CESTAT set aside ₹1.44 crore customs duty demand and penalties against Bharti Gems in a major SEZ customs ruling.

June 3, 2026 : The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), New Delhi, has delivered a major relief to Jaipur-based SEZ unit Bharti Gems and associated entities by quashing a customs duty demand of ₹1.44 crore along with penalties and confiscation proceedings arising out of allegations of diversion of duty-free imported gold and silver.

The dispute originated from an order passed by the Commissioner of Customs (Preventive), Jodhpur, who had concluded that Bharti Gems, operating from Jaipur Special Economic Zone (SEZ), imported gold and silver without payment of customs duty but failed to use the precious metals for authorized manufacturing activities. According to the department, the imported bullion was diverted into the Domestic Tariff Area (DTA), while other goods were allegedly exported in the guise of gold and silver jewellery. On this basis, customs duty of ₹1.44 crore was demanded under Section 28(4) of the Customs Act, 1962, and penalties were imposed under Sections 112(b)(ii), 114A and 114AA of the Act.

The case also involved P P Jewellers & Diamonds Pvt. Ltd., Its My Name Pvt. Ltd., and several employees who were accused of facilitating the alleged evasion. Customs authorities had additionally confiscated seized silver jewellery under Section 111(o) of the Customs Act while providing an option for redemption on payment of fine.

Bharti Gems challenged the findings before CESTAT, arguing that it was a duly approved SEZ unit engaged in manufacturing gold and silver jewellery and that it had imported raw materials under valid approvals and Bond-cum-Legal Undertakings accepted by SEZ authorities. The company maintained that manufacturing was largely carried out through traditional hand-made methods and that the absence of specialized machinery could not be treated as proof that manufacturing activity never occurred.

A key issue before the Tribunal was whether Bharti Gems had exceeded its approved import limits. The Commissioner had relied only on an earlier Bond-cum-Legal Undertaking while ignoring a subsequent undertaking worth ₹224.73 crore that had been accepted by SEZ authorities in January 2016. CESTAT found that once the competent authority had approved the undertaking, the SEZ unit was entitled to act on that approval. The Tribunal observed that activities undertaken pursuant to such approval could not later be declared unauthorized merely because an objection was subsequently raised regarding the signatory who executed the document.

The Tribunal also rejected the Commissioner’s conclusion that Bharti Gems lacked manufacturing capability. CESTAT noted that the department relied heavily on statements recorded under Section 108 of the Customs Act from employees and workers. However, the Tribunal emphasized that such statements cannot be treated as substantive evidence unless the mandatory procedure prescribed under Section 138B of the Customs Act is followed.

In an important observation on evidentiary standards, the Tribunal stated, “The provisions of Section 138B(1)(b) of the Customs Act have been held to be mandatory and failure to comply with the procedure would mean that no reliance can be placed on the statements recorded under Section 108 of the Customs Act.”

The Bench further noted that several statements relied upon by the department had subsequently been retracted. It also found fault with the Commissioner’s assumption that jewellery chains could only be manufactured using specialized machines. Referring to evidence on record, the Tribunal accepted the contention that handmade jewellery manufacturing remains a traditional and recognized practice in the industry.

Another significant aspect of the ruling concerns the reliance placed by customs authorities on NSDL system records to argue that Bharti Gems had procured insufficient alloy material to manufacture the quantity of jewellery exported. The Tribunal held that NSDL data could not be treated as exhaustive or conclusive evidence, particularly when the company had produced stock registers, purchase ledgers, invoices, shipping bills and packing lists maintained in the ordinary course of business. According to the Tribunal, these records could not be disregarded without adequate reasons.

CESTAT also rejected the department’s allegation that duty-free imported gold and silver had been diverted into the domestic market. The Bench observed that the customs authorities themselves had not examined the export consignments and could not later shift the burden onto the exporter to prove that such examination had taken place. It held that the conclusion that non-jewellery goods were exported in the guise of jewellery was unsupported by evidence.

Addressing another important legal issue, the Tribunal disagreed with the Commissioner’s distinction between “manufacture” and “manufacturing services.” It held that neither the Special Economic Zones Act, 2005 nor the SEZ Rules, 2006 prohibit an SEZ unit from procuring raw materials free of cost from overseas entities. The Tribunal observed that manufacturing activity does not become unauthorized merely because it is carried out under contractual arrangements with foreign entities.

The Tribunal further found no evidence to justify treating Bharti Gems, P P Jewellers and Its My Name as a single economic entity for recovery purposes. It held that common employees or business associations alone were insufficient to establish intermingling of finances or misuse of statutory benefits.

Since the foundation of the department’s case regarding diversion of imported goods and evasion of customs duty failed, the Tribunal concluded that the demand of ₹1.44 crore, confiscation of jewellery, and all penalties imposed on the companies and individuals were unsustainable. Consequently, CESTAT allowed all seven appeals and completely set aside the impugned order.

The ruling is likely to have broader significance for SEZ units across India. It reinforces that customs authorities must establish allegations of diversion and misuse through credible evidence rather than assumptions regarding manufacturing infrastructure. The judgment also reiterates that statements recorded during investigations cannot be relied upon unless statutory safeguards under Section 138B are strictly followed. For exporters operating within SEZs, the decision provides important clarity on the treatment of approved undertakings, handmade manufacturing processes, and evidentiary standards in customs enforcement proceedings.

Case Reference: M/s P P Jewellers & Diamonds Pvt. Ltd. v. Commissioner of Customs (Preventive), Jodhpur & Connected Appeals (C/51904/2024, C/51905/2024, C/51900/2024, C/51901/2024, C/51902/2024, C/51903/2024 & C/51906/2024).