1 wp10079-10-jud IN THE HIGH COURT OF JUDICATURE AT BOMBAY CIVIL APPELLATE JURISDICTION WRIT PETITION NO.10079 OF 2010 Piramal Glass Limited ] (formerly known as Gujarat Glass Limited) ] having their registered office Nicholas ] Pirmal Tower, Peninsula Corporation Park, ] Ganpatrao Kadam Marg, Lower Parel, ] Mumbai. ] ..Petitioner V/s. 1. The Union of India ] (Through the Secretary, Ministry of Law ] and Justice Department of Legal Affairs ] Branch Secretariat, Aaykar Bhavan ] Annex, 2nd Floor, New Marine Lines, 2] Mumbai - 420 020. ] ] 2. The Director General of Foreign Trade, ] Government of India, Ministry of ] Commerce & Industry, Department ] of Commerce, Udyog Bhawan, ] New Delhi - 110 011 ] ] 3. The Zonal Joint Director General of ] Foreign Trade, New CGO Building, ] Churchgate, Mumbai - 400 020. ] 2 wp10079-10-jud 4. The Foreign Trade Development Officer, ] New CGO Building, Churchgate, ] Mumbai - 400 020. ] ] 5. The Commissioner of Customs (Export ] Promotion) having his office at Jawahar ] Customs House, Nhava Sheva, ] Dist. Raigadh. ] ..Respondents. Mr. V. Sridharan with Mr. Prakash Shah and Mr. Jas Sanghvi i/b. PDS Legal for the appellant. Mr. D.J. Khambata, Additional Solicitor General with Mr. Rui Rodriques and Mr.A.S. Rao for the respondents. CORAM : J.P. DEVADHAR AND MRS. MRIDULA BHATKAR, JJ. JUDGMENT RESERVED ON : 25TH FEBRUARY, 2011 JUDGMENT PRONOUNCED ON : 3RD MARCH, 2011 JUDGMENT (PER J.P. DEVEDHAR, J.) 1) Rule, returnable forthwith. By consent, the petition is taken up for final hearing. 2) The petitioner is aggrieved by the communication dated 03/05/2010 issued by the Director General of Foreign Trade (DGFT) as also 11 orders in original all dated 26/11/2010 passed by the Jt. DGFT, Mumbai. 3 wp10079-10-jud 3) By communication dated 03/05/2010 the DGFT has informed the Jt. DGFT, Mumbai that during the period 2004-05, Duty Free Replenishment Certificates ('DFRC' for short) ought to have been issued to the petitioner, for import of duty free inputs which were set out in the Standard Input Output Norm (SION) notified by the DGFT on the date of exports and not as per the SION notified subsequent to the exports. Based on the above communication, the Jt. DGFT, Mumbai by 11 orders in original all dated 26/11/2010 has demanded duty with penalty from the petitioner in respect of the 'Formers' imported duty free by the holder of the DFRC's issued to the petitioner on the ground that the 'Formers' were not covered under the SION notified by the DGFT on the date of exports effected by the petitioner. 4) Ordinarily, we would have relegated the petitioner to avail the alternate remedy of appeal against the orders in original dated 26/11/2010 which are impugned in this Writ Petition. However, since the said orders in original are based on the communication issued by the DGFT on 3/5/2010 and the validity of the said communication is challenged, we have deemed it proper to entertain the Writ Petition and decide the issue on merits. 5) The petitioner is engaged in the business of manufacture and export of glass bottles, perfumary bottles, vials, etc. During the 4 wp10079-10-jud period 2004-05 the petitioner had exported several consignments of glass bottles and opted for DFRC licences. 6) Under the EXIM Policy 2002-2007 the exporters were eligible for incentives by way of Advance licence / DFRC / DEPB (Duty Exemption Pass Book). Advance licence permits duty free import of inputs which are physically incorporated in the export product. DFRC / DEPB licences permit duty free replenishment of inputs used in the export product. In the present case, we are concerned with the duty free import of inputs under DFRC's issued to the petitioner. Para 4.1, 4.2, 4.2.3 and 4.2.4 of 2002-2007 policy are relevant for deciding the issues raised in the petition and the same are reproduced hereinbelow:- "4.1 The Duty Exemption Scheme enables duty free import of inputs required for export production. An Advance Licence is issued under Duty Exemption Scheme. The Duty Remission Scheme enables post export replenishment / remission of duty on inputs used in the export product. Duty Remission scheme consist of (a) DFRC and (b) DEPB. DFRC permits duty free replenishment of inputs used in the export product. The DEPB scheme allows drawback of import charges on inputs used in the export product. 4.2 DFRC is issued to a merchant-exporter or manufacturer-exporter for the import of inputs used in the manufacture of goods without payment of basis customs duty, and special additional duty. However, such inputs shall be subject to the payment of additional customs duty equal to the excise duty at the time of import. 