CESTAT Rules, Customs Dept. Can’t Invoke Section 28AAA Without DGFT First Initiating License Cancellation
Pranav B Prem
In a significant ruling, the Delhi Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) held that proceedings under Section 28AAA of the Customs Act, 1962 cannot be initiated unless the Directorate General of Foreign Trade (DGFT) first initiates and concludes the process of cancelling the instrument, such as an scrip, issued under the Foreign Trade Policy. The Tribunal allowed the appeal filed by M/s Colour Cottex Pvt. Ltd. and set aside the entire demand raised under Section 28AAA along with the related penalties. The decision was rendered by a Bench comprising Justice Dilip Gupta (President) and P.V. Subba Rao (Technical Member).
Background
The appellant, M/s Colour Cottex Pvt. Ltd., a manufacturer and exporter of readymade garments, had entered into export contracts with UAE-based buyers. To promote exports to specified countries, the Indian government had introduced the Focus Market Scheme (FMS) under the Foreign Trade Policy (FTP) 2009-14. This scheme allowed exporters to claim duty credit scrips for exports to remote markets like Panama, which was a notified destination.
The appellant made exports under 211 shipping bills from April 2013 to August 2015 and availed FMS benefits. However, subsequent investigation revealed that while shipping documents indicated Panama as the destination, some consignments were actually diverted to Jebel Ali, UAE — a country not covered under FMS.
On this basis, a show cause notice dated 09.09.2017 was issued, proposing to recover the FMS scrip value of ₹1,58,44,432/- under Section 28AAA of the Customs Act, and to impose penalties under Sections 114AA and 114(iii). The adjudicating authority confirmed the recovery with interest, held the goods liable for confiscation under Section 113, and imposed penalties, though it dropped the demand of duty drawback.
Appellant's Contention
The appellant argued that the invocation of Section 28AAA was without jurisdiction, as the DGFT had neither initiated any cancellation proceedings nor cancelled the duty credit scrips. It was emphasized that the issuance and cancellation of scrips fall solely under the domain of the DGFT under the Foreign Trade (Development and Regulation) Act (FTDR Act), and the customs authorities cannot independently question the validity of such instruments.
In support, the appellant relied on the Delhi High Court’s judgment in Amit Exports v. Union of India [W.P. (C) 17314/2022 decided on 22.11.2024], where it was held that action under Section 28AAA must be preceded by DGFT’s finding of invalidity of the scrip. The Tribunal was also shown a CBIC (TRU) clarification dated 01.06.2012 stating that field formations are advised to issue demands only after the DGFT initiates cancellation, and adjudication should follow only upon actual cancellation.
The appellant also argued that it had exported goods on a FOB basis, whereby the title and control over goods passed to the buyer upon issuance of the Let Export Order. The freight forwarding and final delivery were handled by the buyer’s agents, and the appellant had no control over any change in destination or diversion of goods. It submitted that no evidence, apart from the statement of Imran Mirza (freight forwarder), implicated it in any wrongdoing.
Department's Stand
The department contended that even though the DGFT had not yet cancelled the scrips, they were informed that the process was underway. They argued that since the benefits were allegedly obtained by collusion or suppression of facts, recovery under Section 28AAA was justified. The department relied on the statement of Imran Mirza made under Section 108 of the Customs Act, which allegedly implicated the appellant in altering shipping destinations.
Tribunal's Observations and Ruling
The Tribunal held that the entire demand under Section 28AAA was without jurisdiction, as the DGFT had neither initiated cancellation proceedings nor cancelled the instruments. It relied extensively on the Delhi High Court’s ruling in Amit Exports, which clarified that customs authorities cannot bypass DGFT’s role and act unilaterally to invalidate or deny benefits under schemes like FMS.
It noted: “The impugned order, therefore, is without jurisdiction as the DGFT has neither cancelled the instrument nor even initiated proceedings for cancellation of the instrument.”
The Tribunal also rejected the reliance on Imran Mirza’s statement under Section 108, holding that such statements must comply with Section 138B of the Customs Act, and without the witness being examined before the adjudicating authority and the opportunity for cross-examination being provided, such statements have no evidentiary value.
Further, the Tribunal accepted the appellant’s argument that under an FOB contract, the exporter ceases to have control once the Let Export Order is issued, and the onus of delivery to the notified destination lies with the buyer and their agents. The Tribunal also noted that no proof of landing documents or falsified documents submitted to DGFT were brought on record by the department to show misuse of the scheme by the exporter.
Verdict
The CESTAT concluded that:
Action under Section 28AAA requires prior cancellation of the scrip by DGFT.
Penalties under Sections 114AA and 114(iii) were also not sustainable since the necessary elements of mens rea were not established.
The statement of Imran Mirza could not be treated as admissible evidence.
Accordingly, the impugned order dated 15.09.2021 was set aside in its entirety, and the appeal was allowed.
Appearance
Shri Naveen Bindal, Advocate for the Appellant
Shri Rakesh Kumar, Authorized Representative for the Department
Cause Title: M/s Colour Cottex Pvt. Ltd. V. Commissioner of Customs (Export)
Case No: Customs Appeal No. 55760 Of 2023
Coram: Hon’ble Mr. Justice Dilip Gupta [President], Hon’ble Mr. P. V. Subba Rao [Member (Technical)]
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