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REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 554  OF 2006

DIRECTOR GENERAL OF FOREIGN  TRADE AND ANOTHER

.....APPELLANT(S)

VERSUS

M/S. KANAK EXPORTS AND ANOTHER .....RESPONDENT(S)

W I T H

CIVIL APPEAL NO. 658 OF 2006

CIVIL APPEAL NO. 1587 of 2006

CIVIL APPEAL NO. 1589 OF 2006

TRANSFER CASE (CIVIL) NO. 32 OF 2007

TRANSFER CASE (CIVIL) NO. 33 OF 2007

TRANSFER CASE (CIVIL) NO. 36 OF 2007

TRANSFER CASE (CIVIL) NO. 1 OF 2008

TRANSFER CASE (CIVIL) NO. 3 OF 2008

WRIT PETITION (CIVIL) NO. 27 OF 2008

TRANSFER CASE (CIVIL) NO. 49 OF 2009

WRIT PETITION (CIVIL) NO. 343 OF 2009

WRIT PETITION (CIVIL) NO. 246 OF 2010

A N D

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TRANSFER CASE (CIVIL) NO.                   OF 2015 (ARISING OUT OF TRANSFER PETITION (CIVIL) NO. 568 OF 2014)

J U D G M E N T

A.K. SIKRI, J.

Civil Appeal No. 554 of 2006 Civil Appeal No. 658 of 2006 Civil Appeal No. 1587 of 2006 Civil Appeal No. 1589 of 2006 Transfer Case (Civil) No. 36 of 2007 Transfer Case (Civil) No. 1 of 2008 Transfer Case (Civil) No. 3 of 2008 Transfer Case (Civil) No. 49 of 2009 Writ Petition (Civil) No. 343 of 2009 Writ Petition (Civil) No. 246 of 2010

Export Import (EXIM) Policy 2002-2007 was framed by the Central

Government under Section 5 of the Foreign Trade (Development and

Regulation) Act, 1992 (hereinafter referred to as the 'Act'), which came

into  force  with  effect  from April  01,  2003.     The main  purpose and

objective of this Policy was to boost the exports.  In furtherance of the

same,  a  Special  Scheme  containing  the  provisions  thereof  was

incorporated  therein  which  gave  certain  kind  of  incentives  to  the

exporters of some specified items.  However, some amendments were

made thereto vide Notification No. 28 dated January 28, 2004.  On the

same day, Public Notice No. 40(RE-2003)/2002-2007 was also issued in

exercise of powers conferred under the provisions of Para 2.4 of the said

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Policy, which was followed by Notification No. 38 dated April 21, 2004

and Notification No. 40 dated April 23, 2004.

2) Vide  Notification  No.  28  dated  January  28,  2004,  the  Central

Government sought to amend certain provisions of the EXIM Policy by

inserting Notes 1 to 5, which was unpalatable to the exporters of the

goods mentioned therein as, according to them, under the guise of the

said Notes, some benefits which had already accrued to these exporters

under  the EXIM Policy  were  taken away.  Vide Public  Notice  dated

January  28,  2004,  the  Government  announced  exclusion  of  export

performance in relation to four classes of goods mentioned in para 2

thereof from computation of the entitlement under the Scheme and, at

the same time,  sought  to  disallow the  import  of  agricultural  products

falling under Chapters I to XXIV of ITC (HS) under the said scheme.

Thereafter, Notification No. 38 dated April 21, 2004 was published under

Section 5 of the Act  on the same lines on which Public Notice dated

January 28, 2004 was issued.  The exporters of these goods, naturally,

felt  aggrieved  thereby.   There  was  an  innocuous  amendment  to

Notification  No.  38  dated  April  21,  2004  wherein  in  addition  to  the

Director General of Foreign Trade (for short, 'DGFT') as an Officer to

enforce  these  Notifications,  ex-officio  Additional  Secretary  to  the

Government  of  India  was also  added.   All  such  exporters  who were

affected thereby filed writ  petitions in various High Courts,  particulars

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whereof shall be taken note of hereinafter at the appropriate stage.

3) The Bombay High Court in Writ Petition No. 2397 of 2004, decided on

July 04, 2005, has given partial relief to the exporters/ writ petitioners.

The Gujarat High Court has substantially affirmed the validity of these

Notifications  while  giving  relief  on  one  particular  aspect.   Insofar  as

judgments of Bombay High Court and Gujarat High Court are concerned,

both the Union of India as well as the writ petitioners preferred Special

Leave  Petitions,  in  which  leave  was  granted,  and  these  are  now

converted as Civil Appeal No. 658 of 2006 and Civil Appeal 554 of 2006

respectively.  That apart, the Single Judge of the Gujarat High Court in

one of the cases dismissed the writ petition and the LPA was filed by the

said petitioner before the Division Bench of the High Court.  Since the

issue involved in these appeals is the same, which is raised in the LPA in

the  Gujarat  High  Court  and  still  pending  in  the  writ  petitions  filed  in

various High Courts, transfer petitions were filed by the Union of India

seeking transfer of all those cases and to be heard along with these two

appeals.  Those transfer petitions were allowed.  This is how all these

cases are bunched together and heard simultaneously as the issue is

substantially the same in all these matters.

4) With  this  background  reflecting  the  nature  of  these  cases,  we  now

proceed to discuss the main provision of the EXIM Policy and how the

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aforesaid Notifications have amended the provisions of that Policy.  That

would give an indication as to what kind of grievance is raised by these

exporters in challenging the validity of these Notifications.

5) The Act was passed to provide for the development and regulation of

foreign trade by facilitating imports into, and augmenting exports from

India and for  matters connected therewith  or  incidental  thereto.   The

Statement  of  Objects  and Reasons of  this  Act  stipulates  that  foreign

trade is the driving force of economic activity.  Technology, investment

and  production  are  becoming  increasingly  interdependent  upon  each

other  and  foreign  trade  brings  these  elements  together  and  spurs

economic growth.   The Imports  and Exports  (Control)  Act,  1947 was

made in different circumstances.   Although it has been amended from

time to time, the Act does not provide an adequate legal framework for

the development and promotion of India's foreign trade.  Besides, in July,

1991 and August, 1991, major changes in trade policy were made by the

Government of India.  The goals of the new trade policy are to increase

productivity  and  competitiveness  and  to  achieve  a  strong  export

performance.   The  Exports  and  Import  Policy  is  a  vital  part  of  trade

policy.   The  basic  law  governing  foreign  trade  must  serve  as  an

instrument to create an environment that will provide a strong impetus to

exports, facilitate imports and render export activity more profitable.  It

has, therefore, been considered necessary to enact a new law repealing

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the existing law.  The Act intends to achieve these objectives.

6) In  order  to  achieve  the  aforesaid  objectives,  power  is  given  to  the

Central  Government  under  Section  3  of  the  Act  to  make  provisions

relating to imports and exports with primary focus on the development

and regulation of foreign trade.  Further, Section 5 specifically empowers

the Central Government to formulate and announce the EXIM Policy.  It

reads as under:

“5.  Export and import policy. – The Central Government may,  from  time  to  time,  formulate  and  announce,  by notification in the Official  Gazette, the export and import policy  and  may  also,  in  the  like  manner,  amend  that policy.”

7) In order to carry out the purposes of this Act, DGFT is to be appointed by

the Central Government as per the provisions of Section 6 of the Act.  In

addition to carrying out the purposes of this Act, DGFT is also supposed

to advise the Central Government in formulation of the EXIM Policy.  He

is  also  made  responsible  for  carrying  out  that  Policy.   However,

sub-section (3) of Section 6 empowers the Central Government to give

the aforesaid functions of the DGFT even to other Officer subordinate to

DGFT, except for powers conferred under Sections 3, 5, 15, 16 and 19 of

the Act.

8) As already noted above, Sections 3 and 5 give certain powers to the

Central Government and, therefore, these powers have to be exercised

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by the Central Government only and cannot be delegated to DGFT or an

Officer subordinate to him.  Sections 15 and 16 relate to appeal and

revision which can be filed against the orders passed by the Adjudicating

Authority against any person committing contravention of provisions of

the Act,  Rules,  Orders and EXIM Policy.  Appeal lies to DGFT if  the

Adjudicating Authority, who passes the order, is an Officer subordinate to

DGFT.  In those cases, where the Adjudicating Officer is DGFT himself,

appeal lies to the Central Government.  Under Sections 16, revisionary

powers are conferred upon the Central Government.  These powers of

appeal and revision also cannot be delegated by virtue of Section 6(3) of

the Act.  Section 19 again confers power upon the Central Government

to make Rules for carrying out the provisions of the Act generally and in

respect of various matters specifically enumerated in sub-section (2) of

Section  19.   This  power  of  the  Central  Government  also  cannot  be

delegated.

9) It may be noted that under Section 5 of the Act, the Central Government

has been formulating EXIM Policies from time to time. The Policy with

which we are concerned is the EXIM Policy for the period 2002-2007,

which was substituted by EXIM Policy 2004-2009.

10) EXIM Policy of  2002-2007 was announced and came into force from

April  01,  2002.  Amendment to this Policy was notified on March 31,

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2003 and the revised edition of the Policy was to come into force from

April  01,  2003.   Even  though  the  Central  Government  is  generally

entitled and empowered to carry out  amendments in  this  Policy from

time to time, in the EXIM Policy 2002-2007, such a right was specifically

reserved stating that  'however, the Central  Government  reserves the

right  in  public  interest to  make  any  amendments  to  this  Policy  in

exercise  of  powers  conferred  by  Section  5  of  the  Act'.   It  was  also

mentioned  that  such  amendments  would  be  made  by  means  of  a

notification published in the Gazette of India.

11) Chapter I of the Policy, which gives 'Introduction', had made transitional

arrangements vide para 1.2 thereof clarifying that any notifications made

or public notices issued or anything done under the provisions of EXIM

Policy and in force immediately before the commencement of the said

Policy shall continue to be in force, insofar as those notifications, etc. are

not in consistent with the provisions of the instant Policy.  It was also

clarified  that  licences/certificates/permissions  issued  under  the  earlier

Policy  would  continue to  be followed for  the purpose for  which such

licences/certificates/permissions  were  issued,  unless  otherwise

stipulated.  Para 1.4 enshrines the objectives which led to formulation of

such a Policy and reads as under:

“1.4 The principal objectives of this Policy are:

(i)   To facilitate  sustained  growth  in  exports  to  attain  a share of at least 1% of global merchandise trade.

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(ii)  To stimulate sustained economic growth by providing access  to  essential  raw  materials,  intermediates, components,   consumables   and

capital  goods  required  for  augmenting  production  and providing services.

(iii)  To enhance the technological strength and efficiency of  Indian  agriculture,  industry  and  services,  thereby improving their competitive strength while generating new employment  opportunities,  and  to  encourage  the attainment of internationally accepted standards of quality.

(iv)  To provide consumers with good quality goods and services at internationally competitive prices while at the same time creating a level playing field for the domestic producers.”

