Demand Cannot Rest on Valuation Rules Not Invoked in Show Cause Notice: CESTAT Mumbai

The Customs, Excise and Service Tax Appellate Tribunal, Mumbai set aside excise demands on a hookah tobacco unit because the adjudicator went beyond the show cause notice and relied on unverified shortages.

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Mumbai has held that an excise demand cannot be confirmed by applying valuation rules that the show cause notice (SCN) never invoked, since the SCN is the foundation of the proceedings [Soex India Private Limited v. Commissioner of CGST Pune‑I Commissionerate, 2026-juristway.com-3389-CESTAT(Mumbai)-CE].

M.M. Parthiban, Member (Technical), wrote the order for a Bench with Ajay Sharma, Member (Judicial), in appeals by Soex India Private Limited, a 100% export‑oriented unit (EOU) making flavoured and herbal hookah tobacco, and its three directors. Duty on an EOU’s clearances into the domestic tariff area (DTA) equals the customs duties leviable on like imported goods.

An SCN dated 28 Jun 2016 alleged undervaluation of DTA sales made through a related company, Arabian Nights Private Limited, and proposed about ₹5.49 crore of duty under the Central Excise valuation rules of 2000. It also demanded duty on stock shortages. The Commissioner instead applied Rule 7 of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007, and confirmed ₹8,40,044 on valuation and ₹5,00,965 on shortages, with penalties.

The Tribunal held that the Commissioner had adopted revised values under the 2007 Rules, which were not the basis of the SCN, and that this did not stand legal scrutiny. It relied on Commissioner of Central Excise, Nagpur v. Ballarpur Industries Limited (2007), where the Supreme Court held that a rule not mentioned in the SCN cannot be invoked. It also noted that the Commissioner had himself found that the relationship did not influence the price for most of the period.

On shortages, the Tribunal noted a Bureau of Indian Standards specification for flake‑type hookah tobacco permitting a heating loss of 17%. The Department had relied only on shortages reported in Form 3CD, filed for income tax audit, without independently verifying them.

Holding the confirmed demands and the penalties on the company and its directors unsustainable, the Tribunal set aside the order and allowed all four appeals.

2026-juristway.com-3389-CESTAT(Mumbai)-CE