Power of DGFT as licencing Authority for amendment in EPCG licence

PJ/Case Laws/2010-11/1166

Case: Bhilwara Spinners Ltd. Vs. Union of India

Citation: 2011(267) E.L.T. 49 (Bom)

Issue:- The DGFT as licensing authority has power to amend the policy relating to EPCG and customs cannot challenge the same.

Brief Facts:- Petitioner is engaged in the business of manufacture and sale of yarn. They had applied for and obtained EPCG licence, with obligation to export goods 6 times the CIF value of the capital goods imported. At the relevant time, there were two types of EPCG licences namely 10% basic duty EPCG licence (10% Basic duty + Nil CVD) and zero duty EPCG licence ('Nil' Basic duty + 10% CVD). The petitioner opted for zero duty EPCG licence.

Para 6.3 of the Foreign Trade Policy as well as condition No.5 of Notification No.29/97 governing zero duty EPCG licence provided that the minimum CIF value of capital goods to be imported under zero duty EPCG licence should be Rs. 20 crores and if the same is not complied, the importer shall be liable to pay full duty with interest.

The petitioner who had obtained zero duty EPCG licence could not import the capital goods of the value of Rs.20 crores and therefore applied for revalidation of the licence. Accordingly, the licence was revalidated upto 31/7/2001. However, even within the extended period, capital goods worth Rs.20 crores could not be imported. In these circumstances, the Customs Authorities issued various show cause notices proposing to confiscate the capital goods for violating condition No.5 of Notification No.29/97 and to recover the duty with interest and penalty.

Thereafter, petitioner applied for conversion of licence from ‘zero duty EPCG licence' into '10% duty EPCG licence' so that there is no requirement of importing capital goods worth Rs. 20 crores and consequently there is no violation of the condition No. 5 in Notification No.29/97. The application was considered by EPCG Committee consisting of both the Licensing Authorities and the Customs Authorities and approval for conversion of licence was granted. Thereupon, the Assistant Commissioner of Customs, EPCG issued 'No Dues' certificate and the Foreign Trade Development Officer by his communication informed that the petitioner has fulfilled the export obligation by exporting goods 6 times the value of the capital goods imported and that they can approach the customs authorities for release of BG/LUT executed by the petitioner.

In the meantime, one of the show cause notice was adjudicated and impugned order was passed holding that the failure to import capital goods worth Rs. 20 crores under zero duty EPCG licence was in violation of condition No.5 in Notification No.29/97 and, therefore, the petitioner was liable to duty, interest and penalty.

The petitioner challenged the impugned order by filing appeal before the Tribunal. During the pendency of appeal, since the zero duty EPCG licence was converted into 10% duty EPCG licence by order, the question arose as to whether the conversion of licence would apply retrospectively. The Division Bench of Tribunal referred the matter to Larger Bench for decision on the following issues:-

"(i) Whether DGFT has powers to amend the licences including the re-validation (obviously referring of a situation where validity is expired) and whether amendment will be retrospective in nature ?

(ii) Whether as to the amendment carried out by the DGFT, whether right or wrong can be the subject matter of the scrutiny and challenge by the customs authorities?

The Larger Bench held as under:-

(i) The licensing authorities do not have powers to amend any licence retrospectively.

(ii) The Customs authorities cannot challenge the powers of the licensing authority for amendment of the licence.

When the appeal filed against the another order in original came up for hearing before the Division Bench of the Tribunal, the petitioner contended that in view of the conversion of the licence it cannot be said that there is violation of Notification No. 29/97. The Division Bench by its order held that in view of the Larger Bench decision to the effect that the licensing authorities do not have the power to amend the licence retrospectively, the petitioner cannot escape duty liability on account of the conversion of licence by Order dated 8/9/2003.

Therefore, the petitioner is before the High Court challenging the order passed by the Tribunal as well as order passed by the Larger Bench of the Tribunal.

