Delhi HC Upholds Validity of Notification Prescribing 15% Interest for Unfulfilled Export Obligations

The Delhi High Court has upheld the validity of Notification No. 18/2015-Cus dated April 1, 2015, which prescribes 15% interest on customs duties where exporters fail to fulfil their obligations under the Advance Authorisation Scheme.

The case arose from imports made by the petitioner KBS Industries Ltd under the Advance Authorisation Scheme (AAS), a government initiative that permits duty-free import of inputs required for export production. The petitioner, a manufacturing company, imported copper and copper alloy products without payment of customs duty under two DGFT advance authorisations issued in 2015 and 2016.

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Under the terms of the scheme and the governing Notification No. 18/2015-Cus, importers availing such exemptions must fulfil corresponding export obligations within a specified period. Failure to do so triggers recovery of the duty forgone along with interest at 15% per annum from the date of clearance of the goods.

Following an investigation by the Customs (Preventive) Commissionerate, it was found that the importer had not fulfilled its export obligations and had sold the imported goods in the domestic market. A show-cause notice was issued demanding customs duty of ₹2.35 crore, along with interest and penalty.

The importer approached the Customs, Central Excise and Service Tax Settlement Commission, admitting part of its liability but disputing the computation of interest. The Commission ultimately settled the case, confirming the entire duty and imposing interest of ₹1.15 crore as per the 15% rate specified in the notification.

Aggrieved, the importer filed a writ petition before the Delhi High Court challenging both the legality of the interest levy and the constitutional validity of the notification itself.

The petitioner contended that the interest liability imposed by the Settlement Commission was without legal authority. It argued that the interest computation included amounts related to Countervailing Duty (CVD) and Special Additional Duty (SAD) levied under the Customs Tariff Act, 1975, whereas the Customs Act contains no express provision for levying interest on such duties.

The counsel relied heavily on the Bombay High Court’s ruling in Mahindra & Mahindra Ltd. v. Union of India (2022 SCC OnLine Bom 3155), affirmed by the Supreme Court, which held that in the absence of specific statutory backing, interest could not be levied on CVD or SAD. On this basis, it was argued that the Settlement Commission’s imposition of interest lacked a statutory foundation.

The petitioner further challenged the constitutional validity of Notification 18/2015-Cus, contending that the 15% interest clause was arbitrary, excessive, and ultra vires Section 25(1) of the Customs Act. Section 25(1), it argued, empowers the government to grant exemptions but not to impose interest liabilities that go beyond the statutory scheme.

The Revenue defended the impugned order, asserting that the interest clause was not punitive but conditional, forming an integral part of the exemption granted under Section 25(1). It was submitted that importers availing duty-free import facilities under the Advance Authorisation Scheme execute bonds binding themselves to pay the duty along with 15% interest if they fail to discharge their export obligations.

The government, therefore, had the statutory competence to prescribe such a condition while granting an exemption, and once the importer defaulted, the liability to pay both duty and interest automatically arose.

The Revenue also distinguished the Mahindra & Mahindra judgment, arguing that it dealt with misdeclaration of import value and not failure to comply with conditions of a conditional exemption notification.

It was further contended that orders passed by the Settlement Commission under Section 127C(5) of the Customs Act are final and conclusive, and cannot be dissected to challenge certain parts while accepting others.

The Division Bench comprising Justice Vibhu Bakhru and Justice Swarana Kanta Sharma (Judge) rejected the challenge and upheld both the notification and the interest levy.

The Court observed that Section 25(1) of the Customs Act, 1962, expressly empowers the Central Government to grant duty exemptions “subject to such conditions as may be specified.” Therefore, the inclusion of an interest clause in the notification was a valid exercise of statutory power.

The Bench reasoned that when an importer avails an exemption under a Section 25 notification, it does so voluntarily and is bound by its terms. “The importer, having availed the benefit of duty-free import subject to fulfilment of export obligations, cannot now contest the condition stipulating payment of interest from the date of clearance,” the Court held.

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The judges further noted that Notification 18/2015-Cus expressly required importers to execute a bond undertaking to pay the full duty “together with interest at 15% per annum from the date of clearance” if export obligations remained unfulfilled. Such a stipulation, the Court said, was neither arbitrary nor ultra vires the enabling provision.

Distinguishing the Mahindra & Mahindra case, the Court held that the earlier decision applied to situations involving misdeclaration of value, whereas the present case concerned non-fulfilment of export obligations under a conditional exemption scheme. Here, the liability to pay interest was a direct consequence of the exemption condition itself, and not an independent levy.

The Bench also observed that orders passed by the Settlement Commission are settlements and not adjudications, and hence, must be accepted in entirety. The importer could not accept the favourable portions (such as penalty reduction) while disputing the adverse component (interest). Accordingly dismissed the petition.

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