Source: CESTAT Delhi
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