Reasoning of Judgment:- The High Court perused Rule 8 of the Foreign Trade (Regulation) Rules, 1993 and held that from the said Rule it is evident that the licensing authorities have the power to amend the licence in such a manner as may be necessary. It was noted that the next question arises is as to whether such a power can be exercised retrospectively, to the advantage of the licence holder?

The Court observed that the fact that the licensing authorities as also the EPCG Committee which consists of both the licensing authorities as well as customs authorities permitted the conversion of licence even after the licence had expired long back, clearly shows that the said conversion was allowed obviously with a view to enable the petitioner to overcome the condition No. 5 of the Notification No, 29/97. It was observed that in view of changed market conditions, the petitioner was unable to import capital goods of value of more than Rs. 20 crores as stipulated in Condition No. 5.

It was held that it was not the case of customs that decision of the licensing authorities to allow conversion of EPCG licence issued to the petitioner was not a bona fide decision or the said decision was vitiated by mala fides. Since the policy empowers the DGFT to exempt any person from any provision of FTP or any procedure, in the facts of the case, bona fide decision was taken by the EPCG committee/licensing authority to convert the licence so as to relieve the petitioner from complying the condition of the said Notification. It was held that therefore the Larger Bench was not justified in holding that the licensing authorities do not have any power to amend the licence retrospectively especially when the FTP and the Rules framed thereunder empowered the DGFT to do the needful in deserving cases.

The High Court held that it is relevant to note that neither the DGFT nor the EPCG Committee were party respondent before the Larger Bench. Since the decision to convert the licence was taken by the DGFT with the approval of the EPCG Committee (which includes customs authorities), the Commissioner of Customs/Commissioner of Central Excise were bound by the decision of the EPCG committee and could not have challenged the decision. Similarly, the Larger Bench of the CESTAT could not have held behind the back of the licensing authorities that they do not have the power to amend the licence retrospectively. Moreover, the Larger Bench decision of the CESTAT is mutually contradictory, because the Larger Bench on the one hand holds that the customs authorities cannot challenge the powers of licensing authorities to amend the licence and on the other hand holds at the instance of the customs authorities that the licensing authorities do not have the power to amend the licence retrospectively. Such an order of the CESTAT which is mutually contradictory cannot be sustained in so far as it holds that the licensing authorities do not have the power to amend the licence retrospectively.

It was held that reliance was placed by Revenue on judgment given in Vikrant Overseas v/s Union of India [2000 (123) ELT 486 (P&H)] wherein the license was amended to the prejudice of the licence holder. It was held that in the present case, licence was amended retrospectively for the benefit of the licence holder.

The High Court also considered that affidavit filed by Jt. DGFT duly affirmed on 8/3/2011 to the effect that Para 2.5 of the Foreign Trade Policy empowers the DGFT to exempt any person or class or category of persons from any provision of Foreign Trade Policy or any procedure and that the amendments carried out by the DGFT cannot be the subject matter of scrutiny and challenged by the customs authorities.

On facts of the case, it was held that once the licencing authority has found that the licence conditions have been fulfilled, it would not be open to the customs authorities to contend that the imports under the licence are contrary to law and to take action against the licence holder.

The High Court set aside the Larger Bench decision of the Tribunal and the Division Bench decision of the Tribunal to the extent they hold that the licensing authorities do not have the power to amend the licence with retrospective effect from the date of granting the licence. Consequently, the decision of the customs authorities seeking to recover duty with interest and penalty on the footing that the petitioner has violated condition No. 5 of Notification No.29/97 is also quashed and set aside.

Decision:- Petition allowed accordingly.

Comment:- We have seen that there is always dispute between DGFT and Custom. But the Custom has upper hand as they are implementation authority. We have seen in case of allowing exemption from service tax to 100% EOU that though the policy has announced the same but it was never allowed by finance minister. Ultimately cenvat credit was allowed. Thus, the implementation agency always have upper hand and custom normally say that we will be governed by custom notification and not FTP. But this particular decision has shown that the DGFT is licensing authority and can amend the policy and his power cannot be challenged by the Custom department.

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PJ/Case Laws/2010-11/1166

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