1 wp1604.11-12.7 IN THE HIGH COURT OF JUDICATURE AT BOMBAY APPELLATE SIDE WRIT PETITION NO.1604 OF 2011 Kwality Polymers & Anr. ..Petitioners versus Union of India & Ors. ..Respondents. ..... Mr.Zubin Behramkamdin with Ms.Naira Variava and Shavger Merchant i/b.Bharucha & Partners for the Petitioners. Mr.A.S.Rao for the Respondents. ..... CORAM : DR. D.Y. CHANDRACHUD AND ANOOP V.MOHTA, JJ. July 12, 2011. P.C.: The First Petitioner is a Government recognised export house and has been manufacturing and exporting industrial rubber products since 1987. Until 31 March 2002 Entry 547 which was the relevant entry in the DEPB rates for the product group “chemicals” was entitled “rubber compounded sheets/rings/gaskets”. With effect from 1 April 2002, the DEPB rates for the export product rubber 2 wp1604.11-12.7 compounded sheets/rings/gaskets came to be prescribed at Sr. No. 507 of the product group “chemicals”. At the relevant time, the applicable DEPB rate was 8% with a cap value of Rs.85/- per kg. of the FOB value of exports. Between 5 September 2003 and 27 November 2009, the First Petitioner obtained 38 DEPB licences under Entry 507 pursuant to the export of doormats and rubber mats. The First Petitioner availed of a DEPB credit under Entry 507. 2. The Kerala High Court delivered on 17 March 2006, a judgment in a batch of petitions in which the issue which arose before the Court was, whether the export of rubber mats was liable to be covered under Entry 547 dealing with rubber compounded sheets. A view was taken by the DEPB Committee that doormats are a stage further to sheets and involve further processing resulting in a commercially different commodity which would not be covered by the expression “rubber compounded sheets”. Accordingly, a notification clarifying the stand of the Department was issued. A Learned Single Judge of the Kerala High Court observed that there was a dispute or 3 wp1604.11-12.7 doubt as to whether rubber compounded mats would be covered by the DEPB entry pertaining to rubber compounded sheets. If that be so, ruled the High Court, the matter required either an amendment or a clarification. Hence, the batch of Petitions was allowed by declaring that the export of rubber mats shall be liable to be covered under Entry 547 unless it was duly amended by the Central Government or clarified by the DGFT by a public notice, if such a clarification would meet the purpose. 3. On 8 December 2009, the Second Respondent issued a policy circular (Circular 18/2009-2014) to the effect that the product doormats/rubber mats would not be covered by the DEPB entry meant for the product rubber compounded sheets/rings/gaskets mentioned in the DEPB rate schedule. The circular notes that in pursuance of the judgment of the Kerala High Court, the matter was examined by the DEPB (Inter-ministerial Committee). The Committee opined that doormats and rubber mats are value added products whose export price is higher than the price of rubber compounded 4 wp1604.11-12.7 sheets. According to the Committee, DEPB rates are calculated on the basis of customs duties on specific inputs used, their import prices and the export price of the final product and hence, higher the value addition, the less the DEPB rate. The Committee was of the view that the DEPB rate and the value cap noted against the product were based on the price parameters for the product rubber compounded sheets/rings/gaskets only and not for value added products such as doormats and rubber mats. The Committee recommended that a clarification should be issued by DGFT. Accordingly, the circular states that doormats and rubber mats would not be covered by the DEPB entry meant for the product, rubber compounded sheets/rings/gaskets. 4. Between 10 May 2010 and 4 August 2010 demand notices were issued by the Second Respondent calling upon the First Petitioner to refund DEPB credit availed of under the licences obtained prior to the circular. Those notices proceeded on the basis that there was a failure on the part of the Petitioners to submit proof 5 wp1604.11-12.7 of having completed the export obligation pro rata to the duty free imports and/or that the Petitioners had failed to achieve a minimum value addition. The Petitioners filed their replies to the notices. Between 30 August 2010 and 22 October 2010, the Second Respondent issued show cause notices under Section 14 for action under Section 11(2) of the Foreign Trade (Development and Regulation) Act, 1992. The show cause notices which were initially issued were on the basis that there was a failure to submit payment realization certificates evidencing the realization of export proceeds. In their reply, the Petitioners clarified that since a transferable DEPB was issued to them, this was only after the realisation of sale proceeds and scrutiny of proof being submitted with the application. 