Recovery u/s 28AAA of Customs Act Not Valid without Prior DGFT Cancellation of Scrips: CESTAT [Read Order]

Ganpati Hosiery Mills, the appellant, is a manufacturer and exporter of readymade garments. The appellant exported garments to buyers in Panama and the Netherlands under FOB contracts and claimed benefits under the Focus Market Scheme (FMS).

Later, it was discovered that the goods were diverted to Dubai, and the customs department alleged misuse of FMS benefits and issued a show cause notice demanding recovery under Section 28AAA along with penalties under Sections 114(iii) and 114AA of the Customs Act.

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The appellant's counsel argued that recovery under Section 28AAA could only be made after the DGFT cancelled the scrips. In this case, the DGFT had neither cancelled the scrips nor initiated cancellation proceedings. The counsel further argued that the goods were exported on FOB terms, and once the Let Export Order was issued, the title passed to the buyer, and the appellant had no control over the goods.

They also argued that the customs department had wrongly relied on the statement of the freight forwarder recorded under Section 108 of the Customs Act without following the procedure under Section 138B, making such statements inadmissible as evidence.

The revenue counsel argued that recovery under Section 28AAA was valid as the scrips were obtained by misstatement and collusion, and the requirement of DGFT cancellation was not necessary when fraud was involved.

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The two-member bench comprising Justice Dilip Gupta (President) and P. Comprehensive Guide of Law and Procedure for Filing of Income Tax Appeals, Click HereV. Subba Rao (Technical Member) observed that under the law and as clarified in the Delhi High Court’s judgment in Amit Exports, recovery under Section 28AAA requires the DGFT to first cancel the scrips before customs authorities can initiate recovery.

The tribunal further observed that statements recorded under Section 108 cannot be used as evidence unless the procedures under Section 138B are followed, including examination and cross-examination before the adjudicating authority, which was not done in this case.

The tribunal explained that in the absence of DGFT cancellation and valid evidence, the recovery and penalties imposed on the appellant were not sustainable. The appellant’s appeal was allowed, and the order of recovery and penalties was set aside.

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