5 wp10079-10-jud 4.2.3 DFRC shall be issued only in respect of products covered under the Standard Input Output Norms as notified by DGFT. However, in respect of Standard Input Output Norms which are subject to "actual user" condition or where the input(s) is allowed with prior import condition or for import of fuel under the general norms, DFRC shall be issued with actual user condition for these inputs. In cases where Standard Input Output Norms allow import of Acetic Anhydride, Ephedrine and Pseudo Ephedrine, DFRC shall be issued provided these items are specifically deleted from the list of import items. 4.2.4 DFRC shall be issued for import of inputs as per SION as indicated in the shipping bills. The validity of such licences shall be 18 months. DFRC and or the material(s) imported against it shall be freely transferable. However, DFRC with actual user condition or the material(s) imported against it shall not be transferable. " 7) From the aforesaid policy provisions it is clear that after export, the exporters are issued DFRC's for import of inputs used in the export product, which are covered under the SION notified by the DGFT and also indicated in the shipping bills. 8) As per the SION notified by the DGFT, originally six inputs eligible for duty free import under heading 'Chemical & Allied Product SI No. A3016' in respect of the products exported by the petitioner. By a 6 wp10079-10-jud Public Notice dated 12/04/2004 the DGFT amended the SION so as to include two more inputs viz. "Formers' & 'Packing material' under SI No. A3016. Thus, as per the amended SION, an exporter of glass bottles became entitled to import eight inputs enumerated in entry A3016 of SION without payment of duty. 9) In the present case, the petitioner had applied for DFRC's from time to time after the SION was amended on 12/4/2004. In the said applications, the petitioner claimed DFRC's for duty free import of all the eight inputs used in the products exported prior to 12/4/2004 as also exported subsequent to 12/4/2004. The licensing authority under the DGFT accordingly issued several DFRC's during the period 2004-05. The said DFRC's specifically permitted duty free import of all the eight items including Formers & packing materials irrespective of the fact that the petitioner had exported goods prior to 12/04/2004 or subsequent to 12/4/2004. 10) Under the EXIM policy 2002-07 the DFRC's being freely transferable, the petitioner transferred the DFRC's to third parties for consideration. Those third parties have imported inputs including formers & packing materials duty free under the DFRC's issued to the petitioner by the office of the DGFT, within the validity period i.e. within 24 months from the issuance of DFRC's. 7 wp10079-10-jud 11) Subsequently, on 18/12/2007 it appears that the Audit Authority raised an objection to the effect that Formers & packing materials which were included in the SION by Public Notice dated 12/4/2004 could not be allowed to be imported under DFRC's where the exports were made prior to 12/4/2004. Thereupon the Jt. DGFT sought clarification in that behalf from the DGFT. By the impugned communication dated 3/5/2010 the DGFT clarified thus :- "To, The Jt. DGFT, Mumbai Subject: Classification regarding effective date of import against DFRC - M/s. Gujarat Glass Ltd. Sir, With reference to this office letter of even number dated 26-4-2010 on the above mentioned subject, I am directed to further clarify that SION available on the date of export is required to be taken into consideration and not that as per SION modified subsequent to exports. DFRC being cost export replenishment scheme has to be linked to the date of exports. " 12) Accordingly, 11 show cause notices were issued in January- February, 2010 calling upon the petitioner to show cause as to why customs duty with interest and penalty should not recovered from the petitioner in respect of Formers & Packing materials imported under the 8 wp10079-10-jud DFRC's issued to the petitioner during the period 2004-2005, because 'Formers / packing materials' were included in the SION on 12/4/2004, whereas the exports were made prior to 12/4/2004 and in such cases formers / packing materials could not be allowed duty free import under the DFRC's issued to the petitioner. 13) The petitioner objected to the issuance of the show cause notices as also the claim to recover duty with interest and penalty. However, rejecting the contentions of the petitioner, 11 impugned orders in original were passed on 26/11/2010 confirming duty, interest and imposed penalty upon the petitioner and its Directors. Challenging the communication dated 3/5/2010 and also 11 orders in original dated 26/11/2010 the present petition is filed. 