The Customs, Excise & Service Tax Appellate Tribunal (CESTAT) Mumbai has delivered a pivotal ruling clarifying that the recovery of duty drawback under Rule 16 of the Customs, Central Excise Duties and Service Tax Drawback Rules, 1995, cannot be invoked after the enactment of the 2017 Drawback Rules unless a claim was pending on the date of repeal. This decision invalidates a demand of Rs. 773.86 lakhs and sets a binding precedent on the temporal applicability of repealed customs rules.
Background & Facts
The Dispute
The dispute arose from the Commissioner of Customs (Exports), Mumbai, issuing an order dated 15.11.2023 demanding the recovery of Rs. 773.86 lakhs in duty drawback already paid to M/s. Haji's International and its partner, Shri Ashfaq Anwar Nursumar, under Rule 16 of the 1995 Drawback Rules. The department alleged that the export goods were procured using fake invoices issued by Suhel Parvez Ansari, and that foreign exchange proceeds for 198 shipping bills (amounting to Rs. 2,24,93,070) were not realized. The order also imposed penalties under Section 114(i)/(iii) and Section 114AA of the Customs Act, 1962, and ordered confiscation of goods.
Key Facts
- The appellant, M/s. Haji's International, exported garments primarily to Nigeria between January 2012 and December 2016 under 699 shipping bills.
- Duty drawback at the All Industry Rate (AIR) was granted and disbursed, totaling Rs. 773.86 lakhs.
- Bank Realization Certificates (BRCs) were submitted by the appellant to prove receipt of foreign exchange proceeds.
- The Directorate of Revenue Intelligence (DRI) initiated an investigation in August 2015 against Suhel Parvez Ansari for issuing fake supplier invoices to exporters, naming Haji's International as one recipient.
- The appellant denied any involvement with Suhel Ansari, stating it sourced goods from legitimate manufacturers in Gujarat, Tamil Nadu, and Kolkata, and made payments via cheque and online transfer.
- No show cause notice was issued by the department prior to 01.10.2017.
- A show cause notice dated 14.12.2022 was issued over five years after the repeal of the 1995 Rules.
- The appellant had received Let Export Orders for all shipments and no prior inquiry or notice was issued during the export period.
Procedural History
- January 2012 to December 2016: Export of garments under AIR drawback claims.
- August 2015: DRI investigation initiated against Suhel Parvez Ansari.
- 01.06.2017: Statement recorded from Ashfaq Anwar Nursumar.
- 28.10.2018: Second statement recorded from Ashfaq Anwar Nursumar.
- 01.10.2017: Customs, Central Excise Duties and Service Tax Drawback Rules, 2017, came into force, repealing the 1995 Rules.
- 14.12.2022: Show cause notice issued under Rule 16 of the 1995 Rules.
- 15.11.2023: Commissioner’s order confirmed recovery of Rs. 773.86 lakhs, imposed penalties, and ordered confiscation.
- 17.04.2026: Hearing before CESTAT Mumbai.
- 30.04.2026: Final order passed.
The Parties' Positions
Appellant (M/s. Haji's International & Ashfaq Anwar Nursumar):
- Argued that Rule 16 of the 1995 Rules could not be invoked after 01.10.2017 because the 2017 Rules explicitly repealed the 1995 Rules and contained no saving clause for recovery of already disbursed drawback.
- Relied on Hindustan Construction Co. Ltd. v. State of Haryana (SC) and Famina Knit Fabs v. Union of India (P&H HC) to establish that a specific saving clause in the new law overrides the general saving provision under Section 159A of the Customs Act.
- Contended that the show cause notice issued in 2022 was time-barred and that no claim was pending on 01.10.2017.
- Asserted that the All Industry Rate drawback cannot be questioned on grounds of alleged fake invoices, as the rate is a statutory presumption.
- Argued that confiscation and penalties under Sections 114 and 114AA were legally unsustainable.
Respondent (Commissioner of Customs):
- Relied on Section 159A of the Customs Act to argue that repeal of the 1995 Rules did not affect the operation of prior rules, including Rule 16.
- Claimed that proceedings were initiated before the 2017 Rules came into force, though the show cause notice was issued in 2022.
- Contended that fraud vitiates everything and that the department was entitled to recover erroneous payments.
- Asserted that the statement of Suhel Ansari under Section 108 was sufficient to establish fraud.
Relief Sought
The appellants sought:
- Setting aside of the order dated 15.11.2023.
- Cancellation of the demand for recovery of Rs. 773.86 lakhs under Rule 16.
- Cancellation of the demand for Rs. 2,24,93,070 under Rule 16A.
- Quashing of penalties under Sections 114(i)/(iii) and 114AA.
- Setting aside of the confiscation order.
The Legal Issue
Can the department recover duty drawback already disbursed under Rule 16 of the 1995 Drawback Rules by issuing a show cause notice after the 2017 Drawback Rules came into force, where no claim was pending on the date of repeal?
