Recovery of duties / taxes paid utilizing duty credit scrips, by the DGFT office

Vide Trade Notice No. 2/2016 dated April 19, 2016 the Joint Director General of Foreign Trade (JDGFT) has advised all the regional authorities to not to grant the benefit of merchandize exports from India scheme (MEIS) on export of ‘tamarind kernel powder’ from India. It has further been advised to review all cases wherein this benefit has already been granted and make recoveries wherever necessary. This raises a very pertinent question that whether DGFT has the power to recover benefits granted under the MEIS or services exports from India scheme (SEIS). In simpler words, whether customs duty / central excise duty / service tax paid utilizing these duty credit scrips (scrips) can be recovered by the DGFT authorities.

  1. This question also assumes significance in all the pending cases wherein DGFT authorities have sought to recover the amount of customs duty / central excise duty / service tax paid utilizing scrips issued under Chapter 3 of the erstwhile foreign trade policy, 2009-14.
  2. To answer these questions and to ascertain the source of power of DGFT authorities to recover, if there is any, we need to examine the provisions of the Foreign Trade (Development and Regulation) Act, 1992 (FTDR Act), Foreign Trade (Regulations) Rules, 1993 (FTR Rules), Foreign Trade Policy, 2015-20 (FTP) and the Hand Book of Procedures, 2015-20 (HBP). Such examination has been detailed in below paragraphs.

Provisions of the FTDR Act

  1. The DGFT authorities are not toothless to deal with a situation which warrants rolling back of benefits granted in form of scrips under Chapter 3 of the FTP. These authorities, however, have been granted limited power of cancellation or suspension of these scrips, under Section 9(4) of the FTDR Act. Such cancellation or suspension dis-allows the holder from availing any benefit in the future, from the scrip so cancelled. This, however, do not empower the DGFT authorities to recover the benefits already utilized from the scrips so cancelled. In simpler words, this provision does not empower the authorities to recover the amount of customs duty / central excise duty / service tax paid utilizing the scrips, before cancellation or suspension. The cancellation or suspension is going to have a limited effect of stopping the holder from utilizing the cancelled or suspended scrips in future towards any duty payment.

Provisions of the FTR Rules

  1. Apart from the procedural nitty-gritties relating to cancellation and suspension of scrips issued under the FTP, the FTR Rules confers limited powers of recovery on the DGFT authorities, which are contained in Rule 7(3) of the FTR Rules. This provision empowers the DGFT authorities to recover terminal excise duty, duty drawback or any other ‘cash assistance benefits’ admissible to an exporter in the FTP.
  2. It is noteworthy that the scrips issued under chapter 3 of the FTP cannot be said to fall within the ambit of ‘cash assistance benefit’ enumerated in the above referred provision. This is based on the understanding that the FTP allows such scrips to be utilized for payment of customs duty, central excise duty and service tax. The benefit under the MEIS and SEIS is not provided in form of cash, which is what is granted in case of the refund of TED or duty drawback (in case of deemed exports).
  3. It will not be out of place to mention here that this provision was introduced in April, 2015 to render the judgement given in the case of Alstom India Ltd. vs. Union of India, 2014 (301) ELT 446 (Guj.) as otiose and redundant. In this judgement, actions by the DGFT authorities to recover duty drawback benefits were held as being null and void, in absence of provisions to recover the same.
  4. However, as discussed above, the provision introduced is limited to recovering duty drawback, TED refund and other cash assistance benefits provided by the central government, it does not empower recovery of customs duty / central excise duty / service tax paid by utilizing scrips issued under the MEIS and SEIS.
  5. Apart from the aforementioned provision, there is no other provision in the FTR Rules which empowers the DGFT authorities to recover anything. Therefore, it would not be wrong to say that even in the FTR Rules there is no provision which empowers the DGFT authorities to recover customs duty / central excise duty / service tax paid utilizing the scrips issued under the MEIS or SEIS.

Provisions of the FTP and HBP

  1. Even in the FTP and the HBP there is no provision which empowers the DGFT authorities to recover customs duty / central excise duty / service tax paid utilizing the scrips issued under the MEIS or SEIS.

Conclusion

Given the above, any action by the DGFT authorities to recover customs duty / central excise duty / service tax paid utilizing scrips issued under the MEIS, in terms of the above referred trade notice will be contrary to law and will clearly tantamount to DGFT authorities acting beyond their statutory jurisdiction. Such recovery if challenged before the courts, is likely to be declared as null and void basis the absence of provisions for recovery, as detailed above.

Further, Rule 7(3) of the FTR Rules is also liable to be struck down if challenged before the courts. The FTR Rules are issued under Section 19 of the FTDR Act. This provision empowers the Central Government to formulate rules on a number of specified issues. This provision, however, do not empower the central government to formulate recovery provisions. Therefore, this provision is also liable to be declared as null and void, as going beyond the powers conferred by the parent legislation.