12) Keeping in mind the aforesaid principal objectives, para 2.1 made it clear

that exports and imports shall be free, except in cases where they are

regulated by the provisions of the said Policy or any other law for the

time being in force.  As per para 2.4, DGFT was authorised to specify the

procedure which needs to be followed by an exporter or importer or by

any  licencee  or  other  competent  authority  for  the  purposes  of

implementing the provisions of the Act, the Rules and the Orders made

therein  and this  Policy.  Such a  procedure was to  be stipulated and

included in the Handbook (Volume-I), Handbook (Volume-II), Schedule

of DEPB and in ITC (HS) and published by means of a public notice.  It

was permissible to amend this procedure from time to time.

13) Another provision of this Policy which needs to be noticed is para 2.34

that pertains to 'third party exports' and reads as under:

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“2.34  Third party exports, as defined in paragraph 9.55 shall be allowed under the Policy.”

14) Since the third party exports are to be allowed, as defined in para 9.55,

we reproduce herein the said para as well:

“”Third-party exports” means exports made by an exporter or manufacturer on behalf of another exporter(s).  In such cases, shipping bills shall  indicate the name of both the exporter/ manufacturer and exporter(s).”

15) Registration by importer or exporter is needed to avail the benefits of this

Policy and provision in this respect is contained in para 2.44 mentioning

about  the  Registration-cum-Membership  Certificate,  which  reads  as

under:

“2.44   Any  person,  applying  for  (i)  a  licence/ certificate/permission to import/export, [except items listed as restricted items in ITC (HS)] or (ii) any other benefit or concession under this policy shall  be required to furnish Registration-cum- Membership Certificate (RCMC) granted by  the  competent  authority  in  accordance  with  the procedure  specified  in  the  Handbook  (Vol.I)  unless specifically exempted under the Policy.”

16) Chapter III of the EXIM Policy deals with 'Promotional Measures' which

are to be undertaken to achieve the objective of the Policy. Apart from

various  other  measures  stipulated  therein,  with  which  we  are  not

concerned, this Chapter also deals with grant of 'Status Certificate' which

is to be given to various kinds of exporters etc. who are eligible for such

recognition.   Categories  of  the  exporters  are  mentioned  therein

depending upon the export performance level achieved by such export

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houses.   Such  status holders  are  eligible  for  certain  special  facilities

which could be availed during the validity period of the Policy, i.e. April

01, 2002 to March 31, 2007, unless otherwise specified.  Since all the

petitioners who filed the writ petitions have this Status Certificate, on the

strength  of  which they are  claiming the special  facilities,  and in  their

perspective the impugned notifications adversely affect the availment of

these facilities,  we reproduce  verbatim  concerned paras of  the Policy

touching upon this aspect:

Status Certificate

3.7.1 Merchant  As  Well  as  Manufacturer Exporters,  Service  Providers,  Export Oriented Units (EOU's) / Units Located in  Special  Economic  Zones  (SEZ's)  / Agri  Export  Zone (AEZ's)  /  Electronic Hardware Technology Parks (EHTPs) / Software  Technology  Parks  (STPs) shall be eligible for such recognition.

Export Performance

Level

3.7.2 The  applicant  is  required  to  achieve the  prescribed  average  export performance level:

Category Total  FOB/FOR  during  the  current licencing year or during the preceding 1/2/3 licensing years

(in Rupees) Export House 45 crores Trading House 300 crores Star Trading House 1500 crores Super Star Trading House 6000 crores

Note: 1. Units  in  Small  Scale  Industry/Tiny  Sector/ Cottage  Sector/Units  registered  with  KVICs  or KVIBs/Units  located  in  North  Eastern  States,

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Sikkim  and  J&K/Units  exporting  handloom, handicrafts,  hand knotted carpets,  silk carpets/ exporters  holding  golden  status/exporters exporting to countries in Latin America and CIS/ sub Saharan Africa as listed in  Appendix-17C, units  having  ISO  9000  (series)/  WHOGMP/ HACCP/SEI  CMM  level-II  and  above  status granted  by  agencies  listed  in  Appendix-28A, shall  be  entitled  for  export  house  status  on achieving  Rs.15  crore  FOB/FOR  during  the current  licencing  year  or  during  the  preceding 1/2/3 licensing years.  The same threshold limit shall be applicable to the service exporters and agri  exporters (other than grains)  for  obtaining Export house status.

2. Export  made  on  re-export  basis  shall  not  be counted for the purpose of recognition.

3. The exports made by a subsidiary of  a limited company  shall  be  counted  towards  export performance  of  the  limited  company  for  the purpose of  recognition.   For  this  purpose,  the company shall  have the majority share holding in the subsidiary company.

We now advert to the most crucial provision which entitles these

Status Holders to the following benefits:

Special Strategic

Package for Status Holders

3.7.2.1 The  status  holders  shall  be  eligible  for the following new/special facilities:

(i)   Licence/certificate/permissions  and Customs clearances for both imports and exports on self-declaration basis;

(ii)   Fixation  of  Input-Output  norms  on priority within 60 days;

(iii)   Exemption  from  compulsory negotiation of documents through banks.

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The remittance, however, would continue to be received through banking channels;

(iv)  100% retention of foreign exchange in EEFC account;

(v)  Enhancement in normal repatriation period from 180 days to 360 days;

(vi)   Duty  free  import  entitlement  for status holders having incremental growth of  more  than  25%  in  FOB  value  of exports  (in  free  foreign  exchange) subject to a minimum export turnover of Rs. 25 crore (in free foreign exchange). The duty free entitlement shall be 10% of the incremental growth in exports.  Such entitlement  can  be  used  for  import  of capital  goods,  office  equipment  and inputs for their own factory or the factory of the associate/supporting manufacturer /job worker.  The entitlement/goods shall not be transferable.  

The exporters  who gets  the  Status  Certificate  are  known as  'Status

Holders'.  The term 'Status Holder' is defined in para 9.53 and reads as

under:

“”Status Holder” means an exporter recognised as “Export House/Trading  House  by  DGFT/  Development Commissioner or Star Trading House/Super Star Trading House” by the Director General of Foreign Trade.”

17) As noted above, the main objective of this EXIM Policy was to achieve

the share of 1% of global trade and accelerated growth in exports.  For

this purpose, certain sectors, where such exports were to be given the

necessary  boost,  were  mentioned  in  para  3.10  describing  them  as

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'Thrust Sector'.  These are as under:

3.10 With a view to achieve the share of 1% of global trade  and  accelerated  growth  in  exports,  the following shall be the thrust sectors:

a)  Electronic hardware b)  Textile including garments c)  Auto components/ancillary d)  Gem & Jewellery e)  Agriculture f)  Service sector

Department  of  Commerce shall  take concerted efforts  to  promote  exports  of  these sectors  by specific sectoral strategy.

18) It is already noted above in para 3.7.1 that various kinds of categories

are  eligible  for  recognition  as  status  holders.   These  include  Export

Oriented Units (EOUs), Electronic Hardware Technology Parks (EHTPs)

and  Software  Technology  Parks  (STPs).   A  separate  Chapter,  i.e.

Chapter VI, is carved out to deal with the aforesaid categories.  Eligibility

thereof is stipulated in para 6.1, which is to the following effect:

Eligibility 6.1 Units  undertaking  to  export  their  entire production of goods and services, except permissible sales in the DTA, as per the Policy, may be set up under the Export Oriented Unit (EOU) Scheme, Electronic Hardware  Technology  Park  (EHTP) Scheme  or  Software  Technology  Park (STP) Scheme for manufacture of goods, including  repair,  re-making, reconditioning,  re-engineering,  and rendering of  services.  No trading units shall, however, be permitted.

19) Such EOUs/EHTPs/STPs are permitted to export goods through status

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holder,  as  specifically  provided  in  para  6.10  and  we  reproduce

hereunder:

Export through Status Holder

6.10 An  EOU/EHTP/STP  unit  may  export goods manufactured/software developed by it through a merchant exporter/status holder  recognized  under  this  Policy  or any other EOU/EHTP/STP/SEZ unit.

20) Special Economic Zones (SEZs) are also entitled for Status Certificate.

The provisions concerning these SEZs are contained in Chapter VII of

the EXIM Policy.  Their eligibility is defined in para 7.1 in the following

words:

Eligibility 7.1 (a)  Special Economic Zone (SEZ) is a specifically delineated duty free enclave and  shall  be  deemed  to  be  foreign territory  for  the  purposes  of  trade operations and duties and tariffs.

(b)  Goods and services going into the SEZ area from DTA shall  be treated as exports and goods coming from the SEZ area into DTA shall be treated as if these are being imported.

(c)   SEZ  units  may  be  set  up  for manufacture of  goods and rendering of services.

21) Para 7.8 deals with DTA Sales and Supplies which these SEZ Units ma

undertake.  These SEZ Units are also entitled to export through status

holder in terms of para 7.10, as under:

Export through 7.10 SEZ  unit  may  also  export  goods

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Status Holder manufactured/software  developed  by  it through  a  merchant  exporter/status holder  recognized  under  this  Policy  or any other EOU/SEZ/EHTP/STP unit.

22) Chapter IX contains definition of various terms which are used in the

EXIM Policy.  We have already noted the definition of 'Status Holder' as

well  as  'Third Party Exports'.   Some other definitions which require a

mention are as under:

9.5 “Actual User (Industrial)” means a person who utilises the  imported  goods  for  manufacturing  in  his  own industrial  unit  or  manufacturing  for  his  own  use  in another unit including a jobbing unit.

9.6 “Actual  User  (Non-Industrial)”  means  a  person  who utilises the imported goods for his own use in:

(i)   any  commercial  establishment  carrying  on  any business, trade or profession; or

(ii)   any  laboratory,  Scientific  or  Research  and Development  (R&D)  institution,  university  or  other educational institution or hospital; or

(iii)  any service industry.

9.10 “Capital  Goods”  means  any  plant,  machinery, equipment or accessories required for manufacture or production, either directly or indirectly, of goods or for rendering  services,  including  those  required  for replacement, modernisation, technological upgradation or expansion.   Capital  goods also include packaging machinery and equipment, refractories for initial lining, refrigeration  equipment,  power  generating  sets, machine tools,  catalysts  for  initial  charge,  equipment and instruments for testing, research and development, quality and pollution control.  Capital goods may be for use in manufacturing, mining, agriculture, aquaculture, animal husbandry, floriculture, horticulture, pisciculture, poultry, sericulture and viticulture as well as for use in

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the services sector.

9.31 “Manufacturer  Exporter”  means a person who export goods manufactured by him or intends to export such goods.

9.33 “Merchant  Exporter”  means  a  person  engaged  in trading  activity  and  exporting  or  intending  to  export goods.

23) To put it in nutshell, EXIM Policy 2002-2007 was promulgated with the

principal objective,  inter alia, to facilitate sustained growth in exports to

achieve a share of 1% of global merchandise trade. Therefore, the thrust

of this Policy was to ensure and facilitate growth in exports.  Because of

this reason, exports and imports were made free, except in relation to

cases where they were specifically regulated by the provisions of this

Policy or under any law.  In order to facilitate the growth of these exports,

following measures were specifically provided in the EXIM Policy:

(a)  third party exports;

(b)  stipulating thrust sector, viz. mentioning those products which were having

potential in achieving the target of 1% of global trade and accelerated

growth in  exports.   It  was,  therefore,  perceived that  in  these sectors

there is  an ample scope for  boosting the exports.   Six  such sectors

mentioned in para 3.10 include Gem and Jewellery Sector as well;

(c)  it was held that growth in exports can be accelerated through small scale

industry sector/mid level export houses.  For this purpose, depending

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upon the level of export by the exporters, categories of the exporters

were carved out, namely, Export Houses, Trading Houses, Star Trading

Houses and Super Star Trading Houses.  In order to encourage these

export categories, depending upon their category, the export incentives

were provided for them;

(d)   in  the  same  direction,  certain  categories  were  chosen  for  giving

recognition as status holders, who could get such Status Certificate if

they  come  within  the  purview  of  the  definition  of  'Status  Holder'

contained in para 9.55.

