Summary: In the case of Designco Vs Union Of India & Ors. (Delhi High Court); W.P.(C) 14477/2022 & CM APPL. 44224/2022 (Stay); 22/11/2024, the Delhi High Court addressed whether customs authorities could question the issuance of Merchandise Exports from India Scheme (MEIS) benefits. The petitioners, exporting handcrafted stone articles under HSN Code 68159990 since 1991, contested a 2019 CBIC directive reclassifying their goods under HSN Code 6802, making them ineligible for MEIS benefits. Customs authorities demanded a refund of ₹1.23 crore and issued summons under Section 108 of the Customs Act. The petitioners argued that MEIS scrips were issued lawfully under the Foreign Trade Policy (FTP) and that customs acted beyond their jurisdiction without allegations of fraud or misstatement. They contended that only the DGFT, under the FTDR Act, had authority over MEIS benefits. Conversely, customs authorities claimed deliberate misclassification by the petitioners and cited retroactive validations under the Finance Act, 2022, to support their actions. The High Court ruled that customs exceeded their jurisdiction, as disputes over MEIS certificates fall solely within the DGFT’s purview. It emphasized that Section 28AAA of the Customs Act applies only in cases of fraud or suppression, which were absent here. The court declared customs’ actions illegal and unsustainable, reiterating that classification disputes must be referred to the DGFT for resolution.
1. Facts of the Case
- The petitioners (M/s Sharma International) have been exporting handcrafted stone articles under HSN Code 68159990 since 1991, claiming MEIS benefits.
- In 2019, CBIC issued a letter stating that these products should be classified under HSN Code 6802, making them ineligible for MEIS benefits.
- The Commissioner of Customs issued Public Notice No. 57/2019, directing reclassification under CTH 6802.
- Customs authorities demanded a refund of ₹1.23 crore and issued summons under Section 108 of the Customs Act.
- The petitioners approached the court, seeking restoration of MEIS benefits and quashing of CBIC’s letter and the customs action.
2. Contentions by the Petitioners
- Customs authorities had accepted their classification for decades without objection.
- MEIS scrips were issued lawfully and never challenged before.
- CTH 6802 applies to building materials, not decorative handicrafts like those exported by the petitioners.
- Customs acted without independent examination, and blindly following CBIC’s 2019 letter.
- No fraud, suppression, or misstatement was alleged, making the customs action baseless.
- Section 28AAA of the Customs Act only allows recovery in cases of fraud or collusion, which was not alleged against the petitioners in the present case.
- DGFT (Director General of Foreign Trade) has sole authority over MEIS benefits, and not customs.
- The Foreign Trade Policy (FTP) and past court rulings (Zuari Industries, Titan Medical, Alstom India) confirm that customs cannot override DGFT’s decisions.
3. Submissions by the Respondents (Customs Authorities)
- The petitioners misclassified their goods under CTH 6815 instead of CTH 6802 to wrongfully claim MEIS benefits.
- Intelligence reports indicated that exporters were misclassifying products to get MEIS incentives.
- At Nhava Sheva Port, petitioners correctly classified their goods under CTH 6802, proving deliberate misclassification elsewhere.
- Summons under Section 108 were lawfully issued and should not be interfered with.
- Section 97 of the Finance Act, 2022 had proposed changes in the Customs Act and which essentially stated that “anything done or any duty performed or any action taken or purported to have been taken” under the Customs Act as it stood prior to its amendment shall be “deemed to have been validly done” and that any notifications issued shall be “deemed to have been validly issued for all purposes”. Finance Act, 2022 retroactively validates past customs actions, making them legally sound.
- Post-clearance audits under Section 99A are valid, and recovery of benefits does not require a Show Cause Notice (SCN).
- Customs officers have the final authority to classify goods under the Customs Tariff Act, 1975, not the DGFT.
4. Findings of the High Court
- Customs reopened transactions decades later without justification.
- Section 28AAA applies only in cases of fraud, suppression, or misstatement, which was never alleged against the petitioners, in the present case.
- Even if misclassification occurred, it does not automatically mean fraud or suppression.
- MEIS certificates are governed by the FTDR Act, and only the DGFT has the authority to cancel them.
- Customs authorities cannot question or override MEIS certificates issued under the FTDR Act.
- Before demanding recovery, the DGFT must first determine that a certificate was illegally obtained, which never happened in the present case.
- Past court rulings (PTC Industries, Autolite India) confirm that classification disputes must be referred to the DGFT.
- Customs authorities acted beyond their jurisdiction, making their actions illegal and unsustainable.
5. Conclusion
The High Court ruled in favor of the petitioners, stating that customs authorities exceeded their jurisdiction by reclassifying goods and demanding MEIS refunds without a prior determination by the DGFT. The court declared the customs actions illegal, arbitrary, and unsustainable.
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