FEBRUARY 09, 2024

By Mr P Sridharan, Advocate and Senior Advisor & S Rahul Jain, Partner, M2K, Chartered Accountants

BRIEF facts and Question of law

In the case of Jeena & Company [2024-TIOL-172-HC-MAD-CUS], the key issues revolved around the jurisdiction of Directorate of Revenue Intelligence to issue notice for the recovery of customs duties under Section 28AAA of the Customs Act, considering the issuance and subsequent withdrawal of show cause notices by the DGFT and the absence of steps by the DGFT to cancel the license.

The petitioner had obtained SEIS Scrips (Service Exports from India Scheme) from the Director General of Foreign Trade (DGFT) and sold them to third parties.

The petitioner argued that the DGFT had issued the SEIS Scrips under the Foreign Trade Development and Regulation Act, and until the DGFT initiated any steps to cancel the license, the Customs Act could not assume jurisdiction for recovery of customs duties.

Reference was drawn to Circular No.334/1/2012-TRU dated 01.06.2012, which stated that recovery proceedings could be initiated by Customs authorities only after the DGFT initiated action for cancellation of the instrument, and the matter could be decided after the instrument had been cancelled by DGFT. In the facts of the present case, the show cause notice dated 24.11.2020, issued by the DRI, was challenged on the grounds that it lacked jurisdiction and was not in line with the circular.

Discussion relating to precedents of the SC

In the case, the court also highlighted the applicability of the decisions in Titan Medical Systems (P) Ltd. v. Collector of Customs [2003-TIOL-42-SC-EXIM] and Pennar Industries Limited = 2015-TIOL-162-SC-CUS.

In Titan medical systems, the brief facts where that an importer obtained an advance license on 27-12-1988 to import components for manufacturing Ultrasound Scanners, to be exported later, with M/s. Titan Medical Systems Pvt. Ltd (the Appellant) declared as the supporting manufacturer. The components were under exemption Notification 116/1988 and exported the scanners. However, a show cause notice was issued on 6th November 1990 for allegedly not complying with the exemption conditions.

The SC in this case held that once the license was issued without challenge, Customs authorities cannot deny exemption based on alleged misrepresentation. Any misrepresentation would fall under the jurisdiction of the licensing authority to address. The relevant para from the decision is as under

Undoubtedly, while applying for a licence, the appellants set out the components they would use and their value. However, the value was only an estimate. It is not the respondents' case that the components were not used. The only case is that the value which had been indicated in the application was very large whereas what was actually spent was a paltry amount. To be noted that the licensing authority having taken no steps to cancel the licence. The licensing authority have not claimed that there was any misrepresentation. Once an advance licence was issued and not questioned by the licensing authority, the Customs authorities cannot refuse exemption on an allegation that there was misrepresentation. If there was any misrepresentation, it was for the licensing authority to take steps in that behalf.

In Pennar Industries, the SC was dealing with the scenario where the importer had imported the goods against an advance authorization which was coupled with the actual user condition. The importer used the imported raw materials for manufacture of goods and cleared the manufactured goods in the DTA instead of exporting the goods. The importer subsequently fulfilled the EO on the basis of third-party exports, after seeking approval from the DGFT. The customs authorities issued a demand stating that the conditions for import of the goods were specified in the license and they had not been fulfilled.

The Hon'ble Court held that since the conditions of the exemption notification are not fulfilled and the law requires strict compliance of the exemption notification, the assessee becomes liable to pay the import duty which was payable, but for the benefit of exemption Notification No. 30/1997, which was obtained by the assessee. The Court also noted that aforesaid Order-in-Original of DGFT was under the provisions of EXIM Policy. The Court held that the orders passed under the Exim policy would not be binding on the customs authorities and as far as action taken under the Customs Act is concerned, the same is to be covered by the provisions of the Customs Act

The Court also distinguished the application of the decision of M/s Titan Industries on the ground that the facts were different.

Decision of Madras High Court

The Hon'ble Madras High Court in this case highlighted that the Titan case was relevant, emphasizing that the Customs Authorities couldn't interfere if an advance license issued by the DGFT was not questioned or canceled. Unlike Pennar Industries Limited, where non-compliance with import conditions led to Customs jurisdiction, the present case involved withdrawn show cause notices by the DGFT.

As the DGFT hadn't initiated license cancellation, the court held the Customs Act's Section 28AAA couldn't be invoked by the DRI, declaring the show cause notice of 24th November 2020 as lacking jurisdiction. The court stressed that unless the DGFT acts, Customs authorities cannot assume such jurisdiction.

The court noted that the DGFT had issued show cause notices but subsequently withdrew them entirely. As of the judgment date, the DGFT had not taken steps to cancel the license issued to the petitioner.

The Court held that, in line with the circular, the Customs Act could assume jurisdiction for recovery only after the DGFT initiated action for cancellation, and the matter could be decided post-cancellation. Since the DGFT had not taken any steps to cancel the license and had withdrawn the show cause notices, the court concluded that the show cause notice issued by the DRI lacked jurisdiction. Therefore, the court set aside the notice, allowing the writ petition.

Our comments

In our view, this decision, though conclusive to the extent of defining the jurisdiction of Customs authorities to issue a Notice invoking Section 28AAA ibid, still falls short of defining the scope this Section.

A Notice issued under Section 28AAA of the Customs Act, is on the ground that the duty credit scrips were obtained in the first place by collusion, willful misstatement or suppression of facts. A conclusion in this regard lies with the DGFT who issues the scrips and not with the Customs authorities. Cancellation of the scrips is a corollary to this conclusion. Therefore, without a conclusion by the DGFT that scrips in question were obtained by the exporter by collusion, willful misstatement or suppression of facts, any action by the Customs authorities to issue a Notice invoking Section 28AAA ibid will be without jurisdiction.

Can the customs authorities issue a Notice invoking Section 28AAA ibid on a mere cancellation of the scrips by the DGFT, without a clear finding by the DGFT on collusion, willful misstatement or suppression of facts? The jury is still out on this question.

[The views expressed are strictly personal.]