24) The importance that was given to these status holders was highlighted

by  the  then  Commerce  Minister  while  announcing  special  strategic

package  for  status  holders.   Relevant  extract  of  the  said  speech

contained in para 19 thereof is noted as under:

“19.  The status holders have been a pillar of strength in increasing exports.   There is a feeling among them that under the Exim Policy, substantive benefits are no longer available to them since the earlier benefits such as fast track  clearance  and  relaxation  from certain  procedures, are  now  universally  applicable  in  the  liberalized environment.   We recognize that  the status  holders  will continue  to  play  a  significant  and  increasing  role  in boosting exports, particularly from the small scale sector, as most of the small scale units will not be in a position to directly access the international markets.  Moreover, it will be our endeavor to facilitate India emerging as a major base for outsourcing products and services for the rest of the  world.   They  are  also  critical  to  our  strategy  for accelerating  the  rate  of  incremental  growth  of  exports. Therefore,  we  intend  to  give  a  premium  to  the  status holders who achieve high growth rate in their exports.  It is proposed to give a duty free entitlement to them for import of  capital  goods,  spares,  office  equipments  and

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consumables.  This will be available to status holders who achieve a growth rate of 25% or more in the current year with a minimum export performance of Rs.25 crore.  They would be entitled to a duty free entitlement of 10% of the incremental growth in exports during the current financial year.   This  entitlement  would  be  subject  to  actual  user condition  which  can  be  passed  on  to  associate manufacturers.”

25) In fact, as a part of the EXIM Policy, with amendment coming into effect

from  April  01,  2003,  certain  incentives  known  as  'Special  Strategic

Package'  for status holders was incorporated in para 3.7.2.1.  We are

concerned with sub-para (vi) thereof, which granted duty free entitlement

of 10% of the incremental growth in exports.  This para is reproduced

above.  A reading of the said para would demonstrate that in order to

have the aforesaid entitlement, following conditions were to be satisfied:

(a)  the exporter had to be 'Status Holder';  

(b)  achieving incremental growth of more than 25% in FOB value of exports in

free foreign exchange ;

(c)  minimum export turnover of ₹25 crores in free foreign exchange;

(d)  entitlement could be used for import of capital goods, office equipment

and inputs for their own factory or the factory of the associate/supporting

manufacturer/job worker;

(e)  such entitlement/goods was non-transferable; and

(f)  since the Scheme was intended to be a specific incentive for fast growing

status holders, the benefits were to be available only after April 01, 204

on the basis of the export performance during the period April 01, 2003

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to March 31, 2004.

26) On the very same day, i.e. on March 31, 2003, in exercise of the powers

conferred by Section 5 of the Act, read with para 1.1 of the EXIM Policy

2002-2007,  the  Central  Government  amended and notified  the  EXIM

Policy  2002-2007 (revised edition:  March 2003).   The revised edition

came into force with effect from April 01, 2003.  The relevant provisions

of the EXIM Policy, as amended upto March 31, 2003, and relevant for

the purpose of the present case, are paras 1.1, 1.2, 1.3, 2.2, 2.3, 2.4,

2.6, 2.8, 2.9 and 2.10 and the same are reproduced below:

“1.1  In exercise of the powers conferred under Section 5 of  the  Foreign  Trade  (Development  &  Regulation)  Act, 1992  (No.  22  of  1992)  the  Central  Government  hereby notifies  the  Export  and  Import  Policy  for  the  period 2002-2007.  This Policy shall come into force with effect from  1st April  2002  and  shall  remain  in  force  upto  31st March 2007 and will  be co-terminus with the Tenth Five Year Plan (2002-2007).  However, the Central Government reserves  the  right  in  public  interest  to  make  any amendments  to  this  Policy  in  exercise  of  the  powers conferred by Section 5 of the Act.  Such amendment shall be  made  by  means  of  a  Notification  published  in  the Gazette of India.

1.2  Any Notifications made or  Public Notices issued or anything done under the previous Export/ Import policies, and in force immediately before the commencement of this Policy shall, insofar as they are not inconsistent with the provisions of this Policy, continue to be in force and shall be deemed to have been made, issued or done under this Policy.  Licence/certificate/permissions issued before the commencement of this Policy shall continue to be valid for the purpose for  which such licence/certificate/permission was issued unless otherwise stipulated.

1.3  In case an export  or import  that is permitted freely under  this  policy  is  subsequently  subjected  to  any

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restriction  or  regulation,  such  export  or  import  will ordinarily be permitted notwithstanding such restriction or regulation, unless otherwise stipulated, provided that the shipment of the export of import is made within the original validity of the irrevocable letter of credit established before the date of imposition of such restriction.

xx xx xx

2.2   Every  exporter  or  importer  shall  comply  with  the provisions of  Foreign Trade (Development & Regulation) Act  1992,  the  Rules  and  Orders  made  thereunder,  the provisions of this Policy and the terms and conditions of any licence/certificate/ permission granted to him, as well as provisions of any other law for the time being in force. All imported goods shall also be subject to domestic laws, rules,  orders,  regulations,  technical  specifications, environmental  and  safety  norms  as  applicable  to domestically  produced  goods.   No  import  or  export  of rough diamonds shall  be permitted unless the shipment parcel  is  accompanied  by  Kiberley  Process  (KP) Certificate required under the procedure specified by the Gem & Jewellery Export Promotion Council (GJEPC).

2.3   If  any  question  or  doubt  arises  in  respect  of  the interpretation of any provision contained in this Policy, or regarding the classification of any item in the ITC (HS) or Handbook  (Vol.I)  or  Handbook  (Vol.2),  or  Schedule  of DEPB Rate the said question of doubt shall be referred to the  Director  General  of  Foreign  Trade  whose  decision thereon shall be final and binding.

If  any  question  or  doubt  arises  whether  a licence/certificate/permission  has  been  issued  in accordance with  this  Policy  or  if  any  question  or  doubt arises  touching  upon  the  scope  and  content  of  such documents,  the  same  shall  be  referred  to  the  Director General of Foreign Trade whose decision thereon shall be final and binding.

2.4  The Director General  of  Foreign Trade may, in any case  or  class  of  cases,  specify  the  procedure  to  be followed by an exporter or importer or by any licensing or any  other  competent  authority  for  the  purpose  of implementing the provisions of the Act the Rules and the Orders made thereunder and this Policy.  Such procedures shall  be  included  in  the  Handbook  (Vol.1),  Handbook (Vol.2),  Schedule  of  DEPB  Rate  and  in  ITC  (HS)  and

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published by means of a public notice.  Such procedures may, in like manner, be amended from time to time.

The Handbook (Vol.1) is a supplement to the EXIM Policy and contains relevant procedures and other details. The procedure of availing benefits under various schemes of the Policy are given in the Handbook (Vol.1).

xx xx xx

2.6  DGFT may, through a notification, adopt and enforce any measure necessary for:

(i)  Protection of public morals.

(ii)  Protection of human, animal or plant life or health.

(iii)  Protection of patents, trademarks and copyrights and the prevention of deceptive practices.

(iv)  Prevention of prison labour.

(v)  Prevention of national treasures of artistic, historic or archaeological value.

(vi)  Conservation of exhaustible natural resources.

(vii)  Protection of trade of fissionable material or material from which they are derived; and

(viii)   Prevention  of  traffic  in  arms,  ammunition  and implements of war.

xx xx xx

2.8  Every licence/certificate/permission shall be valid for the  period  of  validity  specified  in  the licence/certificate/permission and shall contain such terms and  conditions  as  may  be  specified  by  the  licensing authority which may include:

(a)  the quantity, description and value of the goods;

(b)  Actual User condition;

(c)  export obligation;

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(d)  the value addition to be achieved; and

(e)  the minimum export price.

2.9  No person may claim a licence/certificate/ permission as a right and the Director General of Foreign Trade or the licensing authority shall have the power to refuse to grant or  renew a  licence/  certificate/permission  in  accordance with  the  provisions  of  the  Act  and  the  Rules  made thereunder.

2.10  If a licence/certificate/permission holder violates any condition of  the  licence/certificate/  permission or  fails  to fulfill the export obligation, he shall be liable for action in accordance  with  the  Act,  the  Rules  and  Orders  made thereunder, the Policy and any other law for the time being in force.

27) On  March  31,  2003,  in  exercise  of  the  powers  conferred  under

paragraph  2.4  of  the  EXIM  Policy,  2002-207,  the  DGFT notified  the

Handbook  of  Procedures  (Volume-I)  (Revised  Edition  –  March  2003)

which was to come into effect with effect from April 01, 2003.  Para 3.2.5

of the same provided that:

“The status holders having an annual incremental growth of  more than 25% in the FOB value of  exports  (in  free foreign exchange) shall  be entitled to the facility  of  duty free  credit  entitlement  subject  to  achieving  a  minimum annual  export  turnover  of  Rs.25  crore  (in  free  foreign exchange).  Such status holders shall be entitled to duty free credit  entitlement certificate to the extent of 10% of the incremental growth in exports.

Accordingly,  status  holders  who  will  achieve  more  than 25% growth in exports in the year 2003-04 (in free foreign exchange) as compared to the exports made in 2002-03 (in free foreign exchange) subject to a minimum export of Rs.25 crore (in free foreign exchange) shall be entitled for duty  free  credit  entitlement  certificate  @  10%  of  the incremental growth in exports.

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The duty free credit entitlement can be used for import of capital goods, office equipments and inputs provided the same is freely  importable under ITC (HS).   Such goods shall  be non-transferable.  Goods imported against such entitlement certificate shall be used by status holders or his supporting manufacturer/job worker provided the name and address of the supporting manufacturer/job worker is endorsed on the certificate issued by RLA.

Application  shall  be  filed  with  the  jurisdictional  regional licensing  authority  as  per  the  address  given  in  status certificate.   The  application  for  the  duty  free  credit entitlement certificate would be made in Appendix 17D.

The duty  free  entitlement  certificate  shall  be  valid  for  a period of 12 months.  The status holder shall within one month  of  the  expiry  of  the  validity  of  the  duty  free entitlement certificate, submit a statement of imports made under  the  certificate  as  per  Appendix  17E  to  the jurisdictional Regional Licensing Authority.”

28) After  taking  stock  of  the  main  provisions  of  the  EXIM  Policy  which

concern  us  in  these  proceedings,  we  now  advert  to  the  nature  of

amendments made by Notification dated January 28, 2004 as well as

Public Notice of even date, followed by Notification No. 38 dated April

21, 2004.

