DGFT Circulars No.06/2018 and No.08/2018 quashed for exceeding Foreign Trade Policy; aggregator entitled to SEIS benefits

The HC held the DGFT Policy Circulars No. 06/2018 and No. 08/2018 adding conditions to the SEIS scheme to be ultra vires the Foreign Trade Policy, illegal, arbitrary and beyond DGFT's jurisdiction, and quashed those circulars and related show-cause notices. The court found the petitioner-an aggregator, not an actual service provider-was not lawfully denied SEIS benefits and relied on the earlier Bombay HC determination that DGFT must follow statutory procedure before suspending or canceling scrips; the petition was allowed.

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ISSUES PRESENTED AND CONSIDERED

1. Whether DGFT policy circulars that add conditions or restrict eligibility under the Service Exports from India Scheme (SEIS) are ultra vires the Foreign Trade Policy (FTP) and Section 5 of the Foreign Trade (Development & Regulation) Act (FTDR Act).

2. Whether DGFT can, by way of policy circulars or public notices, amend or curtail substantive rights/benefits conferred by the FTP or impose conditions not present in the statutory policy.

3. Whether circulars excluding "aggregators" or distinguishing "actual service providers" from other service providers, and thereby denying SEIS benefits, are arbitrary and violative of Article 14.

4. Whether DGFT circulars attempting to alter the mechanism for treating INR receipts as deemed foreign exchange contravene FEMA and related regulations.

5. Whether customs authorities (DRI/Customs) have jurisdiction under Section 28AAA of the Customs Act to issue recovery/show cause notices for utilisation of SEIS scrips where the issuing authority (DGFT) has not cancelled the scrips.

6. Whether policy circulars/orders of DGFT are prospective only and thus cannot be applied retrospectively to transactions already concluded and scrips already issued.

7. Whether show cause notices based principally on the impugned circulars, and actions taken thereunder (including directions to withhold processing/granting of scrips), are without jurisdiction and liable to be quashed.

ISSUE-WISE DETAILED ANALYSIS

Issue 1 & 2 - Power of DGFT to amend FTP via circulars; validity of circulars imposing additional eligibility conditions

Legal framework: Section 5 FTDR Act vests power to formulate and amend the Foreign Trade Policy exclusively with the Central Government by notification in the Official Gazette. FTP paras (notably 1.01-1.03, 3.00-3.10 and 9.51) set out SEIS objectives, eligibility, definition of "service provider", and procedural delegation to DGFT (Handbook/Appendices/Public Notices) for implementation.

Precedent treatment: The Court expressly follows and relies on the reasoning of higher courts holding that DGFT cannot amend FTP substantive provisions (Kanak Exports, and subsequent High Court decisions including Atlantic Shipping, Patanjali Foods, and related precedents distinguishing instances where only the Central Government amended policy by notification).

Interpretation and reasoning: The Court reasoned that DGFT's power under FTP paras to notify procedures/Handbook cannot be read as power to introduce or modify substantive eligibility criteria of the FTP. Circulars that effectively alter para 3.08 or introduce new conditions (for example, excluding aggregators or changing issuance of deemed foreign exchange certificates) effect a modification of the FTP and thus require exercise of Section 5 power by the Central Government. Where the FTP uses distinct terminology (e.g., "net foreign exchange" vs. "free foreign exchange earned"), the Court follows established principle that differing terms bear distinct meanings; unilateral administrative narrowing would amount to amendment, not interpretation.

Ratio vs. Obiter: Ratio - DGFT cannot, by policy circulars/public notices, add or amend substantive conditions in FTP; circulars that do so are ultra vires. Obiter - illustrations and comparative discussion of related authorities (SFIS/SFIS analogies) support the conclusion.

Conclusions: Policy Circular Nos. 06/2018 and 08/2018 (which sought to restrict SEIS eligibility and modify treatment of INR receipts) are ultra vires the FTP and Section 5 FTDR Act and therefore unlawful.

Issue 3 - Classification of "aggregator" vs. "actual service provider" and Article 14 challenge

Legal framework: FTP definition of "service provider" (para 9.51) and eligibility under para 3.08; Article 14 equal protection doctrine against arbitrary administrative classification.

Precedent treatment: Court cites Supreme Court and High Court authorities on arbitrariness and requirement that administrative differentiation be founded on policy language and legitimate objective (e.g., Shayara Bano principles and tax-administration precedents distinguishing permissible classification from arbitrary differentiation).

Interpretation and reasoning: The circulars' creation of an "aggregator" category is not grounded in FTP text; petitioners' activities fall within FTP's definition of "service provider" and the SEIS eligibility criteria. Merely outsourcing parts of a contracted service does not convert an entity into a non-provider or intermediary for FTP purposes where contractual responsibility and remuneration indicate rendering of notified services. Administrative classification absent statutory basis is arbitrary and unreasonable.

