Retrospective withdrawal of DEPB benefit by Public Notice

PJ/Case Laws/2011-12/1550

Retrospective withdrawal of DEPB benefit by Public Notice - validity of

Case: Noble Resources and Trading India Pvt. Ltd. Vs. Union of India

Citation: 2012 (276) E.L.T. 3 (Bom.)

Issue:- Whether Director General of Foreign Trade can make a retrospective amendment by a Public Notice to withdraw DEPB benefits when public notice issued in this regard is neither clarificatory nor involving interpretation of policy?

Brief Facts:- Petitioner is engaged in manufacturing and export of cotton bales. The Central Government in exercise of power conferred by Section 4 of the Foreign Trade (Development and Regulation) Act, 1992 has formulated the Foreign Trade Policy for 2009-2014. Chapter IV of the policy contains provisions for duty exemption and covers the Duty Entitlement Passbook (DEPB) scheme. The Handbook of the procedures, which has been notified by the Director General of Foreign Trade, makes provision for implementing the DEPB scheme.

The basic object of the DEPB scheme is to neutralize the incidence of custom duty on import content of export products. Neutralization is provided by way of a grant of duty credit against the export product. An exporter may apply for a credit at a specified percentage of the FOB value of exports made in freely convertible currency. Credit is made available against such export products and at such rates as may be specified by the Director General of Foreign Trade by way a public notice. The credit can be utilized for the payment of custom duty on freely importable items and/or restricted items.

By a Public Notice dated 05.11.2008 general instructions were issued by the DGFT for DEPB rates. The DEPB schedule prescribes several product groups of which product code 89 relates to the product group textiles. In respect of cotton yarn DEPB rates was 3.67% whereas the rate against the residuary entry Sr. No. 22D (Melange Yarn) was 1.5%.

By a Public Notice dated 21.04.2010 the DGFT provided that the export of cotton yarn including Melange Yarn appearing at DEPB entry 78 of the product group ‘textile’ shall not be entitled to DEPB benefit with immediate effect. Subsequently a policy circular was issued on 29.11.2010 by the DGFT that the export of cotton shall not be entitled to any DEPB benefit either under entry Sr. No.78 of products group ‘textile’ or under residuary entry Sr. No. 22D of the product group ‘miscellaneous’ products of the DEPB rate schedule.

On 31.03.2011, DGFT made amendment in the Schedule of DEPB rates. The effect of the amendment was explained in the circular that DEPB benefit on export of cotton shall not be available. DEPB benefit on export of cotton yarn was withdrawn with effect from 21.04.2010, therefore the, DEPB benefit on cotton (the basic raw material for cotton yarn) has been disallowed for export made from 21.04.2010 onwards.

Subsequently, on 4.08.2011, DGFT has issued a further circular by which the export of cotton yarn including Melange yarn appearing at Sr. No. 78 of the product group ‘textile’ has been made entitled to DEPB benefit on export made on or after 1 April 2011. Similarly, another public notice dated 4 August 2011 was issued with regard to the extension of DEPB benefits on the export of cotton, with effect from 1 October 2010 under Sr. No. 22D of the schedule of rates of the product group ‘miscellaneous products’. Consequently, exports of cotton made on or after 1 October 2010 have been made entitled to for the grant of DEPB benefits.

In Petioner’s case, the dispute relates to export of cotton made after 21 April 2010, but prior to 30 September 2010. As the DEPB benefits on cotton have been restored with effect from 1 October 2010.

Petitioner’s Contention:- Petitioner submitted that the grant of DEPB benefits is governed under the substantive provisions of Chapter IV of the Foreign Trade Policy. It was not open to the DGFT to withdraw the benefit accruing under the DEPB scheme on the export of cotton retrospectively with effect from 21 April 2010 by issued a public notice dated 21 March 2011.

Petitioner submitted that DGFT has no power to issue a public notice so as to retrospectively deprive an exporter of a benefit which has already accrued on the basis of exports effected prior to the date of the notice. As a matter of fact, where the Government has intended to withdraw the DEPB benefit on exports, it has always done so specifically and prospectively.
It was submitted that the power to make a retrospective alteration can be exercised by the DGFT only if it is beneficial and not detrimental to the interest of the exporter more so when a right has accrued; and that the DGFT is estopped from recovering benefits which have already been received.

Respondent’s Contention:- Revenue contended that DGFT is vested under paragraph 2.3 of the policy to resolve any question or doubt in respect of the interpretation of a provision contained in the policy or classification of any item or as regard the Handbook of procedure and schedule of the rates. It was argued that with effect from 21 April 2010, DEPB benefits were withdrawn on the export of cotton yarn. The reason for keeping cotton yarn under restriction was relatable to domestic concerns more particularly the rising prices of the cotton yarn and non-availability of the quantity at reasonable prices to domestic manufacturers. Consequently, through the benefit under DEPB scheme came to be withdrawn in respect of cotton yarn, no specific provision was introduced in Sr. No. 22D of the schedules of rates clarifying that the benefit would not be available in respect of export of cotton.

