2022 (2) TMI 471 - HC - Customs

Court Invalidates Demand Notice Based on Retroactive Policy Circular

Essar Shipping Limited Versus Union of India & Ors.

The court ruled in favor of the petitioner, finding that the demand notice and reminder issued based on a policy circular were invalid as the circular ... Validity of Policy Circular No.25 of 2007 dated 1st January, 2008 issued by the Director General of Foreign Trade - SFIS Scheme - suppression of material fact - Whether the said Circular is prospective, in the sense that it would apply only to claims that are yet to be finalized, or whether cases settled and/or closed could be reopened thereby? - seeking to recover the duty benefit received by the petitioner under the SFI Scheme - Whether the writ petition ought to be dismissed for suppression of any material fact or that the petitioner has approached the writ court with unclean hands? - HELD THAT:- Mr. Singh’s argument is that by reason of the contents of the Application and/or the Declaration/Undertaking and the disclosures now made, the petitioner was not entitled to any benefit under the SFI Scheme. If indeed that is so, it stands to reason that the petitioner was disqualified from seeking any benefit under the SFI Scheme, yet, the respondents granted the benefit to it. Once the benefit was granted and such benefit is not sought to be taken away by reason of any disqualification evident from the Application and/or the Declaration/Undertaking but in pursuance of the said Circular based whereon the demand notice and the reminder have been issued and such circular and notice/reminder are under challenge, it is considered too far-fetched for Mr. Singh to argue that the petitioner has been guilty of suppression of a material fact. Had the demand notice/reminder been issued without being goaded by the said Circular but on the ground that the petitioner in terms of its Application and/or the Declaration/Undertaking was not qualified to obtain any benefit of the SFI Scheme and such notice had been made the subject matter of challenge without such application and/or such declaration/undertaking being brought on record of the writ petition, the decision on the issue could have been otherwise. The non-disclosure of the Application and/or the Declaration/Undertaking by the petitioner does not amount to suppression of material facts warranting dismissal of the writ petition. Should the answer to the above issue be in the negative, whether the said Circular is ultra vires Articles 14 and 19(1)(g) of the Constitution, section 5 of the FTDR Act and paragraph 3.6.4 of the FTP 2004-2009? - Whether the said Circular is prospective, in the sense that it would apply only to claims that are yet to be finalized, or whether cases settled and/or closed could be reopened thereby? - Whether the demand notice dated 28th January 2010 and the reminder 31st May 2010 seeking to recover the duty benefit received by the petitioner under the SFI Scheme are valid in law and hence, sustainable? - HELD THAT:- Recital of the said Circular envisaging that the same was issued as a clarification of the SFI Scheme notwithstanding, we are not to be bound by such recital but as guided by various decisions of the Supreme Court its contents have to be analyzed to find out whether (i) it is clarificatory in nature; and (ii) even though clarificatory, whether the same is applicable without restrictions. As earlier observed, we have little reason to doubt that the said Circular only highlighted what was implicit in the SFI Scheme. What would “Served From India” mean required a clarification and it was, accordingly, clarified by the DGFT that where “export of service from India does not take place, although foreign exchange may have been earned”, such of those services not originating from India (emphasis ours) would not qualify for the benefit under the SFI Scheme. Based on such clarification, it is indeed arguable as to whether the petitioner was qualified to seek the benefit of the SFI Scheme having regard to its admission that in the nature of export of services undertaken by it, the routes neither originated from India or touched India. The terms of the said Circular being at variance with the decision taken in the meeting of the Port Officers dated 14th December, 2007, where it was decided to undertake the exercise “even in cases where RAs may have already granted SFI Scheme benefits earlier” (emphasis ours), the said Circular would prevail over the said decision; consequently, it would logically follow that it was never the intention of the DGFT while approving the said Circular to permit an exercise of reopening settled and/or closed cases - on the terms of the said Circular that though it is clarificatory in nature, it does not have retrospective operation. As such, it was not open for the third respondent to issue the demand notice and the reminder to recover ₹ 27,40,35,827/- from the petitioner acting on the minutes of the meeting of the Port Officers dated 25th November, 2008. Since the said Circular does not take away the benefits that have accrued on the basis of the SFI Scheme prior to the contents thereof being clarified by the said Circular, there are no reason to hold such circular to be ultra vires Articles 14 and 19(1)(g) of the Constitution of India as well as section 5 of the FTDR Act and paragraph 3.6.4 of the FTP 2004-2009. However, the demand notice dated 28th January 2010 and the reminder dated 31st May 2010 being unauthorized, are invalid in law and inoperative; hence, the same deserve to be set aside. Petition allowed. Issues Involved:1. Suppression of material facts.2. Validity of Policy Circular No. 25/2007 under Articles 14 and 19(1)(g) of the Constitution, Section 5 of the FTDR Act, and paragraph 3.6.4 of the FTP 2004-2009.3. Retrospective application of the Circular.4. Validity of the demand notice and reminder.5. Relief entitled to the petitioner.Issue-wise Detailed Analysis:Issue (a): Suppression of Material FactsThe court examined whether the petitioner suppressed material facts by not disclosing its Application or Declaration/Undertaking while seeking benefits under the SFI Scheme. The court concluded that the non-disclosure did not amount to suppression of material facts since the demand notice and reminder were based on the said Circular, not on any disqualification evident from the Application or Declaration/Undertaking. Therefore, the writ petition was not dismissed on this ground.Issue (b): Validity of Policy Circular No. 25/2007The petitioner challenged the Circular on the grounds that it was administrative and could not amend the FTP 2004-2009. The court referred to the decision in Atlantic Shipping Pvt. Ltd., which held that provisions of the FTP cannot be amended by issuing a circular. The court agreed with the petitioner that the Circular was intended to clarify the SFI Scheme but could not retrospectively amend it to take away benefits already granted.Issue (c): Retrospective Application of the CircularThe court analyzed whether the Circular applied retrospectively to settled claims. It concluded that the Circular was intended to apply only to pending claims, as indicated by the language 'while finalizing the claims.' The court held that the Circular did not authorize reopening settled or closed claims, and any attempt to do so was impermissible.Issue (d): Validity of the Demand Notice and ReminderThe court found that the demand notice and reminder were issued based on the Circular, which was not intended to apply retrospectively. Since the Circular could not reopen settled claims, the demand notice and reminder were unauthorized, invalid, and inoperative. The court set aside both the demand notice dated 28th January 2010 and the reminder dated 31st May 2010.Issue (e): Relief Entitled to the PetitionerThe court allowed the writ petition to the extent that the demand notice and reminder were set aside. The petitioner was discharged from the undertaking given at the time of admission of the writ petition. However, the court noted that the respondents could proceed against the petitioner to take away benefits if such action is permissible in law.Outcome:The writ petition was allowed to the extent mentioned, with each party bearing its own costs. The court refused the Union of India's request to stay the operation of the order.