2010 (12) TMI 124 - HC - Customs

Court Rules Sale of Residential Building for Free Foreign Exchange Not a Service Under SFIS

The Court upheld the Directorate General of Foreign Trade's view that the sale of a residential building against payment in free foreign exchange does not ... Duty Free Scrip – Does the sale of a residential building against the payment in free foreign exchange amount to 'service' for the purposes of the grant of a Duty Free Credit Entitlement Certificate - Petitioner was asked to submit the duty credit scrip dated 9th January 2006 and not to utilise such scrip further till clearance was received from the office of DGFT - Commissioner of Customs, ICG, Tughlakabad issued a show cause notice to the Petitioner on 23rd June 2008 demanding the customs duty of Rs. 7,62,55,947 - Hence their earlier letter has become irrelevant, particularly in light of the usage beyond the GATS filed Whether DFCE certificates are 'licences' under the FTDR Act - In this Act, unless the context otherwise requires -(g) 'licence' means a licence to import or export and includes a customs clearance permit and any other permission issued or granted under this Act - The DFCE certificates issued under the SFIS would indeed qualify as licences since they permit the holders of such certificates to avail of duty credit while making subsequent imports of freely importable goods – Held that the two DFCE certificates dated 4th February 2005 and 9th January 2006 are licences within the meaning of Section 2(g) of the FTDR Act - The writ petition is disposed of Issues Involved:1. Whether the sale of a residential building against payment in free foreign exchange amounts to 'service' under the Served From India Scheme (SFIS) for the grant of a Duty Free Credit Entitlement (DFCE) Certificate.2. Whether DFCE certificates are 'licences' within the meaning of Section 2(g) of the Foreign Trade (Development and Regulation) Act 1992 (FTDR Act).3. Whether the Directorate General of Foreign Trade (DGFT) was justified in initiating proceedings to cancel the duty free scrips under the FTDR Act.4. Whether the Respondents' omission to entertain Petitioner's applications for issuance of DFCE certificates is justified.5. Whether the show cause notices issued to the Petitioner on the ground of 'misrepresentation of facts' are sustainable in law.Issue-wise Detailed Analysis:1. Whether the sale of a residential building against payment in free foreign exchange amounts to 'service' under the SFIS:The principal question was whether the sale of a residential building against payment in free foreign exchange qualifies as a 'service' under the SFIS. The DGFT's position, as reflected in the impugned communication dated 25/26th June 2008, was that foreign exchange earnings from the sale of immovable properties do not qualify for benefits under SFIS. It was emphasized that only earnings from services such as commission, fee, or brokerage related to real estate services would be eligible. The Court upheld this view, stating that the sale of immovable property is not included within the expression 'real estate services' involving owned or leased property. The Court concluded that only the amounts corresponding to earnings by way of brokerage or commission on such sales, and not the entire sale consideration, would qualify for the issuance of the DFCE certificate.2. Whether DFCE certificates are 'licences' within the meaning of Section 2(g) of the FTDR Act:The Court examined the definition of 'licence' under Section 2(g) of the FTDR Act, which includes a customs clearance permit and any other permission issued or granted under the Act. The Court concluded that DFCE certificates qualify as licences since they permit the holder to avail of duty credit while making subsequent imports of freely importable goods. Therefore, the DFCE certificates issued under the SFIS are considered licences within the meaning of Section 2(g) of the FTDR Act.3. Whether the DGFT was justified in initiating proceedings to cancel the duty free scrips under the FTDR Act:The Petitioner argued that non-payment of duty or wrongful availment of duty credit is a matter for the Department of Customs and not the DGFT. However, the Court held that the action taken by the DGFT under the FTDR Act for an import contrary to the export and import policy is independent of the action that can be taken by the Customs Department under the Customs Act. The Court found that the DGFT was justified in initiating proceedings under the FTDR Act if it believed that the licence issued was not properly utilized by the Petitioner.4. Whether the Respondents' omission to entertain Petitioner's applications for issuance of DFCE certificates is justified:The Petitioner contended that the Respondents' refusal to issue DFCE certificates for the years 2005-06 onwards was based on an erroneous interpretation of the relevant Clauses of the FTP 2004-09. The Court found that the Respondents' interpretation, which limits the eligibility for DFCE certificates to earnings from services related to the sale of immovable property, such as brokerage or commission, was plausible. The Court held that the Respondents were justified in not entertaining the Petitioner's applications for DFCE certificates based on the entire sale consideration of immovable property.5. Whether the show cause notices issued to the Petitioner on the ground of 'misrepresentation of facts' are sustainable in law:The Petitioner argued that the show cause notices issued on the ground of misrepresentation of facts were unjustified. The Court noted that the Petitioner had declared that it applied for duty free entitlement under the SFIS only against remittances received as service charges and fee charges for Real Estate Services. However, the Petitioner claimed amounts constituting the entire sale consideration, which amounted to misrepresentation. The Court directed that the Respondents issue a supplementary show cause notice to the Petitioner, including all relevant documents, and give the Petitioner an opportunity to reply before taking a final decision.Conclusion:The Court upheld the DGFT's view negating the Petitioner's claim for DFCE certificates based on the entire sale consideration of residential flats. It held that DFCE certificates are licences under the FTDR Act. The Court directed the Respondents to follow the procedure outlined in para 30 of the judgment before taking a final decision on the show cause notices. The writ petition was disposed of accordingly.