Arguments Presented
For the Appellant
The appellant’s counsel relied on the Supreme Court’s judgment in Hindustan Construction Co. Ltd. v. State of Haryana, which held that when a new enactment replaces an old one, the intention of the legislature must be ascertained from the language of the new law. The 2017 Drawback Rules, under Rule 20(2), explicitly saved only three categories: pending applications, pending claims, and existing drawback rates - none of which included recovery of already paid drawback. The absence of any saving clause for Rule 16 demonstrated a clear legislative intent to extinguish past recovery rights. The Punjab and Haryana High Court in Famina Knit Fabs reinforced this, holding that Section 159A of the Customs Act cannot override a specific saving clause in the new rules. The appellant further argued that the All Industry Rate is a statutory presumption and cannot be challenged based on alleged supplier fraud, and that the statement of Suhel Ansari was inadmissible under Section 138B.
For the Respondent
The department contended that Section 159A of the Customs Act preserved the operation of repealed rules for the purpose of recovery, even after the 2017 Rules came into force. It argued that the investigation into fraud began before 2017 and therefore the proceedings were validly initiated under the 1995 Rules. The department also claimed that the appellant’s failure to prove genuine procurement justified the recovery of drawback under Rule 16, and that penalties were justified due to the alleged fraudulent conduct.
The Court's Analysis
The Tribunal conducted a meticulous analysis of the legislative framework governing the repeal of the 1995 Drawback Rules and the introduction of the 2017 Rules. It emphasized that Rule 20(1) of the 2017 Rules explicitly stated that the 1995 Rules "shall cease to operate" from 01.10.2017. Rule 20(2) then provided a limited saving clause, specifying only three exceptions: pending applications, pending claims, and existing rates - none of which encompassed the recovery of drawback already paid.
"By saving few rights accrued under Drawback Rules, 1995 Government has expressed different intention so Section 159A of 1962 Act becomes inapplicable. Had there been intention to save all rights and liabilities arising from Drawback Rules, 1995, the Government would not have inserted Rule 20(2)..."
The Tribunal held that the specific saving clause in Rule 20(2) of the 2017 Rules constituted a "different intention" within the meaning of Section 159A of the Customs Act. As such, Section 159A could not be invoked to revive Rule 16 for recovery purposes. The Supreme Court in Hindustan Construction had similarly held that a new enactment’s express saving clause overrides the general saving provision of the General Clauses Act.
The Tribunal further noted that the show cause notice was issued on 14.12.2022 - over five years after the repeal - and that no proceedings were initiated prior to 01.10.2017. The department had not taken any action to recover the drawback during the operational period of the 1995 Rules. Therefore, the claim was not pending on the date of repeal, and Rule 20(2)(b) did not apply.
The Tribunal also rejected the department’s reliance on Suhel Ansari’s statement under Section 108, noting that Section 138B of the Customs Act requires strict procedural compliance for such statements to be admissible, which was not followed. Furthermore, the All Industry Rate drawback is a statutory entitlement based on export volume, not individual procurement details, and cannot be denied on suspicion of supplier fraud.
Regarding confiscation under Section 113, the Tribunal held that it applies only to goods intended for export, not those already exported. Penalties under Sections 114 and 114AA required proof of intentional falsification, which was absent. The appellant had submitted BRCs and complied with all export formalities.
The Verdict
The appeals were allowed. The order dated 15.11.2023 was set aside in its entirety. The demand for recovery of Rs. 773.86 lakhs under Rule 16 of the 1995 Drawback Rules and Rs. 2,24,93,070 under Rule 16A was cancelled. The penalties imposed under Sections 114(i)/(iii) and 114AA were quashed. The order of confiscation was vacated. The department was directed to refund any amounts already recovered, if any, within 45 days.
What This Means For Similar Cases
Recovery of Drawback Cannot Be Revived Post-Repeal Without Explicit Saving
- Practitioners must now argue that any demand under repealed customs rules (e.g., 1995 Drawback Rules) is invalid if the show cause notice is issued after the new rules take effect, unless the claim was pending on the repeal date.
- The burden shifts to the department to prove that a claim was pending on the date of repeal - mere investigation or suspicion is insufficient.
- Recovery under Rule 16 or Rule 16A of the 1995 Rules is barred for exports completed and drawback disbursed before 01.10.2017, absent a pending claim.
All Industry Rate Drawback Is Presumptive and Cannot Be Challenged on Supplier Fraud
- The All Industry Rate is a statutory convenience; its grant cannot be denied based on allegations of fraud by third-party suppliers.
- Exporters are not required to verify the authenticity of every supplier’s invoice when claiming AIR drawback.
- Investigations into supplier fraud must be pursued against the supplier, not the exporter, unless the exporter is shown to have knowingly participated in the fraud.
Procedural Compliance Under Section 138B Is Mandatory for Admissibility of Statements
- Statements recorded under Section 108 of the Customs Act cannot be used to deny drawback unless the procedural safeguards under Section 138B are followed.
- Failure to record statements in the prescribed manner renders them inadmissible as evidence for recovery or penalty.
- Practitioners should challenge reliance on such statements in all drawback and penalty proceedings.