14) Mr. Sridharan, learned counsel appearing on behalf of the petitioner submitted that the communicated dated 3/5/2010 is contrary to the Exim policy, because the policy provides for duty free importation of inputs used in the export product and it is not in dispute that formers & packing materials are inputs used in the product exported by the petitioner. He submitted that para 4.2.3 of the policy ensures that the DGFT verifies the inputs used in the export product and notifies the same in the SION so that the DFRC is issued only for import of inputs used in the export product and not any other inputs. Similarly, para 9 wp10079-10-jud 4.2.4 of the policy requires that the DFRC's are issued for duty free import of inputs used in the export product which are notified in the SION and indicated in the shipping bills. The object is to ensure that the exporter in the shipping bills submitted to the customs authorities declares that the exports are made with a view to import inputs used in the export product which are covered under the SION notified by the DGFT. In the present case, it is not in dispute that the Formers & packing materials are inputs used in the manufacture of glass bottles and, therefore, the petitioner was entitled to and in fact allowed to import the same duty free under the DFRC's issued to the petitioner. The fact that the DGFT recognised that the Formers / packing materials are inputs used in the export product and notified the same in the SION on 12/4/2004, it does not mean that prior to 12/4/2004 the Formers / packing materials were not inputs used in the export product. 15) Mr. Sridharan further submitted that the inputs covered under the SION as on the date of issuance of DFRC and not on the date of export are relevant. In support of the above contention, reliance is placed on the decision of the Apex Court in the case of S.B. International Ltd. V/s. Asstt. Director Foreign Trade reported in (1996) 62 E.L.T. 164 (S.C.) and a decision of this Court in the case of Sonia Fisheries V/s. Union of India reported in (1997) 90 E.L.T. 22 (Bom). 10 wp10079-10-jud 16) It is further submitted on behalf of the petitioner that in the present case the DFRC's were issued by construing the policy provisions to the effect that the inputs covered under the SION as on the date of issuing the licence is relevant. On the basis of the validly issued DFRC's duty free imports have been made by the third parties to whom the said DFRC's were legally transferred. Assuming that the authorities issuing the DFRC's had wrongly construed the provisions of the policy, the imports already made as per the DFRC's cannot be faulted and the DGFT cannot issue a clarification so as to adversly affect the imports already made pursuant to the validly issued DFRC's. In the present case, neither the DFRC's are cancelled nor the items specifically included in the DFRC's have been deleted. Relying on the decision of this Court in the case of A.V. Industries V/s. Union of India reported in (2005) 187 ELT 9 (Bom), it is contended that even if there is any bonafide mistake on the part of the authority issuing the DFRC's, the petitioner cannot be penalised for that bonafide mistake committed by the licensing authorities. The alleged mistake in the DFRC's, if any, were corrected in time by deleting the two items, the importers to whom DFRC's were sold would have imported items other than Formers / Packing materials. Therefore, it is contended that the communication dated 3/5/2010 being contrary to the policy be quashed and set aside. Consequently, the orders in original dated 26/11/2010 passed on the basis of the communication dated 3/5/2010 seeking to recover duty, 11 wp10079-10-jud interest and penalty from the petitioner who is not even the importer deserve to be quashed and set aside. 17) Mr.Khambata, learned Additional Solicitor General ('ASG' for short) appearing on behalf of the respondents, on the other hand submitted that the communication dated 3/5/2010 merely clarifies the policy provisions as they stood at the relevant time and, therefore, no fault can be found with the communication dated 3/5/2010. As regards the validity of the orders in original all dated 26/11/2010, he submitted that the petitioner must be directed to avail the statutory remedy of appeal provided under the Act. 18) On the merits of the case relating to the issuance of DFRC's permitting the duty free import of 'Formers / Packing materials', the learned ASG submitted that admittedly on the dates on which exports were made 'Formers / packing materials' were not included in the SION. As per para 4.2.3 of the 2002-2007 policy, DFRC's have to be issued only in respect of those inputs which are included in the SION. Unlike Advance licences, the DFRC's are issued for import of inputs used in the product which are already exported. Therefore, it is the date of export which is relevant for issuing DFRC and on the date of export if the input is not covered under SION, the said input cannot be allowed to be imported duty free under the DFRC. In other words, since 'Formers' 12 wp10079-10-jud were not included in the SION on the date of export DFRC could not be issued to the petitioner for import of 'Formers'. 