Customs cannot cancel or question MEIS Licenses Without Prior Action by DGFT: CESTAT [Read Order]

The Kolkata Bench of the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) ruled that Customs authorities cannot cancel or question the validity of MEIS licenses unless the Directorate General of Foreign Trade (DGFT) first initiates and completes cancellation proceedings.

Aquapharm Chemicals Limited, the appellant, is a manufacturer and exporter of Organophosphorus Compounds operating as an Export Oriented Unit (EOU) in Pune. Between 2017 and 2021, the appellant obtained 233 MEIS licenses issued under the Foreign Trade Policy 2015–20 for exports made under Tariff Item No. 29319090.

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The Directorate of Revenue Intelligence (DRI) issued a show cause notice alleging that the goods were misclassified and that the MEIS benefits were wrongly availed. Customs sought to recover approximately Rs. 29.62 crore in duties by invoking Sections 28 and 28AAA of the Customs Act, 1962.

The appellant’s counsel argued that Customs authorities had no legal power to question the MEIS scrips or recover duty based on them unless and until the DGFT had cancelled the scrips in accordance with the Foreign Trade (Development & Regulation) Act, 1992.

They relied on CBEC Circular No. 334/1/2012-TRU, which clarifies that any recovery under Section 28AAA of the Customs Act must follow, not precede, cancellation of the incentive instrument by DGFT.

The appellant submitted that DGFT had not cancelled any of the licenses in question, and even in the case of 18 licenses under inquiry, no final action had been taken. All licenses continued to remain “active” on the DGFT portal.

The revenue counsel argued that the MEIS benefits were obtained through misclassification and that Customs was justified in initiating recovery proceedings under Section 28AAA. They claimed that classification errors leading to ineligible benefits could be independently dealt with by Customs.

The two-member bench comprising Ashok Jindal (Judicial Member) and K. Anpazhakan (Technical Member) observed that MEIS licenses are issued under the Foreign Trade Policy by the DGFT, and their cancellation or invalidation falls strictly within the jurisdiction of the DGFT.

They further observed that Customs cannot unilaterally question the validity of these licenses or initiate recovery under Section 28AAA unless the DGFT first cancels the scrips. Since no such cancellation had occurred, the tribunal held that the entire recovery proceeding was without legal authority.

The tribunal explained that interpreting policy provisions, including determining the validity of incentive scrips, lies exclusively with DGFT. Customs overstepped its jurisdiction by acting before any DGFT action. The demand of Rs. 29.62 crore and associated penalties were accordingly set aside.

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