It was contended that Cotton is a raw material in the manufacture of cotton yarn. As a matter of fact, cotton exports were dis-incentivised by virtue of the export tax which was in place until 30 September 2010. After 1 October 2010, the export tax was removed on the exports of cotton and the policy intention of the Union Government was not to place disincentives on the exports of cotton after that cut off date. Hence, it was urged that it was open to the Director General of Foreign Trade to issue a policy circular on 31 March 2011 withdrawing the benefits under the DEPB scheme on the export of cotton with effect from 21 April 2010.

Reasoning of Judgment:- The High Court perused the relevant provisions and noted that as per Para 2.3. of FTP, DGFT is empowered to resolve a question or doubt in respect of the interpretation of any provision contained in the policy, a classification of any item or in respect of the Handbook of procedures or schedule of rates. Under paragraph 2.4 the DGFT may specify the procedure to be followed for an exporter or importer or by any licensing or any other competent authority for the purposes of implementing the provisions of the Act, the Rules and the Orders made thereunder and the Policy. Credit under the Duty Entitlement Passbook scheme is available against such export products and at such rates specified by the DGFT by way of a public notice. Paragraph 4.3 of the Policy makes a provision in those terms.

Under paragraph 4.37 of the handbook of procedures, it has been specified that the duty credit under the scheme shall be calculated by taking into account the deemed import content of the export product as per the stand input output norms. The DGFT therefore specifies the products and the credit of duty having regard to the standard input output norms. The DEPB benefits available in respect of cotton yarn were withdrawn by a public notice dated 21 April 2010.

The High Court noted that it is not in dispute that the benefit in respect of the exports of cotton continued to exist until the benefit was withdrawn by a public notice on 31 March 2011. The rationale for the withdrawal of the benefit was that the DEPB scheme encourages exports of a particular commodity and when the intention of the government was not to encourage exports of a specific commodity, the grant of the DEPB benefit would be contrary to its intention. DEPB benefits on cotton yarn exports were withdrawn on 21 April 2010 and on this ground DEPB benefits on cotton which is a basic raw material for cotton yarn were sought to be disallowed for exports.

It was held that the Director General of Foreign Trade was entitled to withdraw the benefit which was available in respect of the exports of cotton by the issuance of a public notice. What in our view the Director General of Foreign Trade could not do, however, was to stipulate that the benefits available under the DEPB scheme on the exports of cotton would be withdrawn with retrospective effect from 21 April 2010. Though, the DEPB benefits on cotton yarn were withdrawn on 21 April 2010, no provision was made for the withdrawal of benefits in respect of the exports of cotton until 31 March 2011. There was no specific entry in the schedule of rates pertaining to cotton as there was in regard to cotton yarn including Melange yarn (Sr. No.78 of the product group 'textiles'). Exports of cotton were governed by Sr. No.22D of the miscellaneous product groups. Sr. No.22D as noted earlier was a residuary item relating to export products covered under standard input output norms for which no specific rates were notified, packed in any packaging material.

It was noted that the Petitioner has placed on the record notifications issued by the Director General of Foreign Trade withdrawing with immediate effect DEPB benefits which were hitherto available inter alia in respect of the export of the skim milk products (by a notification dated 17 April 2008) and on exports of Basmati rice (by a notification dated 3 April 2008). This has been pressed in aid to submit that where the DEPB benefit has been withdrawn, it has been withdrawn with prospective effect.

It was held that Director General of Foreign Trade had no power or jurisdiction as an authority vested with the power of implementing the Foreign Trade Policy to withdraw the DEPB benefits on the export of cotton with retrospective effect from 21 April 2010. The rationale for the withdrawal was that with effect from 21 April 2010 the policy of the Union Government was not to grant incentives on the export of cotton or cotton yarn as was reflected in the notice dated 21 April 2010 withdrawing DEPB benefits on cotton yarn. Moreover, it was urged that there was an export tax which was withdrawn only on 1 April 2010. Whatever be the motive, the exercise of powers has to be in a manner which is consistent with the statute. The public notice issued by the Director General of Foreign Trade is clearly not clarificatory nor does it constitute an interpretation of the policy. The public notice specifies that DEPB benefits shall not be available in respect of a particular item viz. cotton. This exercise is not in the nature of interpretation nor is it an exercise in clarification, but is of a substantive nature.

For the afore-said reasons, The High Court was of the view that the Director General of Foreign Trade was within his powers in issuing the public notice dated 31 March 2011, stating that DEPB benefits shall not be available on the exports of cotton, but he could not have done so with retrospective effect from 21 April 2010. The modification would therefore take effect from the date of the public notice which was 31 March 2011.

It was noted that as a result of the subsequent developments, the Director General of Foreign Trade has now allowed benefits on the exports of cotton with effect from 1 October 2010 by and as a result of a subsequent notice dated 4 August 2011. The restoration of a benefit can always take place with effect from an anterior date.

In the end, it was held that Public notice dated 31 March 2011 was affective prospectively only and not retrospectively. Recoveries initiated against Petitioner quashed and set aside.

Decision:- Rule made absolute.

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PJ/Case Laws/2011-12/1550

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