The Customs, Excise & Service Tax Appellate Tribunal has delivered a pivotal ruling clarifying the procedural preconditions for invoking Section 28AAA of the Customs Act, 1962. The judgment establishes that customs authorities cannot initiate recovery of duties or impose penalties based on alleged misclassification of exported goods unless the Directorate General of Foreign Trade has first formally cancelled the export incentive scrips issued to the exporter. This decision reinforces the principle that administrative actions must follow statutory and procedural hierarchies, offering critical protection to exporters relying on official DGFT authorizations.
Background & Facts
The Dispute
The dispute arose from the Directorate of Revenue Intelligence’s issuance of show cause notices under Section 28AAA of the Customs Act, 1962 against three appellants - Rishabh Salvage Energy Pvt Ltd, its director Inderjit Singh Minhas, and Soham Logistics Pvt Ltd - for allegedly misclassifying exported salt. The DRI alleged that the appellants classified salt under CTH 2501 0090 (industrial salt) to claim 2% duty credit under the Foreign Trade Promotion Scheme, when the correct classification was CTH 2501 0010 (common salt), which did not attract such benefits.
Procedural History
The case progressed through the following stages:
- 2020: DRI issued show cause notices under Section 28AAA seeking recovery of duty and imposition of penalty
- 2023: Additional Commissioner of Customs, Mundra, passed adjudication orders sustaining the demand for duty and penalty
- 2024: Appeals filed before the Customs, Excise & Service Tax Appellate Tribunal (CETAT), West Zonal Bench, Ahmedabad
Relief Sought
The appellants sought quashing of the duty demand and penalty orders, arguing that the DGFT had not cancelled the export incentive scrips issued to them, and that the customs authorities had no jurisdiction to override DGFT’s classification decisions absent such cancellation.
The Legal Issue
The central question was whether Section 28AAA of the Customs Act, 1962 permits customs authorities to initiate recovery of duty and impose penalties based on misclassification of goods when the corresponding export incentive scrips issued by DGFT remain valid and uncanceled.
Arguments Presented
For the Appellant
The appellants relied on Circular No. 334/1/2012-TRU dated 01.06.2012, which explicitly states that action under Section 28AAA can only be initiated after the DGFT has cancelled the incentive instrument. They further cited Commissioner of Customs, Mumbai-I v. Adani Ports Limited (2024 (4) TMI 877) and Munjal Shova Limited v. CCE & ST, Delhi-IV (2022 (382) ELT 145 (SC)) to argue that penalties are unsustainable unless fraud or forgery is proven and the scrips are formally revoked. They emphasized that DGFT had issued the scrips after reviewing all shipping bills and classifications, and had not revoked them.
For the Respondent
The Revenue contended that the misclassification was evident from the nature of the goods and that the appellants had deliberately availed benefits through incorrect declarations. It argued that the customs authorities had independent power to reassess classification and recover duties under Section 28AAA, irrespective of DGFT’s issuance of scrips, as the latter was merely an administrative facilitation.
The Court's Analysis
The Tribunal conducted a detailed review of the statutory framework under Section 28AAA, which was inserted by the Finance Act, 2012 to enable recovery of duties where incentive instruments were obtained by "collusion, willful misstatement or suppression of facts." The Court emphasized that the provision is not a standalone tool for reclassifying goods but a remedial mechanism triggered only after the issuing authority - DGFT - has acted to revoke the instrument.
"Field formations are advised to issue demands as soon as DGFT/concerned regional Authority initiates action for cancellation of an instrument but the matter may be decided only after the instrument has been cancelled by DGFT."
The Tribunal noted that the circular was issued by the Central Board of Indirect Taxes and Customs, the apex administrative body, and carries binding force on field formations. It further held that the Munjal Shova case was distinguishable because there, the scrips were proven to be forged, whereas here, no such fraud was established and DGFT had not initiated cancellation proceedings. The Court rejected the Revenue’s argument that customs authorities could independently override DGFT’s classification, stating that such an approach would create regulatory chaos and undermine the statutory scheme of export incentives.
The Verdict
The appellants prevailed. The Tribunal held that Section 28AAA cannot be invoked to demand duty or impose penalty unless the DGFT has first cancelled the export incentive scrips. All duty demands and penalties were set aside, with consequential relief granted to all appellants.
What This Means For Similar Cases
Cancellation by DGFT Is a Prerequisite
- Practitioners must verify whether DGFT has initiated cancellation proceedings before advising clients on liability under Section 28AAA
- Customs authorities cannot bypass DGFT’s authority to issue or revoke scrips
- Appeals against duty demands should be filed on this ground if scrips remain active
Classification Disputes Must Be Resolved at DGFT Level First
- Exporters should ensure all shipping bill classifications are submitted to DGFT for approval
- Once scrips are issued and not revoked, classification is deemed accepted unless formally challenged by DGFT
- Customs cannot unilaterally reclassify goods to deny benefits after the fact
Penalties Require Proof of Fraud, Not Just Error
- Mere misclassification without evidence of willful suppression or collusion cannot justify penalty under Section 114(iii) or 114AA
- The burden lies on the Revenue to prove fraudulent intent, not on the exporter to prove innocence
- This judgment reinforces the principle that administrative penalties require strict compliance with procedural safeguards
