Judgement Update | Drawback cannot be demanded in the absence of machinery provision under Drawback Rules

This update is to apprise you about the recent decision of the Punjab & Haryana High Court in the case of Famina Knit Fabs v. Union of India, 2019 (9) TMI 970 (P&H). In this case, the Court quashed the demand of duty drawback in the absence of any machinery provision in law.

Facts

An exporter of textile goods (‘Petitioner’) exported goods during 2010-11 to 2012-13 and availed drawback under the Central Excise and Service Tax Drawback Rules, 1995 (‘Drawback Rules’). The proper officer physically examined the goods, their quantity, value etc. at the time of export. The Petitioner also realised the export proceeds within the stipulated period. In 2012, the DRI initiated investigation against the Petitioner by alleging over-valuation of export goods. The investigations culminated into issuance of Show Cause Notice on February 9, 2018 (‘SCN’), proposing to reject FOB value of exported goods and demand excess drawback under Rule 16 of the Drawback Rules. The present decision stems from the writ petition filed by the Petitioner.

Contentions of the parties

The Court quashed the SCN on the following grounds:

• Though Rule 16 of Drawback Rules does not stipulate any time limit for issuance of notice but every action must be initiated within a reasonable period where no limitation is prescribed in the law. Section 28 of the Customs Act prescribes a maximum period of 5 years even in cases of fraud, wilful mis-statement etc. and exported goods were physically examined and exported only after due verification by proper officer in the instant case. Under such circumstances, issuance of SCN after expiry of 5 years is unsustainable.

• Rule 20(2) of the Drawback Rules 2017 specifically saves the operation of some rights and liabilities under erstwhile Drawback Rules but does not save drawback claims granted prior to October 1, 2017. Savings clause of Section 159A under the Customs Act also does not save such a demand when a different intention of the Government is apparent from its non-inclusion under Rule 20(2). Section 6 of General Clauses Act, 1897 does not apply to repealed Rules but only to Acts repealed without any savings clause. Further, no right to raise demand of drawback survives under the Valuation Rules as the Drawback Rules are neither subject to nor subservient to the Valuation Rules and function independently to determine drawback.

• The determination of drawback is solely governed by the Drawback Rules. Therefore, the procedure to reject declared value and re-value already export goods must exist under Rule 16 of the Drawback Rules itself. Rule 16 provides for recovery of excess or erroneous drawback on account of calculation error or similar mistakes. The absence of any requirement to issue show cause notice within stipulated or reasonable time clearly indicates that there is no need to re-open the assessment, issue notice or adjudicate in such cases. Further, Rule 16 does not contemplate cases where value of goods was duly assessed by the proper officer at the time of export, export proceeds are duly realized and drawback stands released.

NITYA’s Comments:

There have been several instances where the Courts have struck the tax demands in the absence of machinery provisions. In this case, the Court has rightly quashed the demand for drawback for absence of machinery provisions. The decision also establishes sound jurisprudence in the sphere of repeal and savings clause including inter-play with Section 6 of the General Clauses Act.