Supreme Court Clarifies Interest on Delayed Duty Drawback for Deemed Exports: Union of India vs. B.T. Patil (2024)

Date of the Judgment: 05 February 2024

Citation: 2024 INSC 83

Judges: Abhay S. Oka, J. and Ujjal Bhuyan, J.

Can a company claim interest on delayed duty drawback refunds for deemed exports? The Supreme Court recently addressed this question in a case involving a construction company and the Union of India. The core issue revolved around whether the company was entitled to interest on the delayed refund of duty drawback under the Export-Import (Exim) Policy. The Supreme Court bench, composed of Justices Abhay S. Oka and Ujjal Bhuyan, delivered the judgment.

Case Background

M/S. B.T. Patil and Sons, a Class-I contractor specializing in civil contract works, was awarded a sub-contract for the Koyna Hydro Electric Power Project in Maharashtra. This project was funded by the International Bank for Reconstruction and Development (World Bank). The Chief Engineer of the project informed the contractors that they could avail benefits under the “Deemed Export” concept. The company completed the construction work by March 1996.

The company filed applications on 25 March 1996, 13 September 1996, and 20 December 1996, claiming duty drawbacks. These applications were rejected by the Director General of Foreign Trade (DGFT) on the grounds that civil construction work was not eligible for “deemed export” benefits. Despite the rejections, the company continued to make representations. On 20 August 1998, DGFT issued a circular clarifying that supply of goods under paragraph 10(2)(d) of the 1997-2002 Exim Policy would be entitled to “deemed export” benefits. Further, on 5 December 2000, DGFT issued a circular that drawback was to be paid for excise duty on supply of goods to projects funded by multilateral agencies.

A Policy Interpretation Committee was constituted, and it decided on 7 October 2002, that the benefit of duty drawback under the “deemed export” scheme would be extended to the company. Consequently, the DGFT, on 1 November 2002, permitted a duty drawback of Rs. 2,05,79,740.00. The company received payments on 31 March 2003 and 20 May 2003. However, the DGFT clarified that this would not be treated as a precedent. The company then sought interest on the delayed payment, which was rejected by the DGFT.

Timeline:

Course of Proceedings

The company filed a writ petition before the High Court, which was registered as Writ Petition No. 45525 of 2004, challenging the rejection of their request for interest on the duty drawback. The learned Single Judge referred to the notification dated 05 December 2000 and held that the company was entitled to duty drawback and also to interest for the delayed payment at 15% from the date of the notification till the date of payment, directing the appellants to consider the claim within three months.

The appellants challenged this order before the Division Bench of the High Court in Writ Appeal No. 356 of 2006. The company also filed Writ Appeal No. 3699 of 2005, contesting the direction to pay interest only from 05 December 2000. The Division Bench examined the notification dated 20 August 1998, and observed that it had clarified that ‘deemed export’ would include goods and services of civil construction projects. The Division Bench held that the notification dated 05 December 2000 was clarificatory in nature and had retrospective effect. The Division Bench held that the company was entitled to interest from the date of expiry of three months after submitting the applications for refund of duty drawback in 1996, at the rate of 15%. The writ appeal of the company was allowed, and the writ appeal of the appellants was dismissed.

Legal Framework

The case involves several key legal provisions:

• Section 11A of the Central Excise Act, 1944: This section deals with the recovery of duties not levied or not paid, or short-levied, or erroneously refunded. It allows for the issuance of a show-cause notice to the person chargeable with duty.
• Section 11AA of the Central Excise Act, 1944: This section mandates the payment of interest on delayed duty payments, with rates ranging from 10% to 36% per annum.
• Section 11B of the Central Excise Act, 1944: This section allows a person to claim a refund of excise duty and interest within one year from the relevant date.
• Section 11BB of the Central Excise Act, 1944: This section provides for interest on delayed refunds, payable if the refund is not made within three months from the date of receipt of the application, with rates ranging from 5% to 30% per annum.
• Section 27 of the Customs Act, 1962: This section deals with claims for refund of duty, allowing a person to apply for a refund within one year from the date of payment. The date of payment of duty or interest in relation to a person, other than an importer, shall be construed as the date of purchase of goods by such person.
• Section 27A of the Customs Act, 1962: This section provides for interest on delayed refunds, payable if the refund is not made within three months from the date of receipt of the application, with rates ranging from 5% to 30% per annum.
• Section 75A of the Customs Act, 1962: This section deals with interest on drawback, stating that if the drawback is not paid within one month from the date of filing a claim, interest is payable at the rate fixed under Section 27A.
• The Foreign Trade (Development and Regulation) Act, 1992: This act provides for the development and regulation of foreign trade.
• Rule 2(e) of the Foreign Trade (Regulation) Rules, 1993: Defines ‘policy’ to mean export and import policy formulated and announced by the Central Government under Section 5 of the Foreign Trade (Development and Regulation) Act, 1992.
• Exim Policy 1992-1997: This policy defines ‘drawback’ as the rebate of duty chargeable on imported or excisable materials used in the manufacture of exported goods. It also includes provisions for ‘deemed exports,’ which are transactions where goods do not leave the country, but the payment is received in Indian rupees, and the supplies earn or save foreign exchange for the country.
• Customs, Central Excise Duties and Service Tax Drawback Rules, 1995: These rules define ‘drawback’ and provide for its allowance on the export of goods.