29) Vide Notification No. 28 dated January 28, 2004, which was issued in

exercise of powers contained in Section 5 of the Act read with para 1.1

of the EXIM Policy, certain amendments were made in the EXIM Policy.

However, we are concerned here with  amendment  in  para 3.7.2.1  in

Chapter III.  As noted above, this para provides certain incentives and

contains seven sub-paragraphs.   After  sub-paragraph (vii),  five  notes

were inserted by way of amendment.  Though some provisions of Note I

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are the bone of contention, we reproduce here all these Notes for better

understanding:

“Note  1  –  For  the  purpose  of  calculating  the  value  of exports,  the  following  exports  shall  not  be  taken  into account, namely:

(i)  re-export of imported goods or exports made through transshipment;

(ii)   export  turnover  of  units  operating  under  SEZ/ EOU/EHTP/STP  Schemes  or  products  manufactured by them and exported through DTA units;

(iii)  deemed exports (even when payments are received in free foreign exchange) and payment from EEFC account;

(iv) service exports;

(v)   supplies made by one status holder  to  another status holder;

(vi) export performance made by one status holder on behalf  of  other  status holder  will  not  be  eligible  for entitlement under the scheme;

(vii) supplies made or export performance effected by a non-status holder (Merchant exporter/ Manufacturer with any export  performance in 2003-04) to a status holder if the applicant as well as the non status holder have less than 25 per cent  incremental  growth over their respective previous years direct export turnover; and

(viii)  the exports made by an applicant within a group and the group to which it belongs has individually less than 25 per cent incremental growth of export.

Note 2 – The incremental growth of exports by an exporter shall not, directly or indirectly, be transferred to any other exporters.

Note 3 – Government reserved the right in public interest, to specify the export products, which shall not be eligible for  calculation  of  incremental  growth/  entitlement. Similarly, the government may also notify the list of goods,

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which shall not be allowed for imports under the scheme.

Note 4 – These guidelines will be applicable to the exports made on or after 1.04.2003.

Note 5 – The entitlement will be in terms of duty credit.”

To point out here itself, challenge was laid to sub-note (ii), (v), (vi) and

(vii) of Note 1.

30) Sub-paragraph (3)  of  the  para  3.8  pertaining  to  the  “duty  free  credit

entitlement for service providers” was amended to read as under:

“Service provider  (other  than hotels)  shall  be entitled to duty free import equivalent to 10% of the average foreign exchange  earned  by  them  in  preceding  three  licensing years.   However,  hotels  (one  star  and  above),  heritage hotels,  stand-alone restaurants approved by Department of Tourism, Govt. of India and other service providers in tourism  sector  registered  with  Department  of  Tourism, Govt. of India, and shall be entitled for duty free imports equivalent to 5% of the average foreign exchange earned by them in free imports equivalent to 5% of the average foreign  exchange  earned  by  them  in  preceding  three licensing years.  For one & two star hotels and stand-alone restaurants,  the  foreign  exchange  earned  through international credit cards only shall be taken into account for  the  entitlement  under  the  scheme.   The  duty  free entitlement  shall  be used for import  of  any capital  good including  spares,  office  equipment(s)  &  professional equipment(s), office furniture(s) & consumables.  However, agriculture, diary products motor cars sports utility vehicles and  all  purpose  vehicles  would  not  be  allowed  to  be imported against this entitlement.”   

31) Vide Public Notice bearing No. 40 dated January 28, 2004, which was

issued along with the aforesaid Notification No.28 on the same date,

certain  amendments  were  made  in  the  Handbook  of  Procedures

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(Volume-I).  This Public Notice was issued by the DGFT in exercise of

powers conferred under  para 2.4 of  the EXIM Policy.  By this Public

Notice, paragraph 3.2.6 was inserted below para 3.2.5 of the Handbook

of Procedures (Volume-I), which reads as under:

“The scheme will be applicable to status holders who were also status holders as on 31.3.2003 and who had achieved minimum export turnover of 25 crores in the year 2003-04:

I.   For  direct  as  well  as  third  party  exports,  the  Export documents  viz.  Export  Order,  Invoice,  GR  Form,  Bank Realization Certificate should be in the name of applicant only.  However, for the third party exports, where goods have been procured from a manufacturer, the shipping bill should contain the name of  the exporter  as well  as the supporting manufacturer.

II.  Goods allowed to be imported under this scheme shall have a nexus with the products exported and a declaration in this regard shall be made by the applicant in Appendix 17D.

III.  The licensing authority shall at the time of issuance of the  duty  free  credit  entitlement  certificate  endorse  the name  of  the  associate  manufacturer/supporting manufacturer/ job worker on the certificate as declared by the applicant.   Goods imported against  such entitlement certificate  shall  be  used  by  the  status  holder  or  his supporting  manufacturer/job  worker  in  proportion  to  the value of their direct contribution to the entitlement.

IV.  The last date for filing of such applications shall be 31st December.

V.  The  duty  free  credit  entitlement  certificate  shall  be issued with a single port of registration.  For each duty free credit entitlement certificate, split certificates subject to a minimum of Rs.5 lakh each and multiples thereof may also be issued.  A fee of Rs.1000/- each shall be paid for each split certificate.  However, a request for issuance of split certificate(s) shall be made at the time of application only and shall not be considered at a later stage.

VI.   The  duty  free  credit  entitlement  certificate  shall  be

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valid for a period of 12 months from the date of issue.  The status holder  shall  within  one month of  the last  imports made under this certificate or within one month of expiry of the certificate whichever is earlier, submit a statement of imports/utilization  made  under  the  certificate  as  per Appendix  17E,  to  the  jurisdictional  Regional  Licensing Authority who has issued the certificate with a copy to the jurisdictional excise authorities.

It also provided that:

In  terms  of  para  3.2.5  of  Handbook  of  Procedures (Volume 1),  the  following items would  not  be  taken into account for computation of entitlement and export performance  under  Duty  Free  Credit  Entitlement Scheme for Status Holders:

a)  Rough, uncut and semi polished diamonds.

b)  Gold, silver in any form including plain jewellery thereof.

c)  Good grains sourced from central pool maintained by FCI.

d)  Items exported under free shipping bills.

3.   In  terms  of  para  3.2.5  of  Handbook  of  Procedures (Volume 1) the following items would not be allowed for imports under Duty Free Entitlement Certificate for Status Holders: a)  Agricultural products, which fall under Chapters 1-24 of ITC (HS) classification of Export and Import items.”

32) We would like to mention at this stage itself that as per the Government

rationale  for  the amendment  brought  out  by  Notification  No.28  dated

28.01.2004 and Public Notice No.40 dated 28.01.2004 are as under:

S. No. Exclusion Rational for exclusion Note 1

(i) Re-export  of  imported goods  or  exports made  through transshipment;

Such goods are imported under the customs  bond  and re-exported  with little  value  addition.   Such  exports come  from  country  A  and  go  to

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country B via India and are only pass through exports  and not  considered exports made in India.

(ii) Export  turnover  of units  operating under  SEZ/ EOU/EHTP/STPI Schemes  or products manufactured  by them  and  exported through DTA units;

DFCE  would  be  of  no  use  to Export  Oriented  Units  (EOU)  as they are already entitled to import duty free. And since a firm is not allowed to transfer or sell its DFCE entitlements  or  goods,  it  cannot benefit from it. Notification 28 and Public  Notice  40,  kept  the  above logic  in  mind  while  excluding 100% EOU from the said scheme.

EXIM  Policy  makes  a  very  clear distinction  between  the  exports from  an  Export  Oriented  Units (EOU)  and  other  exports  (called Domestic  Tariff  Area  or  DTA exports)  primarily  because of  the difference  in  nature  of  support required by the two sectors.  EOUs have  been  allowed  zero  duty facilities,  besides  availing industrial  licensing  exemptions. Since  these  exemptions  are  not available  to  DTA  exporters, specific schemes like DFCE been formulated.

(iii) Deemed exports Goods do not leave the country and are not considered physical exports.

(iv) Service exports The  DFCE  scheme  was  available only for physical goods.

(v) Supplies  made  by one status holder to another  status holder;

The  benefits  of  DFCE  Scheme were  not  applicable  to  all  the status  holders  but  only  to  those status holders meeting the growth and turnover criteria.

(vi) Export  performance made  by  one  status holder  on  behalf  of other  status  holder will  not  be  eligible for entitlement under the scheme.

More  than  1300  crores  of  the exports of M/s Adani Exports were accounted  by  the  supplies  taken from  the  status  holders  who supplied  to  the  petitioners because they were not meeting the minimum  turnover  and/or  growth

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criteria  required  to  take  benefit under the scheme.  Claiming other firms export would mean that the country's  export  turnover  would remain  constant  while  applicant firms'  turnover  will  sky  rocket. This would not lead to the stated objective  of  accelerating  the  rate of incremental growth of country's exports.

(vii) Supplies  made  or export  performance effected  by  a non-status  holder (Merchant exporter/Manufactur er  with  any  export performance  in 2003-04)  to  a  status holder  if  the applicant  as  well  as the  non  status holder  have  less than  25  per  cent incremental  growth over their respective previous years direct export turnover.

(viii) The exports  made by an  applicant  within  a group and the group to which  it  belongs  has individually  less  than 25  per  cent incremental  growth  of export.

M/s  Reliance  Industries  Limited manipulated the export turnover of its group company IPCL to maximize its DFCE and Target  plus entitlements. All this led to artificially increasing the export  performance  which  was against  the  basic  principle  of  the DFCE and hence excluded.

Note 2 Note  2. -  The incremental  growth  of exports by an exporter shall  not,  directly  or indirectly,  be transferred  to  any other exporters.

The scheme explicitly was based on individual  exporters  performance. Claiming  other  firm's  exports  would mean  that  the  country's  export turnover would remain constant while applicant  firm's  turnover  will skyrocket.

If the firm had focused on increasing their  exports,  both  the firm and the country would have gained in terms of export turnover, however, the firms chose to focus on people who were already  exporting  (but  were  not entitled  for  this  benefit).   Thus,  the firm's turnover in the past year grew at  astronomical  rate  whereas country's  export  growth  was  just average.

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S. No. Exclusion Rational for exclusion a Rough,  uncut  and

semi  polished diamonds

Rough diamonds are not produced in India  (Except  for  a  trickle  from Panna).   Exporting  rough  diamonds from India is like exporting ostrich or giraffes from India.

India  imports  rough  diamonds polished  them  and  exports  to  the world.   The  scheme  ban  rough diamond while fully allowing polished diamonds.

Together, the export of diamonds and supplies  taken  from  other  status holders  accounted  for  81.4% of  the exports  of  M/s  Adani  Exports  Ltd. during  the  year  2003-04.   Of  these 2475  crores  were  accounted  for  by the export  of  rough and re-exported polished diamonds.

The  fact  that  the  petitioners  were exporting rough diamonds merely  to take the benefits of DFCE Scheme is proved beyond doubt by the fact that firm  stopped  exporting  the  rough diamonds the moment the Notification was  issued  in  January,  2004  and have  not  exported  any  rough diamonds  during  January  –  March, 2004.

b Gold,  silver  in  any form  including  plain jewellery thereof

10%  DFCE  benefits  allowed  the exporters  to  experiment  in commodities  like  gold  wherein  India does  not  have  comparative advantage.  Gold coins and jewellery was exported by M/s.  Adani  Exports and  M/s  Rajesh  Exports  largely  to ports like Dubai where it was melted and  brought  back  to  India  to  be exported again and again.  The entire operation  can be  profitably  financed through  the  proceeds  under  the Scheme.