19) It is further contended by the learned ASG that para 4.2.4 of the 2002-2007 policy clearly provides that the DFRC shall be issued for import of inputs as per SION as indicated in the shipping bills. The petitioner had indicated in the shipping bills that six items are inputs which are used in the export product and the petitioner had not included 'Formers / packing materials' as inputs used in the export product. Therefore, DFRC's could not be issued for duty free import of 'Formers packing materials' as they were not indicated in the shipping bills. The fact that the said two items were erroneously included in the DFRC's, it does not mean that the said two items could be imported duty free, especially when the said two items were not included in SION on the date of export and the said two items were not declared in the shipping bills. The submission is that in respect of the exports effected upto 11/4/2004 DFRC's could not be issued for duty free import of 'Formers / packing materials' and, therefore, duty with interest would be recovered even if the said items were cleared duty free under the DFRC's wrongly issued to the petitioner. 20) Relying on a Division Bench decision of the Madras High Court in the case of Adani Exports Ltd. V/s. Union of India reported in 13 wp10079-10-jud (2003) 151 ELT 520 (Mad) which is upheld by the Apex Court, the learned ASG submitted that DFRC's could be issued for import of duty free inputs which are specifically set out in the SION on the date of exports and not on the date of issuance of DFRC's. In the present case, the petitioner in his application had erroneously claimed DFRC on 'Formers / Packing materials' even though the same were not covered under SION on the date of export. The DFRC's were granted on the basis of the application made by the petitioner. The error committed in issuing DFRC's for duty free import of Formers / Packing materials came to light when the Audit Authority raised the objection. The said objection was confirmed by the DGFT vide communication dated 3/5/2010. The petitioner while making the applications for DFRC's had executed an undertaking to the effect that the contents of the application if proved to be incorrect or false, then the petitioner would be liable for penal action or other consequences. Since the claim of the petitioner for duty free import of 'Formers / Packing materials' which were not included in the SION on the date of export is found to be incorrect, the petitioner in terms of the undertaking given, is liable to pay duty, interest and also liable for penalty. The fact that the duty demand on packing materials has been dropped as the same are allowable as per General Policy for 'packing material' under the Hand Book of Procedures, Vol II for SION, the petitioner cannot escape liability to pay duty with interest and penalty on the 'formers' which were erroneously allowed importation on account 14 wp10079-10-jud of the misdeclaration made by the petitioner. Accordingly, the learned ASG submitted that no fault can be found with the communication dated 3/5/2010 as well as the orders in original all dated 26/11/2010. 21) We have carefully considered the rival submissions. 22) The basic dispute in the present case is, whether DFRC under the 2002-2007 policy was liable to be issued in respect of the inputs which are covered under the SION on the date of export or in respect of inputs covered under the SION on the date of issuing DFRC ? 