Customs Duty Circular Not Applicable To 'Finalised' Benefits Under SFI Scheme: Bombay High Court Quashes Rs. 27.4 Crore Demand Notice To Essar Group

The notice and the reminder which were set aside by the HC sought Rs 27.40 crore from the company comprising customs duty and interest on the basis of the benefits already availed and utilised on account of its entitlement under the Served from India (SFI) Scheme.

A division bench of Chief Justice Dipankar Datta and Justice MS Karnik, in a judgment earlier this week, observed, "The conclusion seems to be inescapable that though the DGFT by issuing the said Circular sought to clarify the terms of the SFI Scheme but such Circular was intended to be implemented to decide claims for grant of benefits under the SFI Scheme which were not finalized as on date the said Circular was issued. Had the DGFT intended to reopen claims which had already been finalized, we are inclined to the view that paragraph 3 of the said Circular, if not also paragraph 2 thereof, would have been differently worded to carry forward such an intention."

The bench further noted that the words "while finalizing the claims" would pertain to claims which had not yet been finalized on the date the Circular was issued and could not have been stretched to take within its coverage "settled and/or closed claims."

The Case

The court was hearing a petition filed by Essar Shipping Ltd against the Directorate General of Foreign Trade and its relevant officials, challenging the demand notice dated January 28, 2010 and reminder dated May 31, 2010. The notice was issued based on a circular from January 1, 2008 saying that the relief under the SFI scheme was available only for "services rendered from India only."

The SFI scheme was introduced as a part of the Foreign Trade Policy (FTP) 2004-09 which allowed some concessions to increase exports from the country. The scheme provided benefit in the form of 'duty credit scrip certificates' equivalent to an amount of 10 percent of such foreign exchange earnings to notified Indian 'Service Providers' engaged in exporting services. These scrips could then be used for setting off the applicable customs duty payable on import of any capital goods, spares, professional equipment, office furniture and consumables.

The Circular of January 2008 clarified that the scheme did not apply to 'services not originating from India' resulting in retrospective demand against Essar for certificates issued in 2007.

Arguments

Senior Advocate Vikram Nankani, appearing for Essar, argued that a circular cannot retrospectively amend take away benefits under the scheme and that only the Central Government could amend a Foreign Trade Policy. Apart from providing services from India, Essar was also engaged in providing services within two different countries, with those services not making any port connection to anywhere in India – though payment even for these services were received in India itself.

Nankani argued that the Essar would be entitled for benefits under the scheme as it was providing services 'from India'. The language of the circular referred earlier was also pointed out.

Additional Solicitor General Anil Singh assisted by Advocate Aditya Thakkar appearing for the respondents, defended the action. He submitted that the letter, intent and purpose of the SFI scheme was always to grant benefit only in respect of services which were originating from India or touching India and the circular only clarified that position.

He added that even the petitioner understood the SFI scheme in the same manner and hence, in its Declaration/Undertaking it specifically stated that the foreign exchange earned is on account of services "rendered from India alone". He also submitted that a holistic reading of the circular clearly envisaged that wrongful benefits that may have been granted cannot be allowed.

He also cited minutes of a meeting of Port Officers from December 2007, based on which the circular was issued to say that it was decided at the meeting to apply the policy to cases which were decided to "adjust excess grant."

Court Order

The HC held the circular as valid saying that it was only clarificatory in nature and did not amount to amending the scheme, and that it was signed by then DGFT Joint Director AK Singh, therefore the DGFT was not in the dark. The bench, however, added that it would apply to only those cases/claims which were yet to be finalised. The court also observed that decisions taken in a meeting would not prevail over a circular and therefore decisions in a meeting cannot be binding on any party which could be contrary to the circular.

"We unequivocally record that the said Circular does not, either expressly or by necessary implication, endorse the decision taken in the meeting of the Port Officers dated 14th December, 2007 and in the absence of any stipulation in the said Circular authorizing reopening of claims that have been settled and/or closed, it seems to us to have been impermissible to again take a decision in the meeting of the Port Officers dated 25th November, 2008 contrary to the terms of such circular and in the absence of issuing a further clarificatory circular," the bench ruled.

Case Title: Essar Shipping Limited Vs. Union of India & Ors.

Citation: 2022 LiveLaw (Bom) 36

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