Arguments

Arguments of the Appellants (Union of India):

• The appellants argued that the applications for duty drawback filed by the respondent were repeatedly rejected by the DGFT.
• They contended that the duty drawback was extended to the respondent as a special case by the Policy Interpretation Committee and not under the Exim Policy of 1992-1997. Therefore, the question of awarding interest did not arise.
• The appellants submitted that there was no provision under the Exim Policy of 1992-1997 for payment of interest on delayed duty drawback.
• They argued that the circulars dated 20 August 1998 and 5 December 2000 were issued under the successor Exim Policy, 1997-2002 and could not be applied to the respondent’s case under the 1992-1997 policy.
• They claimed that the refund of duty drawback was due to the magnanimity of the Central Government and not a right, thus no interest was applicable.

Arguments of the Respondent (M/S. B.T. Patil and Sons):

• The respondent argued that since the appellants had granted the benefit of duty drawback, they could not contend that the respondent was not entitled to it.
• They submitted that there was a delay in the refund of duty drawback, and therefore, the respondent was entitled to interest.
• The respondent relied on Section 27A of the Customs Act, 1962, and submitted that the High Court had taken a conservative approach by awarding interest at 15%.
• The respondent contended that the circulars dated 20 August 1998 and 5 December 2000 were clarificatory in nature and had retrospective effect.

Submissions Table:

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section. However, the core issues that the court addressed were:

1. Whether the respondent was entitled to duty drawback under the Exim Policy of 1992-1997.
2. Whether the respondent was entitled to interest on the delayed refund of duty drawback.
3. Whether the circulars dated 20 August 1998 and 5 December 2000 were clarificatory in nature and had retrospective effect.
4. What should be the rate of interest on delayed refund of duty drawback?

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• The Supreme Court relied on the judgments in S.S. Grewal v. State of Punjab [1993 Supplementary (3) SCC 234], Rajagopal Reddy (dead) by Lrs. v. Padmini Chandrasekharan (dead) by Lrs. [(1995) 2 SCC 630], and Zile Singh v. State of Haryana [(2004) 8 SCC 1] to conclude that the circulars dated 20 August 1998 and 5 December 2000 were clarificatory in nature and had retrospective effect.
• The Court examined Section 11A, Section 11AA, Section 11B, and Section 11BB of the Central Excise Act, 1944, and Section 27, Section 27A, and Section 75A of the Customs Act, 1962, to determine the provisions for duty drawback and interest on delayed refunds.
• The Court referred to the Exim Policy 1992-1997 and the Customs, Central Excise Duties and Service Tax Drawback Rules, 1995, to establish the framework for duty drawback and deemed exports.
• The Court also considered Notification No.32/1995 (NT) -Customs dated 26.05.1995 and Notification No.22/95 -Central Excises (NT) dated 29.05.1995 to determine the applicable interest rate.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following factors:

• Statutory Interpretation: The Court emphasized the clear language of the Exim Policy 1992-1997, the Central Excise Act, and the Customs Act, which provided for duty drawback on deemed exports and interest on delayed refunds.
• Clarificatory Circulars: The Court recognized that the circulars issued by the DGFT were not creating new rights but were merely clarifying existing provisions. This was a major factor that weighed in the mind of the Court.
• Delay in Refund: The Court acknowledged the considerable delay in refunding the duty drawback to the respondent, which was a key factor in awarding interest.
• Fairness and Equity: The Court aimed to ensure fairness and equity by holding the appellants accountable for the delay in refunding the duty drawback.

Fact:Law Ratio:

The Court’s reasoning was more heavily influenced by legal considerations (70%) than factual aspects (30%).

Logical Reasoning

Key Takeaways

• Companies engaged in deemed exports are entitled to duty drawback benefits under the Exim Policy.
• Interest is payable on delayed refunds of duty drawback, as per the provisions of the Customs Act and the Central Excise Act.
• Clarificatory circulars issued by the DGFT have retrospective effect, clarifying existing policies rather than creating new ones.
• The rate of interest on delayed refunds is to be determined by the rate fixed by the Central Government at the relevant time.
• This judgment reinforces the rights of exporters to receive timely refunds and interest on delayed payments, ensuring fairness and equity in trade practices.

Directions

The Supreme Court upheld the order of the Division Bench of the High Court, directing the appellants to pay interest at the rate of 15% per annum on the delayed refund of duty drawback, from the date of expiry of three months after submitting the applications for refund in 1996, until the date of payment.

Development of Law

The ratio decidendi of this case is that companies engaged in deemed exports are entitled to duty drawback benefits and interest on delayed refunds as per the existing legal framework. The judgment clarifies that clarificatory circulars have retrospective effect, ensuring that benefits under the Exim Policy are provided as intended. This judgment reinforces the existing legal framework and does not introduce any new legal principles but provides clarity on the application of existing laws.

The Supreme Court’s judgment in Union of India vs. M/S. B. T. Patil and Sons Belgaum (Construction) Pvt. Ltd. clarifies the entitlement of companies to duty drawback and interest on delayed refunds for deemed exports. The Court’s emphasis on the retrospective nature of clarificatory circulars and the importance of timely refunds reinforces the principles of fairness and equity in trade practices. This case serves as a significant precedent for similar disputes, ensuring that companies are not unduly penalized by delays in the refund process. The judgment underscores the need for adherence to the existing legal framework and promotes transparency and accountability in the administration of trade policies.