With  the exports  taking  place within

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S. No. Exclusion Rational for exclusion two days of the imports, 60 tonnes of gold  could  be  re-circulated  80-90 times in a year.  That means with a little working capital, the country can lose  Rs.1500  for  every  Rs.100 invested by an unscrupulous exporter. Such exports will show an increase in India's  exports,  but  this  will  be unsustainable  increase  and  is ultimately  a  drain  on  country's finances.

c Food  grains  sourced from  central  pool maintained by FCI

Food  grains  sourced  from the  open market were allowed for benefit under the  Scheme.   FCI  is  under Government control where prices are already  subsidised.    As  the Government  did  not  want  to  further subsidize  the  food  grains  sourced from the  central  pool  maintained by FCI, such exports were excluded.

d Items exported under free shipping bills

Free (also called white) shipping bills do not mandatorily require verification of valuation by Customs authority (as per  Customs  Circular  No.6/2002 dated 23/1/2002).  Firms export under free shipping bills  when they do not apply for any Government incentives subsequently.

Government  received  intelligence reports that the export  of high value items  like  rough  diamonds  were taking place under Free shipping bills where  value  of  the  goods  may  be easily  inflated  as  there  was  no customs  valuation,  Government excluded  these  from  the  DFCE scheme.

33) M/s Adani Export Limited, on February 07, 2004, filed S.C.A. No.1676 of

2004 in the High Court of Gujarat at Ahmedabad challenging the validity

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of the Notification No. 28 and Public Notice No. 40 dated January 28,

2004.

34) Thereafter, as noted above, Notification No. 38 dated April 21, 2004 was

issued vide which Note 6 and 7 were inserted in para 3.7.2.1 of  the

EXIM Policy.  It may be recalled that first five notes were inserted by

Notification No. 28 dated January 28, 2004.  By Note 6, certain products

and category of products were excluded from entitlement under duty free

entitlement certificate for status holders, whereas under Note 7, certain

items were not allowed for imports under duty free entitlement certificate

for status holders.  These Notes read as under:

“Note  6  –  The  export  of  the  following  products  and categories of products would not be permitted for counting entitlement under the Duty Free Entitlement Certificate for Status Holders:

e)  Rough, uncut and semi polished diamonds

f)  Gold, silver in any form including plain jewellery thereof

g)  Good grains sourced from central pool maintained by FCI

h)  Items exported under free shipping bills.

Note 7 –  The following items would not  be allowed for imports under Duty Free Entitlement Certificate for Status Holders:

Agricultural products, which fall under Chapters 1-24 of I T C (HS) classification of  Export and Import items.”

 Note 6 added in para 3.7.2.1 of the EXIM Policy was earlier inserted as

part  of  para  3.2.6  in  the  Handbook of  Procedures  (Volume-I)  and  is

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subject matter of controversy.

35) On July 23, 2004, the High Court of Gujarat partly allowed Special Civil

Application No.  1676 of  2004 holding that  “so far  as Note 6 to Para

3.7.2.1 of the EXIM Policy as inserted by the Government notifications

dated  April  21  and  24,  2004  and  the  D.G.F.T.'s  public  notice  dated

28.01.2004 exclude the following exports from the benefit  of  the duty

free import entitlement for the export status holders as contained in Para

3.7.2.1 of the EXIM Policy 2002-2007:-

(i)  Items exported under free shipping bills.

(ii)  Gold, Silver in any form including plain jewellery thereof, insofar as the

import  of  capital  goods  and  office  equipment  for  the  factory  of  the

associate/supporting manufacturer/ job worker of the petitioner Company

is concerned.   

The High Court also clarified that the exports effected by a non status

holder (without any export performance in the year previous to 2003-04)

are eligible for the benefits under the Special Scheme irrespective of the

fact that such exporters did not have any incremental growth in exports,

for obvious reason that they had made no exports in the previous years,

in the first place.   

36) Aggrieved by the judgment and order of the High Court of Gujarat in

Special  Civil  Application  No.  1676  of  2004,  M/s  Adani  Exports  on

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October 30,  2004 filed Special Leave Petition (Civil)  No...CC 6638 of

2005.

37) On April 07, 2005 in exercise of the powers conferred under paragraph

2.4 of  the Export  & Import Policy 2002-2007, the Director General  of

Foreign  Trade  amended  the  first  three  lines  of  Para  3.2.6  of  the

Handbook of Procedures.  The amended provision provided that:

“The scheme will be applicable to the status holders/star export  houses  who  have  achieved  a  minimum  export turnover of Rs.25 crores in the year 2003-2004”.

It  also  replaced  the  earlier  appendix  17D prescribing  the  application

format for claiming the Duty Free Credit Entitlement.   

38) On July 04, 2005 Writ  Petition No. 2397 of 2004 filed by M/s. Kanak

Exports before the High Court of Judicature at Bombay challenging the

Notification No. 28(RE-2003)/2002-2007 dated January 28, 2004, Public

Notice  No.  40(RE-2003)/2002-2007,  Notification  No.

38(RE-2003)2002-2007, came up for hearing before a Division Bench of

High Court and upon hearing the parties, the High Court of Judicature at

Bombay upheld the validity of Notification No. 28(RE-2003)/2002-2007

dated January 28, 2004.  However, it set aside the Public Notice No. 40

dated January 28, 2004 and further held that the Notifications dated April

21  and  23,  2004  have  only  prospective  operation  which  means  that

exports  made by  the  exporters  respondent  prior  to  April  21,  2004 in

respect  of  the  classes  of  goods  covered  by  Notifications  dated  April

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21/23,  2004  were  entitled  to  be  computed  for  the  purposes  of

determining the entitlement of Duty Free Imports.

39) On October  21,  2005,  this  Court  issued notice on the Special  Leave

Petition as well as on application for condonation of delay in the Special

Leave Petition (C) (CC NO.6638 of 2005) filed by M/s. Adani Export Ltd.

40) On December 13, 2005, aggrieved by the order of Bombay High Court

dated July 04, 2005 in W.P. No.2397 of 2004 upholding the validity of the

Notification No.28 of 2004 dated January 28, 2004, M/s. Kanak Exports

filed Special Leave Petition (Civil) No. 26123 of 2005.

41) Aggrieved by the order of the Bombay High Court dated July 04, 2005 in

Writ Petition No.2397 of 2004, the appellant/Union of India and DGFT

filed Special Leave Petition (Civil) No.1331 of 2006.   

42) On January 13, 2006 Special Leave Petition (C) No. 26123 of 2005 filed

by M/s.  Kanak Exports  and Special  Leave Petition (Civil)  No.1331 of

2006 filed by the appellants/Union of India and DGFT challenging the

order of the Bombay High Court dated July 04, 2005 in W.P.(C) No. 2397

of 2004 came up for hearing before this Court.

This Court upon hearing the parties granted leave in the Special Leave

Petition (C) No. 1331 of 2006 and in the meantime stayed the operation

of the impugned order in Civil Appeal arising out of S.L.P.(C) No.1331 of

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2006.

43) On February 17, 2006, the Union of India and DGFT aggrieved by the

judgment  and  order  of  the  High  Court  of  Gujarat  at  Ahmedabad  in

Special Civil Application No.1676 of 2004 dated July 23, 2004 filed the

Special Leave Petition.

44) The High Court of Gujarat, in the lead case Adani Exports Limited &

Anr. v. Union of India & Anr.1, had rendered its judgment on July 23,

2004, which was available with the High Court of Bombay when it gave

its  decision  on  July  04,  2005.   Insofar  as  the  Gujarat  High  Court  is

concerned, it  partly allowed the petition quashing Public Notice dated

January 28, 2004 and Note 6 to Para 3.7.2.1 of the EXIM Policy, as

inserted by the Government Notifications dated April  21 and 23, 2004

and rejected the challenge on all other counts.  The Bombay High Court

substantially followed the same line of action, except differing with the

Gujarat High Court to a limited extent thereby granting some more relief

to these petitioners.  Since these two judgments are the subject matter

of these appeals, it would be apposite to scan through these judgments

to  find out  what  actually  is  decided by the two High Courts  and the

reasons in support of their respective decisions.

45) JUDGMENT OF THE GUJARAT HIGH COURT

1 Special Civil Application No. 1676 of 2004

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In  the  Special  Civil  Application  filed  by  Adani  Exports  Limited  in  the

Gujarat High Court challenge was laid to the amendment to para 3.7.2.1

of the EXIM Policy vide Notification dated January 28, 2004 whereby five

Notes  were  inserted.   It  also  challenged  insertion  of  Note  6  vide

Notification dated April  21, 2004 read with Notification dated April  23,

2004 and Public Notice dated January 28, 2004 issued by the DGFT.

The validity of the aforesaid provisions was questioned on the following

premise:

(i)  Since Note 4 provided that the guidelines would be applicable to exports

made  on  or  after  April  01,  2003,  Notification  was  challenged on  the

ground that it amounted to giving retrospective effect to the amendment

Notification dated January 28, 2004 and there was no such power with

the Central  Government  under  Section 5 of  the Act,  or  otherwise,  to

make amendments to the EXIM Policy with retrospective effect, or even

retroactively.

(ii)  These Notes, particularly Notes 1 to 3, 6 and 7, added by the impugned

Notifications  were  not  mere  guidelines  or  clarificatory  in  nature,  but

amounted to making substantial  changes by inserting new conditions

under the cover of clarification, which was not permissible.

(iii)   Note  4  was also  violative  of  the  petitioners  fundamental  rights  under

Article 14 and 19(1)(g) of the Constitution.

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(iv)  Doctrine of  Promissory Estoppel  was also invoked by contending that

acting upon the EXIM Policy, which came into effect from April 01, 2003,

the petitioners had exported the goods on the promise and assurance

contained in sub-para (vi) of Para 3.7.2.1 of the EXIM Policy and fulfilled

the conditions set out therein, thereby achieving the target of incremental

exports  stipulated in  the said  para and,  thus,  became entitled  to  the

benefit conferred therein, namely, 10% duty free imports of the specified

items.   The  petitioner  had,  therefore,  altered  its  position  and  the

respondents  were  estopped  from  going  back  on  their  promises  and

assurances.

(v)  Insofar as Public Notice dated January 28, 2004 is concerned, paragraphs

2 and 3,  whereby certain  items of  goods which  were exported were

excluded from the purview of the special scheme, were challenged on

the  ground that  they  were  ultra  vires  the  powers  of  the  DGFT as  it

amounted to usurping the power of the Central Government.

(vi)   Insofar  as Notification dated January 28,  2004 read with Notifications

dated April 21 and 23, 2004 is concerned, challenge laid thereon was on

the ground that they could not be made effective retrospectively.

