Court’s decision
The Customs Excise and Service Tax Appellate Tribunal, New Delhi, allowed the appeal filed by an exporter challenging the confiscation of nine consignments of ladies’ garments and the disallowance and appropriation of ₹31,66,822 in drawback. The Tribunal held that the exports were completed once the goods left India, that drawback could not be denied based on an RBI circular relating to State Credit arrangements with Russia, and that Rule 16A of the 1995 Drawback Rules could not be applied retrospectively to shipments made in 1993–1994. The Tribunal also held that the drawback had already been sanctioned earlier in the litigation and could not be reopened. The impugned order was set aside in full.
Facts
The appellant had exported 29 consignments of children’s garments and nine consignments of ladies’ garments between 1993 and 1994 through the ICD at Tughlakabad and the Mumbai Customs House. The Customs Department suspected overvaluation for inflated drawback claims, initiated market inquiries, and reduced the drawback value to ₹210 per set. Despite appeals, the Government of India subsequently enhanced the FOB value to ₹242 per set, affirming the exporter’s entitlement to drawback.
Although drawback of over ₹88 lakh was sanctioned, the appellant voluntarily refunded the amount during investigation to demonstrate bonafides. Later, the department issued a show cause notice in January 2000 proposing confiscation of the nine ladies’ garments consignments, disallowance of drawback, and appropriation of the amounts already refunded. The allegation was that the goods never reached Russia but were diverted to Dubai, violating RBI’s 1993 circular on exports under the Indo-Russian State Credit Protocol. The adjudicating authority confirmed the SCN. Hence the appeal.
Issues
Understanding the Role of the Customs Excise and Service Tax Appellate Tribunal
- Whether shipments of ladies’ garments exported in 1993–1994, but delivered in Dubai instead of Russia, qualify as exports under the Customs Act and Drawback Rules.
- Whether Rule 16A of the 1995 Drawback Rules could be applied retrospectively to deny drawback for shipments preceding the rule’s promulgation.
- Whether violation of an RBI circular issued under the Foreign Exchange Regulation Act can form the basis for denying customs drawback.
- Whether drawback already sanctioned by the Government of India could be reopened and appropriated based on subsequent investigations.
Petitioner’s arguments
The appellant argued that the impugned order lacked jurisdiction because the show cause notice was issued by officers of the Directorate of Revenue Intelligence, who were not the “proper officers” for issuing notices under the Drawback Rules. They asserted that Rule 16A, introduced in December 1995, had no retrospective operation and could not be applied to exports made in 1993–1994. The appellant relied on Supreme Court precedent to argue that when a rule is superseded without a saving clause, proceedings under the old rule cannot continue.
They further submitted that export proceeds were duly received in India through authorised banking channels in 1994, and therefore drawback was fully earned. The route taken by the consignments after leaving India had no bearing on entitlement to drawback, because export is completed once goods are taken out of India to any place outside India. They also argued that earlier orders of the Government of India and appellate authority had already sanctioned drawback, making reopening impermissible.
Respondent’s arguments
The Revenue contended that the goods never reached Russia, the designated destination under the Indo-Russian State Credit Protocol. They pointed to a report from Russian Customs and delivery confirmations from Dubai, arguing that this constituted a violation of RBI Circular No. 30/1993 issued under the Foreign Exchange Regulation Act. According to the department, State Credit funds could not finance third-country exports. Since the shipments were allegedly redirected to Dubai, the export proceeds received could not be treated as legitimate export realisations for drawback purposes.
The department also argued that drawback was deemed never to have been allowed under Section 75 of the Customs Act when export proceeds are not received within the prescribed period, and that recovery under Rule 16 and 16A was justified. They maintained that the appellant’s entitlement was vitiated by misdeclaration and violation of foreign exchange regulations.
Analysis of the law
The Tribunal analysed Rule 2 of the Drawback Rules, holding that “export” means taking goods out of India to any place outside India—with no destination-specific restriction. Thus, the statutory scheme places the emphasis on crossing India’s borders, not on the final foreign delivery point.
The Tribunal held that RBI Circular No. 30/1993, though binding under FERA for banking purposes, cannot override the Customs Act or Drawback Rules. Customs legislation does not condition drawback on compliance with exchange control circulars. Further, the circular itself did not prevent the RBI from releasing remittances; since the export proceeds had been received in India, the statutory requirement was fulfilled.
Most importantly, Rule 16A, introduced in 1995, could not be applied to 1993–1994 shipments. Drawback is a statutory right, and any recovery mechanism must operate prospectively unless expressly stated otherwise.
Precedent analysis
1. Cannon India (Supreme Court)
Relied upon by the appellant to challenge jurisdiction of officers issuing the SCN. The Tribunal noted that the case was distinguishable because the SCN pre-dated the notification considered in Cannon India, but the jurisdictional argument highlighted the need for proper officer compliance.
2. Kolhapur Canesugar Works Ltd. v. Union of India
The Supreme Court held that when rules are repealed without a saving clause, pending actions cannot continue. This supported the appellant’s argument that the 1995 Rules could not be retrospectively applied.
3. Padmini Exports v. Union of India and Famina Knit Fabs v. Union of India
Both High Court decisions held that recovery of drawback must occur within the limitation period and that retrospective application of later rules is impermissible.
These cases reinforced that the department’s invocation of Rule 16A and reopening of settled drawback entitlement was unlawful.
Court’s reasoning
The Tribunal observed that the nine consignments had unquestionably left India and reached a foreign territory. This satisfied the statutory definition of export. Whether the goods ultimately reached Russia was irrelevant for drawback entitlement under the Customs Act. The Tribunal emphasised that if the RBI had considered the routing to Dubai impermissible, it would not have released export proceeds under the State Credit account.
The Tribunal further held that the department failed to cite any statutory provision conditioning drawback on compliance with RBI circulars. The reliance on Rule 16A was rejected on the ground of non-retrospectivity, and the appropriation of ₹31,66,822 was held illegal. The confiscation order was invalid because the goods had long been released and were not available.
Conclusion
The Tribunal set aside the order denying drawback, ordering confiscation, and appropriating ₹31,66,822. It allowed the appeal, holding that the appellant was fully entitled to drawback for all nine shipments. The Tribunal emphasised that statutory rights cannot be curtailed by administrative circulars or retrospective application of rules.
Implications
This ruling has significant implications for exporters operating under special bilateral protocols and for Customs enforcement. It clarifies that:
- Export is complete upon crossing India’s borders, not upon reaching a particular country.
- RBI circulars do not override the Customs Act for drawback entitlement.
- Drawback cannot be denied based on retrospective application of rules.
- Investigating agencies must respect the statutory definition of “export” and cannot rely solely on foreign reports or banking circulars to deny incentives.