5. The Second Respondent issued fresh show cause notices on 27 and 28 October 2010 under Section 14 alleging that the DEPB licences had been obtained by the Petitioners against doormats/floor mats for which a DEPB benefit was not available against Sr. No.507 of the relevant schedule and that the Petitioners mis-declared the 6 wp1604.11-12.7 product under the heading “rubber compounded sheets/rings/gaskets”. The Petitioners submitted their replies to the notices to show cause in which they urged that the shipping documents were checked and the export products were physically verified by the Customs authorities in the context of the details furnished in the shipping bills. The Petitioners contended that the circular issued by DGFT on 8 December 2009 could not be retrospectively applied to recall incentives which had been availed of by the Petitioners in respect of past exports. 6. The Second Respondent issued an order on 8 March 2011 cancelling the DEPB licences that were issued to the First Petitioner and purported to impose a penalty of Rs.1,13,03,028/- under Section 11(2). Besides the order dated 8 March 2011 cancelling the DEPB licences and imposing a penalty, the First Petitioner also received ‘defaulter’ orders passed between 30 August 2010 and 16 March 2011. The Petitioners have called into question in these proceedings, the circular dated 8 December 2009, the order dated 8 7 wp1604.11-12.7 March 2011 and the defaulter orders issued to them as noted above. 7. Counsel appearing on behalf of the Petitioners submitted that the Learned Single Judge of the Kerala High Court had, by a judgment dated 17 March 2006, allowed a batch of Petitions by declaring that the export of rubber mats was liable to be covered by Entry 547 which pertains to rubber compounded sheets unless it was duly amended by the Central Government or clarified by the Director General of Foreign Trade by a public notice if such clarification would meet the purpose. It was urged that the circular that was issued by the Department on 8 December 2009 can by no means be regarded as clarificatory. In the present case, it was urged, there was no mis- declaration on the part of the Petitioners when they applied for and obtained DEPB licences, since while doing so, the Petitioners had specifically disclosed that the export product constituted rubber mats of a specified size. Further more, it has been urged that the order passed by the Second Respondent cancelling the licences and imposing a penalty is ex-facie not a reasoned order. The defaulter 8 wp1604.11-12.7 orders that were issued between 30 August 2010 and 16 March 2011 were issued on the basis of the show causes notices calling upon the Petitioners to adduce proof of the fulfillment of export obligations in respect of which there is no manner of doubt whatsoever. -8. On the other hand, it has been urged on behalf of the Respondents that the circular that was issued by the Department on 8 December 2009 is clarificatory. The Department had re-examined the issue in view of the liberty granted by the judgment of the Kerala High Court and the considered view taken by the Inter-ministerial Committee was that rubber mats or doormats, as the case may be, constitute a value added product which would not fall within the purview of Entry 507 of the product group “chemicals” (corresponding to earlier Entry 547). Moreover, it was urged that in the present case an appeal is available against the order passed by the Second Respondent cancelling the DEPB licences and imposing a penalty. Hence, the Petitioners ought to be relegated to the remedy of an appeal. 