46) The stand of the Union of India/respondents was that Notification dated

January 28, 2004 was only clarificatory in nature.  Detailed justification

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for laying down these 'clarifications' were given stating that large number

of  representations  were  received  from  Trade  Associations/Export

Promotion Councils as well as individual exporters seeking clarification

on various points relating to the implementation of the Scheme.  At the

same time,  the Government had also received information that  many

exporters were trying to misuse the same and details thereof, including

the  investigation/inquiry  that  followed,  were  also  given  and  all  this

necessitated issuance of Notification dated January 28, 2004, in public

interest.   Other  arguments of  the petitioners were also refuted giving

various justifications.  It was also emphasized that Section 5 of the Act

and para 1.1 of the EXIM Policy reserved the right of the Government to

amend the Policy in public interest.  It was argued that a statutory power

to  amend  the  Policy, after  noticing  the  misuse  of  the  Policy, for  the

purpose for  which it  was never intended, cannot be frustrated on the

plea  that  the  petitioners  had  a  legitimate  expectation  that  they  can

continue to exploit the Policy for a purpose totally different from the one

for which it was intended and then expect that the Government would

not take any action whatsoever.  It was argued that the writ Court would

not sit in appeal over the wisdom of the Government in such economic

matters and the Government must have the freedom to experiment and

must be allowed to adopt the “trial and error method”.  It was also argued

that  economic  decision,  as  contained  in  the  Notifications  granting

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monetary  benefits,  can  be  withdrawn  even  before  the  expiry  of  the

period for which the benefit was originally given if  the decision of the

Government is based on relevant material justifying such clarification or

even change of the Policy.

47) After taking note of the aforesaid submissions of both the parties, the

High Court stated certain legal principles referring to few judgments of

this Court, which it deemed necessary to bear in mind, as they reflected

the caveat sounded in those judgments.  In this behalf,  it  quoted the

following passage from the judgment of this Court in  State of Madhya

Pradesh & Ors. v. Nandlal Jaiswal & Ors.2, which guides as to how the

Courts have to deal howwith the challenge to a policy decision of the

Government in economic matters:

“34...We  had  occasion  to  consider  the  scope  of interference by the Court  under  Article  14 while  dealing with laws relating to economic activities in  R.K.  Garg  v. Union of India [(1981) 4 SCC 675]. We pointed out in that case that  laws relating to  economic  activities  should  be viewed with greater latitude than laws touching civil rights such as freedom of speech, religion, etc. We observed that the legislature should be allowed some play in the joints because it has to deal with complex problems which do not admit  of  solution  through  any  doctrinaire  or  strait-jacket formula and this is particularly true in case of legislation dealing with  economic  matters,  where,  having regard to the  nature  of  the  problems  required  to  be  dealt  with, greater  play  in  the  joints  has  to  be  allowed  to  the legislature.  We  quoted  with  approval  the  following admonition give by Frankfurter, J. in  Morey v.  Dond [354 US 457]:

In  the  utilities,  tax  and  economic  regulation  cases, 2 (1986) 4 SCC 566

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there are good reasons for judicial self-restraint if not judicial  deference  to  legislative  judgment.  The legislature after all  has the affirmative responsibility. The  courts  have  only  the  power  to  destroy, not  to reconstruct. When these are added to the complexity of economic regulation, the uncertainty, the liability to error, the bewildering conflict of the experts, and the number of times the judges have been overruled by events – self-limitation can be seen to be the path to judicial wisdom and institutional prestige and stability.  

What  we said in that case in regard to legislation relating to  economic  matters  must  apply  equally  in  regard  to executive action in the field of economic activities, though the executive decision may not  be placed on as high a pedestial  as  legislative  judgment  insofar  as  judicial deference  is  concerned.  We  must  not  forget  that  in complex economic matters every decision is necessarily empiric and it  is  based on experimentation or  what one may call 'trial and error method' and, therefore, its validity cannot be tested on any rigid 'a priori' considerations or on the  application  of  any  straight-jacket  formula.  The  court must  while  adjudging  the  constitutional  validity  of  an executive  decision  relating  to  economic  matters  grant  a certain measure of  freedom or 'play in the joints'  to  the executive. "The problem of government" as pointed out by the  Supreme  Court  of  the  United  States  in  Metropolis Theatre Company v. State of Chicago [57 L Ed 730]:

are  practical  ones  and  may  justify,  if  they  do  not require,  rough accommodations, illogical,  it  may be, and unscientific. But even such criticism should not be hastily expressed. What is best is not discernible, the wisdom  of  any  choice  may  be  disputed  or condemned.  Mere  errors  of  government  are  not subject  to  our  judicial  review. It  is  only  its  palpably arbitrary exercises which can be declared void.

The Government, as was said in Permian Basin Area Rate cases [20 L Ed (2d) 312],  is entitled to make pragmatic adjustments  which  may  be  called  for  by  particular circumstances.  The  Court  cannot  strike  down  a  policy decision taken by the State Government merely because it feels that another policy decision would have been fairer or wiser or more scientific or logical. The Court can interfere only  if  the  policy  decision  is  patently  arbitrary, discriminatory or mala fide.”

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48) The Court then observed that these principles were reiterated in Zippers

Karamchari  Union  v.  Union  of  India  &  Ors.3 and  in  BALCO

Employees Union (Regd.)  v.  Union of India & Ors.4 Thereafter, the

High Court referred to the various provisions of the EXIM Policy and the

amendments  made  by  the  impugned  Notifications  as  well  as  Public

Notice, which have already been taken note of above.

49) The High Court thereafter adverted to three exclusions under Note 1 to

Para  3.7.2.1  which,  according  to  the  writ  petitioner,  had  adversely

affected their interest and these exclusions are:

(i)  Export turnover of units operating under SEZ/EDU/THRP/ STPI Schemes

or products manufactured by them and exported through DTA units.

(ii)  Supplies made by one status holder to another status holder.

(iii)  Export performance made by one status holder on behalf of other status

holder.

50) In the light of the above, the Court first discussed the propriety or validity

of  the  Notification  dated  January  28,  2004 and pointed  out  that  this

Notification does not make 'third party exports' illegal or entirely ineligible

for getting incentive under the said Incentive Scheme for status holders.

On the other hand, basic intention of the Scheme was to encourage the

exports of products manufactured by small-scale industry sector, who do

not  have  access  to  international  market  because  of  lack  of  required 3 (2000) 10 SCC 619 4 (2002) 2 SCC 333

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international marketing experience and the optimum resources to have

presence in the international market arena.  Therefore, the Scheme was

not  intended  to  encourage  a  status  holder/export  house  to  pool  the

exports made by existing exporters, i.e. who have exported in previous

years as well, for the purpose of showing incremental growth in exports

of the status holder.  Similarly, supply of goods by a status holder, who is

having the required marketing skill and has been exporting in previous

years as well, to another status holder does not advance the purpose of

the  Scheme.   Similarly,  transferring  export  turnover  of  the

supplier/exporter, who is the original export order holder, to the status

holder for artificially enhancing the incremental growth of exports of the

status  holder  will  not  further  the  object  of  the  incentive  scheme.

Therefore, the Government stipulated through the impugned Notification

dated January 28, 2004 that the condition of 25% incremental growth of

exports will apply both to the petitioner/status holder as well as to the

supplier,  whether  the  supplier  is  a  status  holder  or  is  an  existing

supplier/exporter  of  goods.   The clarifications made by the impugned

Notification, insofar as they provide that the incremental growth of 25%

in FOB value of  exports  is  the criterion applicable both to the status

holders  as  well  as  to  the  existing  supplier/exporters,  will  have  to  be

treated  as  clarificatory  if  the  basic  object  of  the  incentive  scheme is

looked at.   The object  of the Scheme was to boost exports in actual

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terms and not merely to encourage the existing exporters to pool their

exports for the purpose of giving artificial appearance of the incremental

growth of exports.

51) On the aforesaid basis, the High Court concluded that the main purpose

of the Notification dated January 28, 2004 was to prevent transfer  of

export orders from one group company to another company belonging to

the same group in order to show enhanced export performance of such

another company and, therefore, it was clarificatory in nature.

52) The  Court  then  took  up  for  consideration  the  argument  of  the  writ

petitioner that the impugned Notification and Public Notice had the effect

of taking away the vested right of the writ petitioner, which was repelled

in the following words:

“17.   Under  the  policy  in  force  prior  to  the  impugned notifications and even thereafter the third party exports are permitted.  What the legal earlier is not made illegal at all. For instance, exports of goods manufactured by units in EDU/SEZ zones through status holder are not prohibited but  such  exports  even  made  between  1.4.2003  and 27.1.2004, are excluded because the benefit of duty free import was already availed for the export of such goods. Chapter 6 of the Exim Policy relates to Exports Oriented Units  (EDUs),  Electronics  Hardware  Technology  Parks (EHTPs)  and  Software  Technology  Parks  (STPs).   As provided in paras 6.1 and 6.8 of  the Exim policy, these units undertake to export their entire production of goods and  services,  except  permissible  sales  in  the  Domestic Tariff Area as per the Exim Policy.  Para 6.2(b) of the Exim Policy provides that “an EDU/EHTP/STP unit may import without  payment  of  duty  all  types  of  goods,  including capital goods, as defined in the Policy, required by it for its activities as mentioned in para 6.1...”

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Para 6.10 reads as under:

“6.10   An  EDU/EHTP/STP  unit  may  export  goods manufactured/software  developed  by  it  through  a merchant exporter/status holder recognized under this Policy or any other EDU/EHTP/STP/SEZ unit.”

The amendments  do not  impinge upon the right  of  any party  to  export  its  goods  in  accordance  with  the  Exim Policy.  The clarification only excludes exports which were never  intended  in  the  first  place  to  be  covered  by  the Special Scheme under consideration.

18.  Secondly, the misuse of the scheme by mere paper growth in exports is not to be countenanced.  Hence, it is but  natural  that  the  notification  dated  28.1.2004  would apply to the exports made from 1.4.2003 onwards.  In so far as this Court holds that the Notes 1 and 2 read with Note 4 introduced by the notification dated 28.1.2004 are merely  clarificatory,  the  exports  made  by  the  petitioner between 1.4.2003 and 27.1.2003 (sic) would certainly be covered by the said notes.  Two views were possible about the expression “incremental growth in exports by 25%” and the Government adopted the interpretation as reflected in the  notification  dated  28.1.2004  which  is  quite  in consonance with the objects of the Act, Exim Policy and the  Incentive  Scheme  rather  than  the  interpretation canvassed by the petitioner.  Hence, there is no substance in the challenge to Notes 1 and 2 read with Note 4.”

53) On the aforesaid basis, insofar as Notification dated January 28, 2004 is

concerned, its validity has been upheld.  The High Court then discussed

validity of Public Notice of the even date.  Observing that by this Public

Notice certain export products from the Incentive Scheme were sought

to be excluded and it  could not be treated as mere clarifications, the

High Court held that DGFT had no power to exclude exports of such

groups merely by stating that rough diamonds or food items were to be

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excluded.

