BRIEF FACTS OF THE CASE
- The Appellant was engaged in the hotel business and imported various lighting and light fittings on 25.05.1999. The import was made under the Export Promotion Capital Goods (EPCG) Scheme, claiming concessional duty under Customs Notification No. 28/97 dated 01.04.1997. The Appellant had obtained a valid EPCG license issued by the Directorate General of Foreign Trade (DGFT), which classified the imported items as "capital goods."
- At the time of import, the Customs Authority denied the benefit of the concessional rate of duty, contending that the imported goods did not fall within the meaning of "capital goods" as per the Notification, even though the EPCG license specified otherwise. Consequently, the Appellant was compelled to pay the full rate of customs duty under protest.
- The Appellant faced over 26 years of litigation because the Customs authorities refused to accept the eligibility of the imported goods under the scheme, despite the directions of the CESTAT to reconsider the demand in light of CBEC Circular No. 62/2002, which clarified that hotels could import such items as capital goods under EPCG. Once the claim of the Appellant was finally upheld in its favour by the CESTAT in the second round of appeal, the Appellant, through a miscellaneous application filed before the CESTAT, also claimed compensatory interest from the date of payment of duty, in addition to the interest awarded under section 27A of the Customs Act. The CESTAT rejected this claim of the Appellant.
- This led to the filing of an appeal before the Hon'ble Madras High Court. The key issue raised before the Court was whether the Customs Authority acted without jurisdiction in denying EPCG benefits despite a valid DGFT license. The Appellant also sought compensatory interest from the date of duty payment in 1999, over and above the statutory interest already granted.
KEY OBSERVATIONS OF THE HON'BLE MADRAS HIGH COURT
- The Hon'ble Madras High Court observed that the issue of interest on interest was not relevant, as interest under Section 27A had already been granted and there was no dispute regarding its applicability. The court was not inclined to go into commercial reasons to grant interest on interest. Hence, the question of law had become academic and required no further adjudication
- The Hon'ble Madras High Court observed that the issue of interest on interest was not relevant, as interest under Section 27A had already been granted and there was no dispute regarding its applicability. The court was not inclined to go into commercial reasons to grant interest on interest. Hence, the question of law had become academic and required no further adjudication.
- On the issue of classification of imported goods as "Capital Goods", the Court strongly criticized the conduct of the Customs Department for disregarding a valid EPCG license issued by the DGFT, which had classified the imported goods as capital goods. It emphasized that CBEC Circular No. 62/2002, which permitted EPCG benefits for such items when approved by the DGFT, was binding on the Customs authorities. The Department's refusal to honor both the license and the circular, despite clear administrative and legal guidelines, was held to be unjustified. The Court also referred to the Supreme Court's decision in Titan Medical Systems vs. Collector of Customs, New Delhi [2003 (151) ELT 254 (SC)], affirming that Customs authorities cannot contradict a valid DGFT license unless it is revoked.
- Regarding compensatory interest, the Court drew a distinction between statutory interest (as governed by law) and equitable compensation. Reconciling the rulings in Sandvik Asia Vs. Commissioner of Income Tax – I, Pune [2006 (196) ELT 257 (SC)], and Commissioner of Income Tax, Gujarat Vs. Gujarat Fluoro Chemicals [2013 (296) ELT 433 (SC)], the Court held that while "interest on interest" is not statutorily permitted, compensation for unreasonable delay and unjustified litigation is legally sustainable.
- Applying these principles, the Court found that the Appellant had been wrongfully denied EPCG benefits and forced to engage in litigation for over 26 years without any fault or fraud on its part. It characterized the conduct of the Customs Authority as arbitrary and misconceived, and concluded that the Appellant was entitled to compensatory relief. Although the appeal was allowed and directions for compliance were issued within eight weeks, no costs were imposed on the Customs Department..
AURTUS COMMENTS
- The High Court has unequivocally reaffirmed that Customs authorities lack the jurisdiction to override classifications made by the DGFT, unless the license is either revoked or proven to have been fraudulently obtained. This principle has been upheld by the Indian judiciary in many judicial precedents, where it has been underscored that once a competent authority certifies an import as eligible under a promotional scheme, the Customs Department is bound to honor the benefit unless the foundational certification is revoked or challenged by the issuing authority.
- The ruling further extends its application across various sectors. In Hindustan Lever Ltd. v. Commissioner of Customs (EP), Mumbai [2012 (281) ELT 241 (Tri. - Bom)], the CESTAT held that once an advance license is issued and the export obligations are fulfilled, Customs authorities are precluded from questioning the classification or utility of inputs based on their interpretations. Similarly, the Tribunal's ruling in PSL Ltd. v. Commissioner of Customs, Kandla [2015 (328) ELT 177] further supports the view that classification disputes and procedural lapses should not obstruct the objectives of export promotion schemes. These rulings reinforce the principle that the Customs Department must defer to the DGFT's jurisdiction over advance licenses and EPCG entitlements.
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