Gujarat HC: DGFT Recovery Notices Unconstitutional!

By: Sujit Ghosh, Partner, Advaita Legal

1. Background

In March 2011 the Director General of Foreign Trade (“DGFT”) under the aegis of Policy Interpretation Committee (“PIC”) took several unilateral decisions. One such decision pertained to denial of deemed export drawback on supply of imported as well as domestic plant and machinery for constructing non-mega power plants. Specifically, the PIC interpreted the provisions of the Foreign Trade Policy (“FTP”) to hold that deemed export drawback was never available to supplies made to non-mega power projects and consequently such benefits ought not to have been granted. Pursuant to this interpretation, instructions were issued to various authorities subordinate to the DGFT to effect recovery of deemed export drawback granted in the past to several non-mega power projects. Instructions were also issued to withdraw all formal approvals granted to the sector in the past and to reject all applications in this respect going forward.

Such a decision led to several recovery notices being issued across the country by the office of the DGFT to various non-mega power projects with an express direction that deemed export drawback granted by them should be returned to the Government – the stakes involved ran into several thousand crores. This had led to widespread mayhem and concern in the industry leading to filing of multiple writ petitions before various High Courts including the High Court of Gujarat. 

2. The decision of the Gujarat High Court dated February 13, 2014

Alstom India had filed a writ petition before a division bench of the Hon’ble Gujarat High Court, comprising of Hon’ble Chief Justice Bhaskar Bhattacharya and Hon’ble Justice Pardiwala. The provisions whose constitutionality were challenged, the reasons therefore and the Gujarat High Court’s decisions thereon are summarized hereunder:

(i)                 Paragraph 8.3.6 of the Handbook of Procedures (“HoP”) under the FTP 

Under this provision, while notifying the HoP the DGFT had incorporated the provisions of the Customs and Central Excise Duty Drawback Rules. These Rules contained powers to recover duty drawback erroneously granted. 

In relation to the above, Alstom had pleaded that the DGFT being an administrative authority was seeking to legislate by resorting to ‘incorporation by reference’ of a substantial provision of law, ie., the aforesaid Rules. Such a provision strikes at the root of separation of powers between the executive and the legislature and is thus violative of the basic structure of the Indian Constitution. 

The Hon’ble Gujarat High Court, agreeing with the contention of Alstom, has held that the said provision is indeed unconstitutional. 

(ii)               Paragraph 7 of declaration under ANF 8 (application form for claiming deemed export drawback) 

As per the said paragraph the claimant had to declare that it would “immediately refund the amount of drawback obtained” by them “in excess of any amount/rate which may be re-determined by Government as a result of post verification”. 

Alstom had pleaded that such a declaration imposed upon the claimant was a colorable mechanism through which the DGFT was seeking to assume quasi-judicial power to re-determine which cannot be permitted as provisions relating to revision/review are specifically provided under Section 16 of the Foreign Trade (Development and Regulation) Act which provides for a specific mechanism under which such revisions ought to be carried out. Accordingly, the executive cannot usurp such adjudicatory power outside and de hors the provisions of Section 16 of the FTDR Act. Therefore the said paragraph of the declaration under ANF-8 is also unconstitutional and ultra vires the FTDR Act. 

Agreeing with Alstom, the Hon’ble Gujarat High Court has clearly held that the said paragraph is indeed ultra vires and unconstitutional for reasons stated above. 

(iii)             Paragraph 2.3 of the FTP

Under this paragraph, DGFT is entrusted with the power to interpret the provisions of the FTP (which inter alia granted deemed export drawback benefits to non-mega power projects) and bind subordinate authorities with such interpretation.

Pursuant to powers vested thereunder the DGFT had interpreted the provisions of the FTP through which it had clarified in March 2011 that deemed export drawback was not contemplated to be granted as per the scheme of FTP to non-mega power projects. It is this interpretation that had led to issuance of recovery notices for deemed export drawback benefits conferred in the past to the non-mega power projects.

Challenging the constitutionality of this provision, Alstom had contended that exercise of such power has the effect of binding subordinate authorities even while discharging quasi-judicial functions such as grant of duty drawback etc. Such a control strikes at the root of independent application of mind by lower authorities while discharging a quasi-judicial function and hence the same is unconstitutional.

Agreeing substantially with Alstom, the hon’ble Gujarat High Court has read down the said provision holding that such interpretation cannot bind the lower authorities where there exists decisions by higher courts such as High Courts or the Supreme Court on a particular interpretation. 

3. Effect of the decision of the Gujarat High Court dated February 13, 2014

The ratio laid down by the hon’ble Gujarat High Court will have a far reaching implication in the power sector in as much as all recovery notices issued in the past would be viewed as having been issued without the authority of law – in other words, void ab-initio. This decision will have the force of law across the country until such time it is reversed by the Supreme Court.

It would thus provide a significant relief to the power sector which has in recent times faced great challenges on several accounts.

The recovery notices issued in the past to various non-mega power projects would become illegal. It would also help such players in defending all those cases where order granting duty drawback has been withdrawn pursuant to the aforementioned PIC decision.