Customs Dept. Cannot Deny Import Duty Exemption Made under Valid DFRC/DFIA Licences but Later Cancelled by DGFT: CESTAT [Read Order]

The Customs, Excise & Service Tax Appellate Tribunal ( CESTAT ), Chennai has ruled that Customs authorities cannot deny duty exemption on imports made under valid DFRC/DFIA licences which were later cancelled by the DGFT.

The bench of M. Ajit Kumar and P. Dinesha observed that “Hence the action that lies when a scrip/licence has been issued by DGFT but was obtained by misrepresentation is not the same as in the case of a fraudulent scrip/licence. Since the import in this case was made under a licence which was valid at the time of import and was cancelled by DGFT much later, the said licence are required to be honored by the Custom authorities and no demand can be raised. In the circumstances interest, penalties etc do not survive.”

The appellant, a trader in raw silk, had imported 13,940 kgs of raw silk yarn worth ₹1.64 crore duty-free against DFRC licences originally issued to M/s Shree Kuberappa & Sons and transferred through Telegraphic Release Advise (TRA).

While these imports took place in 2006-07 under valid licences, investigations by DRI later revealed that Kuberappa & Sons had fraudulently obtained several duty credit scrips by mis-declaring exports.

Based on this, the DGFT cancelled the licences in 2010, well after the imports were completed. Relying on such cancellation, the Commissioner of Customs demanded duty of ₹50.39 lakh, imposed equal penalty under Section 114A, and held the goods liable for confiscation.

According to the counsel of the appellant, the licences issued to the above exporter were cancelled by DGFT in January 2010. He added that there is no evidence that the appellants suppressed or misstated anything to attract demand of duty as per the extended period.

He further stated there is a distinction between a forged or fake credit scrip and a scrip validly issued by authorities but which was obtained by misstatement or misrepresentation etc. While the former will vitiate everything, the latter will not affect the validity of the scrips till it is cancelled.

Concurring with the appellant’s counsel, the appellate tribunal observed that if licences were validly issued by DGFT and not cancelled at the time of import, Customs authorities are bound to honour them. Cancellation at a later date does not retrospectively invalidate imports already made, said the tribunal.

In addition, the bench observed multiple precedents which held that Customs cannot deny exemption benefits on the ground of alleged misrepresentation by the original licence holder when the licensing authority itself had not cancelled the licence at the time of import.

The Tribunal clarified that the doctrine “fraud vitiates everything” applies only where the licence itself is forged or fake and never issued by the authority. In contrast, where the licence was lawfully issued but subsequently cancelled for fraud by the original holder, it remains valid until cancellation and imports made during that period are protected.

Accordingly, the CESTAT set aside the demand of duty, interest, and penalties.

S. Murugappan, Advocate appeared for the Appellant and Harendra Singh Pal, appeared for the Respondent

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