Incorrect Classification Is Not By Itself Collusion/ Wilful Misstatement U/S 28AAA Customs Act; Prior Determination By DGFT Must: Delhi HC

The provision provides for recovery of duties in cases where an instrument issued to a person has been obtained by him by means of collusion; or (b) wilful mis-statement; or (c) suppression of facts.

The division bench of Justices Yashwant Varma and Ravinder Dudeja was dealing with three petitions challenging the action initiated under Section 108 of the Customs Act by the Centre, against the Petitioners, exporters of 'handcrafted articles of stone'.

The goods were classified by the Petitioners under Customs Tariff Heading (CTH) 6815 which pertains to 'articles of stone or of other mineral substances not elsewhere specified or included', particularly Tariff item 68159990 (residual clause), which was entitled to rewards @ 7% under the Merchandise Exports from India Scheme (MEIS).

MEIS provides incentives for the export of notified goods and products to eligible countries.

Petitioners were also aggrieved by the audit objection issued by the Customs.

The case against Petitioners was that since their exported goods were made of natural stone, the same are covered by CTH 6802, which pertains to 'worked monumental or building stone'.

The Department contended that Petitioners had deliberately run afoul of the requirement under Section 17 to correctly self-assess their exported goods in order to obtain MEIS benefits.

It was further argued that the final authority to adjudge the correct classification of goods exported under the Customs Tariff Act, 1975 vests with the customs officer and thus, the action was justified.

Petitioners on the other hand contended that no question was ever raised with respect to classification of their goods from 1991 up to October 2018 and if the Department's stand is now accepted, it would cause grave hardship and financial loss to them.

It was submitted that CTH 6802 is confined to stone which is used for purposes of construction and erection of monuments and buildings however, handicraft articles sculpted out of stone and of the kind exported by the petitioner cannot possibly be countenanced as answering to the description of articles which are spoken of in CTH 6802.

It was also pointed out that the first Explanatory Note to CTH 6815 itself prescribes that the said heading would not cover articles of stone or of other mineral substances which may be covered by the earlier headings of that Chapter. This itself is indicative of articles of stone falling within the ambit of CTH 6815 being those which are not used in monuments or buildings, it was argued.

Findings

At the outset, the High Court agreed that it is decades after the exports had been affected and assessments completed that the Department now sought to reopen those transactions and seek to question the benefits claimed by the petitioners.

“Undisputedly, consequent to the self-assessed Bills of Entry having been accepted and thus liable to be viewed as assessed, the stage of enquiry contemplated in terms of Section 17 of the Customs Act has clearly passed.”

Misclassification and Section 28AAA

Coming to Section 28AAA, the High Court said the provision would have to be interpreted as contemplating a prior determination on the issue of collusion, wilful misstatement or suppression of facts tainting an instrument (MEIS certificate of Petitioners in this case), before action relating to recovery of duty could be possibly initiated.

“The sine qua non for Section 28AAA getting attracted is the triumvirate of collusion, suppression and wilful misstatement which are spoken of in sub-section (1) being attracted,” Court said.

However, in the same breath, it added, “Even if it were assumed for the sake of argument that the writ petitioners had wrongly classified or placed articles in question under ITC(HS) 68159990, the same would clearly not amount to it being ipso facto assumed that the same amounted to an act of suppression or wilful misstatement.”

Customs can't doubt instrument issued under FTDR Act

In its 91-page judgment, the Court also pointed out that the MEIS certificate is issued under the provisions of the Foreign Trade (Development and Regulation) Act, 1992 and held that the power to cancel or suspend it vests in the Director General of the licensing authority alone.

“As we read the various provisions enshrined in the FTDR Act alongside the FTP (Foreign Trade Policy) as well as the FTDR Rules, we find ourselves unable to recognize a right that may be said to inhere in the customs authorities to doubt the issuance of an instrument,” High Court said.

It added, “It would thus be wholly impermissible for the customs authorities to either ignore the MEIS certificate or deprive a holder thereof of benefits that could be claimed under that scheme absent any adjudication or declaration of invalidity being rendered by the DGFT (Director General of Foreign Trade) in exercise of powers conferred by either Rules 8, 9 or 10 of the FTDR Rules. The customs authorities cannot be recognised to have the power or the authority to either question or go behind an instrument issued under the FTDR in law.”

It emphasized that the FTDR Rules incorporate provisions conferring an authority on the Director General or the licensing authority to suspend or cancel a license, certificate, scrip or any instrument bestowing financial or fiscal benefits.

It added that if the validity of an instrument issued under the FTDR Act were to be doubted on the basis of it having been obtained by collusion, wilful misstatement or concealment of facts, any action under Section 28AAA would have to be preceded by the competent authority under the FTDR Act having come to the conclusion that the instrument had come to be incorrectly issued or illegally obtained.

“Section 28AAA would thus have to be interpreted as contemplating a prior determination on the issue of collusion, wilful misstatement or suppression of facts tainting an instrument issued under the FTDR Act before action relating to recovery of duty could be possibly initiated…Taking any other view would result in us recognizing a parallel or a contemporaneous power inhering in two separate sets of authorities with respect to the same subject. That clearly is not the position which emerges from a reading of Section 28AAA,” High Court said.

It relied upon PTC Industries Ltd. v. Union of India and Others (2009) where the Allahabad High Court held that any doubt with respect to the description or classification of exported goods would have to be referred for the consideration of the DGFT.

The Allahabad High Court had concurred with the Bombay High Court, which in Autolite (India) Ltd. v. Union of India (2003) too had observed that benefits which could be claimed under a Duty Entitlement Pass Book license could not be denied by the customs authorities on the basis of their own perception on the subject of appropriate classification.

“Action for recovery of benefits claimed and availed would have to necessarily be preceded by the competent authority under the FTDR Act having found that the certificate or scrip had been illegally obtained. We have already held that the reference to a proper officer in Section 28AAA is for the limited purpose of ensuring that a certificate wrongly obtained under the Customs Act could also be evaluated on parameters specified in that provision. However, the said stipulation cannot be construed as conferring authority on the proper officer to question the validity of a certificate or scrip referable to the FTDR Act,” High Court concluded.

In the case at hand, the Court noted that the solitary charge against the Petitioners was with respect to the alleged incorrect classification of the exported items however, it said the same was nowhere alleged to have been prompted by collusion, wilful misstatement or suppression of facts.

Court said even the DGFT had chosen to desist from expressing its stand with respect to the validity of the MEIS scrips issued in favour of the petitioners.

“We find ourselves unable to appreciate how the petitioners could have been charged of having failed to make a ―correct and truthful‖ declaration when the imports were affected under the cover of MEIS certificates granted by the DGFT and which had never been questioned. In fact, the DGFT has not even and till date initiated any action against the writ petitioners alleging that the MEIS Certificate had been wrongly obtained. This too leads us to conclude that the impugned action is rendered wholly illegal, arbitrary and unsustainable,” High Court said and allowed the petitions.

Case title: Designco v. UoI (and other connected matters)

Case no.: W.P.(C) 14477/2022

Click Here To Read/Download The Order