Bombay High Court Quashes DGFT’s Show Cause Notice Against Essar Shipping: “Reopening Settled Claims Violates Res Judicata and Upholds Finality of Division Bench Judgment”

Court’s Decision:

The Bombay High Court quashed the show cause notice (SCN) issued to Essar Shipping Limited by the Director General of Foreign Trade (DGFT). The Court held that the SCN was impermissible and violated the principle of res judicata as it sought to reopen issues already decided by a Division Bench of the same Court in an earlier judgment. The Court deemed the notice arbitrary and a circumvention of the Division Bench’s ruling, which had conclusively settled the matter.

Facts:

1. Background of the Case:
   • Essar Shipping Limited provided shipping services, earning foreign exchange for services between international locations.
   • Under the “Served from India Scheme” (SFIS) of the Foreign Trade Policy (FTP) 2004-2009, Essar earned duty credit scrips amounting to 10% of their foreign exchange earnings.
   • These scrips could be used to offset customs duties on imports of capital goods, spares, and equipment.
2. DGFT’s Policy Circular:
   • In 2008, the DGFT issued a policy circular clarifying that only services physically connected to India (i.e., originating from or touching Indian territory) would qualify for SFIS benefits.
   • Earnings from services between two foreign locations (e.g., Singapore to Colombo) were excluded.
3. Earlier Division Bench Judgment (2022):
   • Essar had challenged the retrospective application of the 2008 circular, arguing that the benefits granted before the circular’s issuance could not be clawed back.
   • The Division Bench upheld the constitutional validity of the circular but ruled that it was prospective in effect. It quashed recovery notices issued by the DGFT, confirming that closed and settled claims could not be reopened.
4. New Show Cause Notice (2023):
   • Despite the earlier judgment, the DGFT issued a fresh SCN in January 2023, alleging that Essar’s original declarations for SFIS benefits contained material misstatements.

Issues:

1. Res Judicata:
   • Did the DGFT’s issuance of the SCN violate the principle of res judicata, which bars reopening issues that have already been decided by a competent court?
2. Material Misstatements:
   • Were Essar’s declarations in its SFIS application false or misleading, thereby justifying the issuance of the SCN?

Petitioner’s Arguments:

1. The petitioner argued that:
   • The Division Bench judgment conclusively settled the issue, and the SCN was an unlawful attempt to circumvent the earlier ruling.
   • No material misstatements existed in their application, as they had complied with the SFIS requirements prevailing at the time of their claims.
   • The DGFT’s attempt to rely on Paragraph 56 of the earlier judgment was baseless, as no new grounds outside the policy circular were presented.

Respondent’s Arguments:

1. The DGFT contended that:
   • Paragraph 56 of the earlier judgment left the door open for remedial action if the petitioner was disqualified based on other grounds (e.g., misstatements in their application).
   • Essar’s declarations in its SFIS file, asserting conformity with the scheme, were false and constituted a material misstatement.
   • The SCN was therefore valid and permissible under law.

Analysis of the Law:

1. Principle of Res Judicata:
   • The Court observed that the Division Bench judgment in 2022 had conclusively ruled on the prospective applicability of the 2008 circular.
   • It had also clarified that closed and settled claims, like Essar’s, could not be reopened.
2. Paragraph 56 of the Division Bench Judgment:
   • The Court scrutinized Paragraph 56, which stated that remedial action could be taken if the petitioner was disqualified for reasons other than the circular.
   • The Court noted that the paragraph provided a limited scope for fresh action, contingent on new material grounds (e.g., fraud or suppression of facts).
   • However, the SCN presented no such new grounds, relying solely on issues already decided in the earlier judgment.
3. Material Misstatements:
   • The Court found that the SCN merely alleged a misstatement in Essar’s SFIS file without presenting evidence of any new or substantial suppression of information.
   • The SCN relied on the same facts and grounds that were dealt with and settled in the Division Bench judgment.
4. Validity of the Policy Circular:
   • The Division Bench had already upheld the policy circular as constitutional but explicitly limited its application to pending claims.
   • The Court emphasized that settled claims could not be revisited, as the circular was not retrospective.

Precedent Analysis:

• The Division Bench judgment in Essar’s earlier writ petition established binding precedent on the issue of retrospective application of policy circulars and the finality of settled claims.
• The judgment also underscored that remedial action under Paragraph 56 required evidence of fraud or misstatements beyond the scope of what was addressed in the earlier proceedings.

Court’s Reasoning:

1. The Court reasoned that:
   • The SCN violated the principle of res judicata as it sought to reopen an issue conclusively settled by the earlier judgment.
   • The DGFT’s reliance on Paragraph 56 was misplaced, as the SCN presented no new grounds outside the scope of the earlier judgment.
   • Essar’s original claims were consistent with the pre-2008 policy, and the benefits were granted after due scrutiny by the DGFT.
   • The Division Bench judgment had already ruled that the DGFT’s approval of Essar’s claims carried a presumption of legality, and the benefits could not be clawed back retrospectively.

Conclusion:

• The Court held that the SCN was arbitrary, untenable, and a circumvention of the Division Bench judgment.
• It quashed the SCN, ruling that the DGFT’s actions were unreasonable and violated established principles of law.
• The rule was made absolute, and the writ petition was disposed of with no order as to costs.

Implications:

1. Judicial Finality:
   • The judgment reinforces the principle of res judicata, ensuring that administrative authorities cannot arbitrarily reopen settled claims.
2. Protection of Legitimate Expectations:
   • Businesses can rely on the finality of judicial decisions and the consistency of policy interpretation when making claims under government schemes.
3. Limitation on Retrospective Action:
   • The case underscores the limits of administrative powers to apply policy changes retrospectively, protecting entities from arbitrary reversals of benefits.

Also Read – Supreme Court Upholds Arbitral Award Rejecting Contractor’s Claims: Holds Clause 49.5 of GCC Validly Bars Damages for Employer-Caused Delays, Estoppel Prevents Appellant From Reneging on Written Undertakings, and Judicial Intervention Under Section 37 Arbitration Act is Limited