2025 (2) TMI 386 - HC - Customs

DGFT Show Cause Notice quashed for attempting to reopen closed issue under Section 14 FTDR Act

Essar Shipping Limited Versus Union of India through the Joint Secretary Department of Commerce, Director General of Foreign Trade, Zonal Additional Director General, Deputy Director General of Foreign Trade, Joint Director General of Foreign Trade.

The Bombay HC quashed a Show Cause Notice (SCN) issued by DGFT under Section 14 of the FTDR Act, 1992. The petitioner had availed benefits under Foreign ... Issuance of SCN issued by the Director General of Foreign Trade (DGFT) u/s 14 of the Foreign Trade (Development and Regulation) Act, 1992 (FTDR Act) and subordinate law thereunder - Essar availed of the benefits under the Foreign Trade Policy 2004-2009 (FTP) by furnishing information, making declarations and relying on certificates, that were allegedly wrong - HELD THAT:- A careful scrutiny of the Impugned SCN shows that it does not allege any mis-statement other than the assertion by Essar that the SFIS File was in conformity with the SFIS. Such an approach in the Impugned SCN is directly in the teeth of the DB Judgement, and is completely untenable. There are no hesitation in holding that the Impugned SCN is covered by res judicata, and is unreasonable and arbitrarily attempts to re-open an issue already closed. The Recovery Notices having been quashed, the Impugned SCN is a circumvention of the effect of such quashing. Petition disposed off. ISSUES PRESENTED AND CONSIDERED 1. Whether a show cause notice issued by the Director General of Foreign Trade (DGFT) under Section 14 of the FTDR Act, alleging entitlement to SFIS duty credit scrips was obtained by mis-statement, is maintainable where a Division Bench has already held the relevant Policy Circular to be clarificatory and prospective and has quashed earlier recovery notices arising from that Circular. 2. Whether the DGFT may, notwithstanding the Division Bench's ruling quashing recovery notices and declaring the Circular prospective, initiate remedial action under the Division Bench's permissive observation (Paragraph 56) that action may lie where the applicant was disqualified on the basis of its own application/declarations - i.e., the permissible scope of post-judgment follow-up based on alleged mis-statements or suppressions in the original application file. 3. Whether settled and closed claims in relation to SFIS duty credit scrips can be re-opened by administrative action once adjudication in favour of the claimant has become final, and whether such reopening is barred by res judicata or by the confirmed prospective character of the Policy Circular. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Maintainability of the Show Cause Notice in face of Division Bench ruling that the Policy Circular is clarificatory and prospective Legal framework: The Foreign Trade Policy (SFIS) provided duty credit scrips linked to foreign exchange earned from export of services. A DGFT Policy Circular clarified entitlement by requiring a connection to India (routes originating from or touching India) for entitlement. Administrative action under the FTDR Act (s.14) permits show cause notices where benefits are alleged to have been wrongly claimed. Precedent Treatment: A Learned Division Bench previously reviewed the Policy Circular and related DGFT files, held the Circular to be clarificatory in form but prospective in operation, and quashed recovery notices issued against claims already examined and settled by DGFT pursuant to the pre-Circular understanding. Interpretation and reasoning: The Court reasons that the Division Bench's ruling conclusively determined that the Circular could not be given retrospective effect to reopen settled claims. The earlier adjudication by DGFT in favour of the claimant carried the presumption of legality and finality. Consequently, a later show cause notice premised primarily on the claim that the original application was merely 'in conformity' with SFIS (i.e., no allegation of other falsehoods) amounts to an attempt to re-open matters closed by the Division Bench decision. Ratio vs. Obiter: The ruling that the Circular is clarificatory yet prospective and that settled claims cannot be reopened is treated as ratio in relation to disputes arising from the Circular's application to previously settled cases; the applied presumption of legality for official acts and the quashing of recovery notices are operative ratios for the present controversy. Conclusions: The show cause notice is untenable insofar as it seeks to re-apply a clarified policy retrospectively to revive claims already adjudicated and quashed by the Division Bench. The Court quashes the impugned notice on this ground. Issue 2 - Scope and effect of Paragraph 56 of the Division Bench judgment (permissive observation regarding disqualification for mis-statements) Legal framework: Judicial pronouncements may include observations that permit subsequent administrative or penal action where independent actionable facts (e.g., mis-statements/suppressions) are demonstrated. The legal question is whether such an observation permits reopening where the only asserted defect is compliance with the policy as previously understood. Precedent Treatment: Paragraph 56 of the Division Bench judgment noted that, if the applicant was disqualified on the basis of contents of the application/declaration, respondents may proceed against the petitioner if permissible in law. That paragraph was not a directive to re-adjudicate settled claims but a conditional observation retaining the possibility of action where independent mis-conduct existed. Interpretation and reasoning: The Court interprets Paragraph 56 as leaving open a narrow avenue for action only where there is material outside the scope of what the Division Bench considered - i.e., independent evidence of mis-statement or suppression in the original application beyond the route-wise issue addressed by the Circular. Where the impugned notice alleges nothing more than that the applicant certified conformity with SFIS (a fact already ruled upon), Paragraph 56 does not justify the notice. The Division Bench's prospective reading of the Circular and the quashing of recovery notices limit the practical operation of Paragraph 56. Ratio vs. Obiter: The Court treats Paragraph 56 as an obiter or a narrowly permissive observation rather than a license to re-open finally settled claims absent new material; its limited nature is used to distinguish rather than follow it as authority for reopening. Conclusions: Paragraph 56 does not assist the respondent in upholding the present show cause notice because the notice lacks allegations of independent mis-statement or suppression that fall outside the matters decided by the Division Bench. Issue 3 - Finality, res judicata and the prohibition on reopening settled SFIS claims Legal framework: Principles of finality of administrative adjudication, presumption of legality attaching to official acts, and res judicata/estoppel against reopening issues finally determined by a competent court govern whether claims already examined and allowed can be re-opened by administrative fiat. Precedent Treatment: The Division Bench quashed recovery notices and declared that settled and closed claims could not be re-opened. That decision was not appealed and thus attained finality. Interpretation and reasoning: The Court holds that issuing a new show cause notice that effectively seeks to recover benefits already adjudicated and quashed is a circumvention of the Division Bench's order and is barred by res judicata and the established prospective character of the Circular. The impugned notice is primarily based on the same factual matrix that the Division Bench considered; no fresh material is alleged to justify reopening. Administrative action that attempts to negate final judicial relief without independent legal basis is unreasonable and arbitrary. Ratio vs. Obiter: The finding that the impugned show cause notice is barred by res judicata and amounts to an arbitrary attempt to re-open closed issues functions as a ratio decisive of the present petition. Conclusions: The impugned notice is covered by res judicata and is an unreasonable and arbitrary attempt to re-open an issue already closed by final judicial order; it is therefore quashed and set aside. Overarching Conclusion and Direction The Court holds that, in the absence of material outside the scope of the Division Bench's decision demonstrating independent mis-statement or suppression in the original SFIS file, administrative initiation of recovery or penal action is impermissible; the impugned show cause notice is quashed as contrary to the Division Bench's prospective reading of the Policy Circular, finality of adjudication, and principles of res judicata.