9 wp1604.11-12.7 -9. The Kerala High Court in its judgment dated 17 March 2006 had expressed the view that a sized sheet would fall within the entry pertaining to rubber compounded sheets. While granting relief in a batch of Petitions before the Court, the Kerala High Court nonetheless left it open to the Central Government to either amend the entry or to the DGFT to issue a public notice by means of a clarification if such a clarification would meet the purpose. The circular issued on 8 December 2009 postulates that rubber mats or doormats, as the case may be, constitute a value added product and would not be covered by the entry which pertains to rubber compounded sheets. The notices to show cause which were issued to the Petitioners proceeded on the basis that the Petitioners had obtained the DEPB licences against the export of door mats/floor mats for which a DEPB benefit was not available under Sr. No.507. The Petitioners had, in their replies to the notices to show cause, stated that there was no mis-declaration on their part and the shipping documents were checked and the export products were 10 wp1604.11-12.7 physically verified by the Customs authorities in the context of the details furnished in the shipping bills. In this background, the contention of the Petitioners was that the circular dated 8 December 2009 could not be applied retrospectively so as to recall the incentive availed of by the Petitioners in respect of exports made in the past. The Second Respondent passed a cryptic order merely stating that “in view of the case narrated above and considering the firm's representations,” the DEPB licences were cancelled ab initio and a penalty of Rs. 1.13 crores was imposed. The Petitioners, as the record before the Court would show, have prima facie a defence to urge in response to the show cause notices. Firstly, as the judgment of the Kerala High Court would indicate, a serious question was raised as to whether Entry 547 and later, Entry 507 would include within its purview rubber mats or doormats. Secondly, the Kerala High Court had granted relief to the Petitioners in the batch of Petitions decided there. According to the Petitioners, they stand on the same footing as the Petitioners before the Kerala High Court and in the absence of a challenge to that decision, the Department could not have made a 11 wp1604.11-12.7 distinction in their case. Thirdly, according to the Petitioners, they had at no stage made a mis-declaration and the shipping bills were duly verified by the authorities together with a physical verification of the products exported. Fourthly, the defence of the Petitioners is that the circular dated 8 December 2009 could not be retrospectively applied so as to deprive them of the benefit which was already availed of. The authority ex-facie failed to apply its mind to the submissions which were urged before it. The order that has been passed does not, therefore, fulfill the criterion of a valid reasoned order. A mere reference to the submissions which have been urged would not constitute compliance with the principles of natural justice. A breach of the principles of natural justice by the adjudicating authority cannot be cured in appeal. Besides, even the order of the Appellate Authority does not reflect a full consideration of all the relevant aspects of the case. -10. Hence, we are of the view that it would not be necessary to relegate the Petitioners to the remedy of an appeal against the order 12 wp1604.11-12.7 of the Joint Director General of Foreign Trade, cancelling the licences and imposing a penalty of Rs. 1.13 crores. There being a manifest failure of justice, consequent upon a breach of the principles of natural justice, the exercise of the writ jurisdiction under Article 226 of the Constitution would be warranted. We accordingly set aside the impugned order dated 8 March 2011 passed by the Joint Director General of Foreign Trade and remit the proceedings back for fresh consideration. We direct that the authority shall pass a reasoned order after furnishing to the Petitioners an opportunity of being heard. In the view that we have taken, we have not, at this stage, adjudicated upon the validity of the circular dated 8 December 2009 or on the submission that the circular is not clarificatory and should not be applied to deprive the Petitioners of the benefits which had accrued on past exports. In the event that the authority upon remand accepts the submission of the Petitioners, their challenge to the circular dated 8 December 2009 would be rendered academic. If on the other hand, the authority passes an order adverse to the Petitioners, it would be open to them to question the legality of the 13 wp1604.11-12.7 order on all counts, including on the validity of the circular dated 8 December 2009. Since the order passed by the Second Respondent cancelling the licences and imposing a penalty has been set aside on account of a breach of the principles of natural justice, the defaulter orders would not survive. All rights and contentions of the parties on remand are kept open. 11. Rule is made absolute in the aforesaid terms. There shall be no order as to costs. (Dr. D.Y. Chandrachud, J.) ( Anoop V.Mohta, J.)