54) Since Notification dated April 21, 2004 read with Notification dated April

23,  2004 were issued whereby Note 6 was added, which was to the

same effect as Public Notice dated January 28, 2004, and since this was

held not to be merely clarificatory in nature, the Court went into the issue

as  to  whether  Notes  6  and  3  read  with  Note  4  were  retroactive  or

retrospective.  In the process, it dealt with the issue of 'vested right' and

after discussing the aforesaid legal concepts, it came to the conclusion

that  Notes  3,  6  and  4  were  only  retroactive  in  nature  and  not

retrospective and since Notification dated January 28, 2004 (including

Note 3 thereof)  on exports  made from April  01,  2003 was upheld as

valid, Notifications dated April  21 and 23, 2004, flowing from the said

Note 3 and adopting contents of Public Notice dated January 28, 2004,

could not be faulted with on the ground of retrospectivity.

55) The Court then took the issue of  Promissory Estoppel and discussed

numerous case law on the subject and concluded that since it  was a

case of change in economic policy with future effect or retroactive effect

only to  'prevent manifest injustice or fraud',  such public interest would

override  individual  interest  even  if  the  promisee  cannot  resume  his

position.   On  this  basis,  the  argument  based  on  the  principle  of

Promissory Estoppel was rejected.

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56) At the same time, exclusion of two items vide Note 6 in Notifications

dated April 21 and 23, 2004 and Public Notice dated January 28, 2004

was found to be neither clarificatory nor in public interest and, therefore,

bad in law.  These are exclusion of following exports from the benefits of

duty-free import entitlement for the export status holders:

(i)  Items exported under free shipping bills.

(ii)  Gold, silver in any form including plain jewellery thereof, in so far as the

import  of  capital  goods  and  office  equipment  for  the  factory  of  the

associate/supporting manufacturer/job worker of the petitioner Company

is concerned.

The  Special  Civil  Application  was  allowed  to  the  aforesaid  extent

directing that the aforesaid items cannot be excluded while computing

the duty free import entitlement.

57) JUDGMENT OF THE BOMBAY HIGH COURT

The Bombay High Court, in its impugned judgment dated July 04,

2005, has held as under:

(i) Notification dated January 28, 2004 is valid. It does not seek to amend

the policy with retrospective effect but is only clarificatory in nature which

was issued to stop the misuse and abuse of the scheme as the main

purport of the scheme was to encourage the export of products and not

to encourage the status holders/export user to pool the exports made by

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other exporters for  the purpose of  showing incremental  growth in the

export. Paras 19 and 20 of the High Court containing discussion on this

aspect are noted below.

“19.  The reasons for making clarifications are contained in para 5 of the impugned Notification. It appears that after the  scheme  was  initiated,  on  the  basis  of  intelligence gathered the Central Government learnt that the scheme was being misused by certain status holders by entering into contracts with various exporters showing themselves as third party exporters. Such contracts were executed on stamp papers ostensibly showing such status holders as third party exporters holding other parties in obtaining the orders. These contracts were found to have been entered into between the parties as merely a paper arrangement with a view to claim benefits of duty free credit entitlement on the export  of  others.  It  also came to  notice that  the status  holders  were  purchasing  exports  made  by  other parties  at  a  premium  with  a  view  to  show  incremental growth of 25% or more in exports without having actually achieved such growth. In the face of this clear abuse of the scheme  the  Central  Government  had  to  intervene  and issue  the  impugned  Notification  to  clarify  the  correct meaning of the scheme. Note 2 of the Notification provides that incremental growth of exports by an exporter shall not, directly or indirectly, be transferred to any other exporter i.e. exporter's own incremental growth will be counted for entitlement.  The  appellants  have  not  challenged  the validity of Note 2. What is challenged is the validity of Note I which states that for the purpose of calculating the value of certain exports shall not be taken into account in respect of sub-clauses (ii),(v),(vi) and (vii) thereof.

20.  It  appears that till  2002-2003 the petitioners'  export performance was going down steadily.  In 2002-2003 the export of the petitioners was hardly Rs.27 crores.  In the year 2002-2003 India's export increased by 22% whereas as  compared  to  the  petitioners'  export  of  about  Rs.27 crores in 2002-2003, it  catapulted to more than Rs.1000 crores.   The national  export  growth  rate  was  only  22% while the petitioners' exports grew at more than 3800%.  It is obvious that this growth is merely a paper growth and not incremental growth within the meaning of the scheme. Notification dated 28th January 2004 does not make any third  party  export  illegal  or  entirely  ineligible  for  getting

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incentives  under  the  Exim  Policy.   However,  the  basic intention of the amended scheme was to encourage the export of products manufactured by small scale units who do not have access to the international market because of lack  of  required  international  marketing  expertise  and optimum resources to have presence in the international marketing  arena.   The  scheme  was  not  intended  to encourage  the  status  holder/export  house  to  pool  the exports  made  by  other  exporters  for  the  purpose  of showing incremental growth in the export.  The clarification issued by the impugned Notification in so far as it provides that supplies made by one status holder to another status holder or export performance made by one status holder on behalf of another status holder shall not be eligible for entitlement is in consonance with the basic object of the scheme.  The export turnover of the units operating under STZ/EOU/EHTP  schemes  was  also  excluded  as  these units are getting all facilities for import without payment of duty  on  various  types  of  goods  including  capital  goods required by them for their activities.  The intention of the makers of  the scheme was not to confer double benefit under  para  3.7.2.1.   Further  an  exporter  is  required  to export himself and not benefit from export capabilities of STZ/EOU/EHTP etc.  This would be only paper growth and amount to abuse of the scheme.  Reliance placed by the petitioners on Circular No. 16 dated 24tth December 2002 is also of no assistance as the said Circular stating that 3rd party  exports  are  eligible  for  all  the  export  promotion schemes  was  issued  long  before  the  special  incentive scheme  was  announced  on  31st March  2003.   In  our opinion,  the  provisions  contained  in  the  impugned Notification  dated  28th January  2004  are  merely clarificatory and cannot be treated as amendment to the scheme.”

In  the  process,  the  High  Court  rejected  the  contention  of  the  writ

petitioners  that  the  said  Notification  was unreasonable  and  irrational.

The  Court  held  that  in  complex  economic  matters  every  decision  is

necessarily empiric and is based on experimentation of what one may

call trial and error method and, therefore, its validity cannot be tested on

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any rigid prior considerations or on the application of any straightjacket

formula.

(ii) Public notice dated January 28, 2004 issued by the DGFT has been held

to be without  jurisdiction inasmuch as DGFT has no power to do so

under Section 5 read with Section 3 of the Act. The Court held that by

this  Public  Notice,  four  items  were  sought  to  be  excluded  from  the

purview of the scheme and, therefore, it amounted to amendment of the

scheme which could be done by the Central Government only that too by

means of Notification under Section 5 of the Notification, clarified that

power of the DGFT is only to be exercised for procedural purpose which

was evident from para 2.1.4 of the EXIM Policy. On the other hand, para

3.2.6 inserted by Public Notice dated January 28, 2004 went beyond the

procedural conditions as these conditions were not found in the Policy.

According to the High Court, since the Notification was not clarificatory

and it  amounted  to  amendment  of  the  policy  which  was  statutory  in

nature, this form of delegated or subordinate legislation could be only

prospective and not retrospective unless the rule making authority has

been  vested  with  the  power  under  the  Statute  to  make  rules  with

retrospective effect.

(iii) Insofar as Notes (vi) and (vii) which were added vide Notifications dated

April 21 and 23, 2004, the High Court took the view that they were not

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merely  clarificatory  in  nature.     It  was  pointed  out  that  vide  these

Notifications, four items were sought to be excluded from the purview of

the scheme and, therefore, could not be treated as merely clarificatory.

The High Court, thus, while affirming the validity of these Notifications,

came to the conclusion that it can be only prospective in nature.

Contention of the Union that the word “amend” used in Section 5 read

with  Section  3  confers  upon  the  Central  Government  to  regulate,

incorporates  in  its  entrustment  of  the  power  to  make  subordinate

legislation retrospectively, was turned down by the High Court. The High

Court took the view that the word “amend” does not give power to make

amendment retrospectively if it is used in relation to the power to make a

piece  of  delegated  legislation.  The  connotation  of  the  word  “amend”

when it  is  used of  the exercise of  power  by a legislature cannot be

pressed to construe the word “amend” in relation to the power to make

delegated legislation. In taking this view, the High Court relied upon the

judgment  of  this  Court  in  Accountant  General  and  Another  v. S.

Doraiswamy and Others5.

Another contention of the Union predicated on Section 21 of the General

Clauses Act to buttress its submission that retrospective effect could be

given to the Notification was also repelled. In the opinion of the High

Court,  Section  21  of  the  General  Clauses  Act  embodies  a  realm  of

construction, nature and extent of application which must inevitably be

5 (1981) 4 SCC 93

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governed by  relevant  provisions  of  the  statute  that  confers  power  to

issue the notification. The said power must be exercised within the limits

prescribed by the provisions conferring such a power and if there was no

specific power given to make amendment retrospectively, that could not

be assumed on the ground that it was necessitated in public interest.

On this aspect, the Bombay High Court did not agree with the view taken

by Gujarat High Court which held that Notifications dated April 21 and

24,  2004  were  merely  retroactive  and  not  retrospective,  by  giving

following reasons:

“The Division Bench, however, proceeded to hold that the Notifications  dated  21st/24th  April,  2004  are  merely retroactive and not retrospective. We may hasten to add that the Division Bench struck down the Notifications dated 21st/ 23rd April, 2004 as far as the free shipping bills and gold, silver and jewellery are concerned on the ground that exclusion of these items was unjustified and unreasonable. With great respect to the learned Judges we are unable to agree  with  the  view  that  the  amendment  is  merely retroactive. Once it is shown that the Central Government does not have the power to give retrospective effect to the amendment  which  is  introduced  in  exercise  of  power conferred by sec. 5 of the Foreign Trade Act then whether the  said  amendment  is  retro-active  or  retrospective  is rather immaterial. The amendment has clearly an impact on  the  rights  which  are  already  crystallized.  We  have therefore no hesitation to hold that the Notifications dated 21st and 23rd April 2004 would have prospective operation only.”

OUR ANALYSIS AND CONCLUSIONS

58) The factual matrix, coupled with the arguments advanced before us by

both sides, makes it clear that the issues remain the same which were

canvassed  before  the  High  Courts.   Even  the  position  taken  by  the

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parties on either  side is  predicated on identical  legal  edifice.   Before

adverting  to  the  analytical  discussion  and  deciding  the  validity  of

impugned  Notifications  and  public  notice,  keeping  in  mind  the  legal

principles, we would like to first discuss the background in which they

came to be issued.  We feel that argument of the Union that these were

issued in public interest has to be considered first as that would provide

the  raison d'etre  behind such a move on the part of the Government.

Therefore, the first question is:

Whether Notifications were issued in public interest?

59) The main objective of the scheme was to achieve the share of 1% of

global trade and accelerated growth in exports.  For this purpose, the

scheme  intended  to  concentrate  on  the  growth  of  certain  kinds  of

products treating the same as “thrust sectors”.  In para 3.10, six such

sectors  are  mentioned  as  thrust  sectors,  viz.,  Electronic  hardware,

Textile  including  garments,  Auto  components/ancillary,  Gem  and

jewellery, Agriculture and service sector.  It would be significant to point

out  that  except  one,  all  other  writ  petitioners  belong  to  Gem  and

jewellery  sector.   One  writ  petitioner  has  export  in  Textile/Garments.