23) Perusal of para 4.1 and para 4.2 of the EXIM policy, 2002 -2007 clearly shows that DFRC's were to be issued for duty free import of inputs used in the export product. Since the DFRC's were issued after the product is exported, to prevent any abuse, the policy provides that the DGFT must approve the inputs that are used in the export product. That is why para 4.2.3 of the policy provides that DFRC shall be issued only in respect of the products covered under the SION as notified by the DGFT. Para 4.2.3 of the policy cannot be construed to mean that the DGFT has the discretion not to include an input used in the export product in the SION. In other words, the policy provides that all inputs used in the export product are eligible for duty free import to the extent permitted under the DFRC, however, the said inputs must be 15 wp10079-10-jud noticed by the DGFT. 24) Since the exports as well as the imports are regulated by the customs authorities, para 4.2.4 of the policy provides that DFRC shall be issued for import of inputs as per SION as indicated in the shipping bills. This para further ensures that the exporter while submitting shipping bills to the customs authorities declares that the exports are effected with a view to import inputs used in the export product which are notified in the SION. 25) Where the DGFT by a public notice amends the existing SION by adding an input used in the export product, then the exporter is entitled to import that input duty free to the extent permitted under the DFRC. No doubt that until an input is is notified under the SION, DFRC cannot be issued in respect of the input. But once the DGFT notifies an input under the SION as an input used in the export product, then there is no reason as to why DFRC cannot be issued in respect of that input, even if the product was exported prior to the issuance of the public notice by the DGFT. In other words, for issuing DFRC what is relevant is that the inputs must be notified under the SION and not the date on which it is notified. Thus, reading the policy provisions as a whole, it is evident that DFRC has to be issued for duty free import of inputs used in the export product which are notified under the SION and the fact that an 16 wp10079-10-jud input was not notified on the date of export cannot be a ground to deny duty free import of that input under the DFRC, because the object of the policy was to allow duty free import of the inputs used in the export product and not restricted to the inputs notified on the date of export. 26) The fact that the 'Formers / packing materials' are inputs used in the product exported by the petitioner is confirmed by the Central Excise authorities. Even the DGFT has confirmed, though belatedly, that 'Formers / packing materials' are inputs used in the product exported by the petitioner. There is nothing in the policy to suggest that DFRC has to be issued in respect of the inputs notified under the SION on the date of export. Even the public notice dated 12/4/2004 does not state that the 'Formers / packing materials' shall be treated as inputs used in the export product with effect from 12/4/2004. Therefore, the petitioner was entitled to seek DFRC for duty free import of 'Formers / packing materials' along with other inputs set out in the SION and consequently, issuance of DFRC's for duty free import of 'Formers / packing materials' in respect of exports effected prior to 12/4/2004 cannot be faulted. 27) It is contended on behalf of the revenue that if the argument of the petitioner that the date of export is not the relevant date for issuing DFRC is accepted, then, it would mean that where subsequent to the export an input is deleted from SION, then, DFRC cannot be issued in 17 wp10079-10-jud respect of that input even though the said input was covered under the SION on the date of export. There is no merit in this argument, because, the DGFT can delete an input covered under the SION only if the DGFT comes to the conclusion that its earlier decision to include that input under SION was erroneous. In such a case, if the DFRC was not issued in respect of the exports effected prior to the deletion, then the question of issuing DFRC after the deletion of the input does not arise at all. In the present case, it is not in dispute that the Formers / Packing materials are inputs used in the product exported by the petitioner. The fact that the DGFT notified the same on 12/4/2004 does not mean that prior to 12/4/2004 the said items were not inputs used in the export product. When the object of DFRC is to permit duty free import of inputs used in the export product, that object cannot be defeated on the ground that the input was notified under the SION subsequently and the same was not indicated in the shipping bills submitted at the time of export. 28) In the present case, even the authorised officer interpreted the policy to mean that irrespective of the date of export once the Formers / packing materials were notified as inputs used in the export product DFRC licences have to be issued irrespective of the date of export, and accordingly issued the DFRC's in