Ratio vs. Obiter: Ratio - Administrative differentiation (aggregator vs. service provider) without statutory basis is arbitrary and inconsistent with FTP; consequently the circulars' classification is invalid. Obiter - factual application to petitioners' contractual and tax filings supports service provider characterisation.

Conclusions: Circulars differentiating aggregators from service providers are arbitrary and violative of Article 14 insofar as they seek to deny SEIS benefits to entities otherwise meeting FTP criteria.

Issue 4 - Conflict with FEMA regarding deemed foreign exchange certificates

Legal framework: FTP para 3.08(c) treats certain INR payments as "deemed" foreign exchange as per RBI guidelines; FEMA and RBI regulations govern foreign exchange receipts and their certification.

Precedent treatment: The Court aligns with Atlantic Shipping's finding that policy changes purporting to override RBI guidance or introducing new methods of issuance of certificates of receipt of foreign exchange are impermissible without appropriate statutory or regulatory authority.

Interpretation and reasoning: Circulars attempting to change the mechanism for deeming INR receipts as foreign exchange or to require certificates contrary to RBI/FEMA regime amount to encroachment on domain governed by FEMA/RBI and cannot be effected via DGFT circulars that amend FTP substance.

Ratio vs. Obiter: Ratio - Circulars that alter method of issuance/recognition of deemed foreign exchange in conflict with FEMA/RBI are impermissible. Obiter - reference to need for alignment with RBI guidelines.

Conclusions: Circulars purporting to introduce new certification methods for deemed foreign exchange contravene FEMA/RBI scheme and are unlawful.

Issue 5 & 12 - Jurisdiction of Customs/DRI under Section 28AAA to recover duties where DGFT has not cancelled scrips

Legal framework: Section 28AAA Customs Act provides recovery mechanism where an instrument (scrip) obtained by collusion/misstatement/suppression is utilised; subsection (3) mandates notice, hearing and determination by proper officer; CBEC circular and judicial precedents instruct that Customs field formations should initiate recovery demands only after DGFT/issuing authority initiates cancellation.

Precedent treatment: Court relies on Titan Medical, Jeena & Co., and related authorities holding customs cannot assume jurisdiction to recover amounts under 28AAA until issuing authority cancels the instrument; CBEC circular explicitly advises recovery action upon cancellation by DGFT.

Interpretation and reasoning: Where DGFT has not cancelled or withdrawn scrips, customs/DRI lacks authority to treat scrips as invalid or to commence recovery under Section 28AAA. A show cause predicated on circulars that are ultra vires and on premise of cancellation where none has occurred is premature and without jurisdiction.

Ratio vs. Obiter: Ratio - Customs/DRI lacks jurisdiction to recover duties under Section 28AAA before cancellation of the scrip by DGFT; show cause notices issued in such circumstances are without jurisdiction. Obiter - procedural requirements under Section 28AAA and CBEC guidance reiterated.

Conclusions: Show cause notices issued by DRI/Customs under Section 28AAA prior to DGFT cancellation are unlawful and liable to be quashed; respondents cannot lawfully withhold or refuse processing/granting of scrips on that basis.

Issue 6 - Prospectivity of policy circulars and retrospective application

Legal framework: Administrative law principle that clarificatory/procedural circulars which alter substantive rights should not be applied retrospectively to completed transactions; apex authority (Suchitra Components and other precedents) holds circulars prospective in nature when they affect substantive rights.

Precedent treatment: The Court follows relevant Supreme Court authority holding circulars cannot be applied to concluded transactions to deprive vested benefits.

Interpretation and reasoning: Circulars that seek to curtail benefits already granted or apply new restrictive criteria to past transactions are impermissible; scrips issued validly under existing FTP remain operative until legally cancelled by competent authority.

Ratio vs. Obiter: Ratio - Policy circulars that alter substantive eligibility are prospective only and cannot be retroactively applied to transactions already concluded nor to scrips already issued. Obiter - application to specific years/transactions in record.

Conclusions: Impugned circulars cannot be applied retrospectively to deny previously granted SEIS scrips; administrative direction to withhold processing of subsequent-year applications based on those circulars is contrary to due process.

Issue 7 - Legality of show cause notices based on impugned circulars

Legal framework & reasoning: Combining the holdings above - circulars being ultra vires, arbitrary, and not a lawful basis for denying benefits; plus absence of DGFT cancellation of scrips - show cause notices rooted principally in those circulars lack legal foundation and jurisdiction.

Ratio vs. Obiter: Ratio - Show cause notices and departmental actions relying on ultra vires circulars and prior to statutory cancellation of scrips are invalid. Obiter - remedies (quashing and directions for grant/refund) follow from legal conclusions.

Conclusions: The show cause notices examined are without jurisdiction and are quashed; directives follow to process/grant valid SEIS scrips and refund amounts paid under protest with interest where appropriate.

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