What is highlighted is that no thrust sector was affected or prejudiced by

the impugned Notification and which was primarily Gem and Jewellery

exporters who got the hit.

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60) As a matter of fact, immediately after the introduction of the scheme, it

was found that there was unprecedented sharp rise in the export in Gem

and Jewellery articles.   It  raised certain suspicion in  the mind of  the

authorities as to whether these were genuine exports.  The matter was

investigated and on the basis of  intelligence gathered by the Central

Government, it was learnt that there was rampant misuse of the scheme

by  certain  status  holders.   On  October  13,  2003,  the  then  Joint

Secretary, Government of India, Central Board of Excise and Customs

addressed a letter to the then DGFT stating as follows:

“It  has been reliably learnt that some status holders are trying to show growth in exports so as to avail the benefit of  the  aforesaid  scheme.   Such  status  holders  are purchasing exports made by other parties at  a premium with a view to show incremental growth of 25% or more in exports  without  having  actually  achieved  such  growth. Similarly  some corporate  groups  having  more  than  one exporting units are reportedly shifting exports in the name of any one status holder group company so as to artificially achieve incremental growth of 25% in exports.  You would agree  that  the  objective  of  DFCEC  Scheme  is  to encourage status holders to achieve substantial growth in exports  so  that  there  is  corresponding  increase  in  the foreign exchange earnings of the country.  It is, therefore, necessary to put suitable safeguards in DFCEC Scheme for  Status  Holders  so  that  third  party  exports  are  not counted  for  the  purpose  of  calculating  the  incremental growth in exports.  Similarly, in case of corporate houses having more than one exporting companies,  incremental growth  may  be  calculated  by  taking  into  account  the overall exports made by all the companies of that group. You may also like to provide for any other safeguards in DFCEC  Scheme  for  Status  Holders  to  ensure  that  the benefits  of  DFCEC  Scheme  is  made  available  only  to those  status  holders  who  actually  achieve  incremental growth of 25% or more in FOB value of exports during the financial year 2003-04 vis-a-vis to financial year 2002-03. One  way  to  disallow  DFCEC  Scheme  benefit  to  such

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artificial  growth  may  be  to  define  the  term “incremental growth in  exports”  used in  para  3.7.2.1(vi)  of  the  EXIM Policy.”  

61) The  said  letter  dated 14.10.2003 was forwarded to  the Office  of  the

Commissioner  of  Customs,  Export  Promotions  to  various

Commissioners of Customs and the Commissioner of Customs, Mumbai

on 05.11.2003 responded that:

“The Customs House at  Mumbai  has noticed exports  of sugar by State Trading Corporation of India Ltd. showing account of Adani Export Ltd., Private Merchant Exporter. The invoice is that of State Trading Corporation of India Ltd.  Mate  Receipt  shows  receipts  of  goods  from  State Trading Corporation of India Ltd. As also the Bill of Lading shows the shipper as State Trading Corporation of India Ltd.  However, the bank certificate of export and realization has been filed by Adani Exports Ltd. In which the exporter is  shown  as  Adani  Exports  Ltd.   Adani  House, Navrangpura,  Ahmedabad A/c State Trading Corporation of  India  Ltd.   Photocopies  of  the  set  of  documents  is enclosed herewith.   It  is  also to be pointed out that the DEPB benefit available on sugar is only 4% but under the incentive scheme the exporter is entitled to benefit of 4% plus additional 10%.

If  purchase  of  exports  from  third  parties  or  shifting  of exports  from one company  to  the other  in  the group is inconsistent with the intention and objective of the scheme, then the flaw in the scheme is to be removed.  The flaw is that  third  party  exports  are  being  permitted  under  the Foreign Trade as well as Customs Regulations.  The flaw can be removed by amending para 3.7.2.1 of that Policy and the relevant customs notifications to provide that third party exports shall not be taken into account by the DGFT in computing the incremental growth and the FOB value qualifying  for  grant  of  Duty  Fee  Credit  Entitlement Certificate.

The scheme may be more precisely stated in the EXIM Policy and the Customs Notifications in accordance with the objectives and intentions of  the Government  so that what is plainly permitted by the scheme is not regarded

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subsequently as misuse or abuse of the scheme.   

It  is  also  brought  to  the  notice  that  it  is  open  to  the exporters to export under free Shipping Bill where as per the  current  instructions  there  is  no  scrutiny  of  Shipping Bills  or  physical  examination  of  the  goods.   This  would enable  the  unscrupulous  exporters  to  inflate  the  FOB Value  and  get  incremental  growth  and  the  additional benefit of 10% under DFCEC.”

62) In a meeting held with the Officials of the DGFT and the Customs it was

suggested as under:

“For  calculation of incremental value the following should be excluded:-

-  Value of goods exported on re-export basis.

-   Since  the  exports  made by  a  subsidiary  of  a  limited company are counted towards export performance of the limited company for the purpose of recognition, the value of  export  made  by  subsidiary  company  and  its  limited company  shall  be  taken  together  to  determine  the incremental exports.

-  In case of EOU/SEZ/STP/EHTP units, this facility shall not be available as such units are already eligible for duty free  import  of  capital  goods/raw  materials/office equipments etc.  Further the status holder which also has a DTA unit along with EOU/SEZ/STP/EHTP unit should be excluded  for  the  purpose  of  determining  of  third  party export.

-  Value of third party export.

-   In  case  of  doubt  regarding  valuation  of  goods  by Customs authorities, the value of goods as determined  by Customs authority should be taken

for  determining  incremental  export  instead  of  value declared by exporter.

-   Value  of  exports  made  in  terms  of  fulfillment  of  any export obligation under any export promotion scheme such as EPCG, Advance License etc.

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Further to plug the loopholes, there is need to incorporate the following safeguards in the scheme.

-  It is essential to incorporate a provision in the scheme providing  that  the  status  holder  availing  the  benefit  of above said scheme and importing raw material  shall  not avail export incentive by way of drawback/DEPB on foods manufactured  using  such  duty  free  inputs  and  their subsequent export.

-  The possibility of excluding gems and jewellery exports may also be examined as the duty incidence on gold (less than  2%)  silver  (5%),  rough  diamond  (0%),  rough gemstones (0%), broken or semi-finished cut and polished diamonds (0%), cut and polished diamonds (15%) is low. In addition to low duty, several  other incentives such as replenishment licence of 1% FOB Value of export for duty free  import  vide  notification  No.41/99-Customs,  dated 28-4-2003 are also available.

In addition, we have several schemes such as:

-  Exemption to gold/silver/platinum, alloys, findings, and mounting  of  gold/silver/platinum  and  plain  semi-finished gold/silver/platinum  Jewellery  by  nominated  agencies, status holders or exporters of standing under the scheme for export against supply by foreign buyer (notification No. 56/2000-Customs dated 5-5-2000)

-  Scheme for providing replenishment license issued order under or in accordance with paragraph 4.4.1 of the EXIM Policy; and Gem Replenishment License issued under in accordance with paragraph 4.4.13 of  the EXIM Policy – under these schemes, raw pearls, natural or cultures, and precious  or  semi-precious  stones  (other  than  rough diamonds),  unset  and uncut  are allowed to be imported duty free.

-  In addition to above, this sector has large potential to manipulate the value of goods and do the circular trading of goods by doing over-invoicing and under-invoicing.  The receipt cases of large scale manipulation of value of rough diamonds is a clear example of this.

-   There  is  need to  clearly  express in  the  scheme that value of only physical exports be taken into consideration and not the value of deemed exports.

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-  The Scheme is open ended and it does not have any linkage with foreign exchange realised.  This aspect also needs careful re-examination.”

63) On  19.11.2003,  the  Officer  on  Special  Duty,  Government  of  India,

Ministry  of  Finance,  Department  of  Revenue  issued  a  Circular  No.

98/2003 stating that:

“Commissioner  of  Customs  (Export),  ACC,  Sahar  had raised an issue whether under DFCEC Scheme, import of all capital goods including professional equipments could be allowed.  This doubt has also been created on account of usage of the words “capital  goods” in condition (3) of Customs Notification No. 54/2003.  This issue has been examined in consultation with DGFT/MOC.  DGFT have confirmed  that  the  objective  of  DFCEC  Scheme  for Services Providers is to permit import of aforesaid goods with  a  view  to  increase  the  capability  of  the  services providers  so  as  to  enable  him  to  render  a  better  and efficient service.  With this in mind import of professional equipments  which  are  required  in  the  profession  of  the service providers has been allowed.  However, insofar as capital goods are concerned, its import to service provider has  already  been  allowed  through  EPCG  route. Therefore, insofar as DFCEC Scheme is concerned, under the  category  of  professional  equipments,  import  of  only those  equipments  would  be  permissible  under  DFCEC Scheme, which are professional  equipments required by the Service Provider for the purpose of rendering service & earning free foreign exchange.  It is reiterated that import of  capital  goods  which  are  other  than  professional equipment or office equipment shall not be allowed under DFCEC Scheme for Service Providers.  In order to remove doubts, the words “capital goods” used in condition (3) of 54/2003-Cus dated 1.4.2003 has also been corrected to read as “Professional equipment” by issue of corrigendum.

Suitable Public Notice for  Trade and Standing Order for the guidance of customs field may be issued.”   

64) In  furtherance  to  the  communications  between  the  Department  of

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Revenue and the  Customs,  a  meeting was held  in  the  Office  of  the

DGFT on October 21, 2003 which was attended by ADG(SB), JS(SSR),

JDG(MCJ), OSD(RKT) and DDGTM in the Chamber of DGFT under the

Chairmanship  of  DGFT  and  with  regard  to  the  Duty  Free  Credit

Entitlement Scheme a tentative decision was taken on the following lines

to safeguard, avoid any fraud or misuse of the Scheme:

(a)  The BRC and Shipping Bill and the GR Form should bear the name

of the merchant exporter and the associate/supporting manufacturer in

case of third party export.

(b)  There should be a minimum growth of 25% in the exports of both

supporting/associate manufacturers in case of third party export.

(c)  For group companies, it was suggested that the export of different

companies under a group may be clubbed so as to check the possibility

of inter-company transfers within a group for showing artificial growth.

However, the matter may be further examined to arrive at a solution.

(d)  It was also decided to go through the other additional issues, if any,

in the matter so that the proper guidelines can be issued as early as

possible.

65) With  regard to the import of capital goods under the Duty Free Credit

Entitlement Scheme the matter was deliberated upon and it was decided

not to allow all capital goods other than the professional equipment and

office  equipment  mentioned in  paragraph 3.8  of  EXIM Policy  against

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DFCE to service providers.

66) On December 11, 2003, the Additional Director General, Directorate of

Revenue Intelligence addressed a letter to the Joint  Secretary, (Draw

back),  Ministry  of  Finance  reiterating  the  suggestions  made  in  the

meeting held with the Officers of the DGFT and the Customs as stated

herein above.

67) On  December  23,  2003,  the  Office  of  the  Chief  Commissioner  of

Customs,  Bangalore  Zone,  addressed  a  Communication  to  the  Joint

Secretary  (Drawback),  Ministry  of  Finance,  Department  of  Revenue,

Central Board of Excise and Customs inter alia indicating:

(i)   In  order  to  prevent  misuse  of  the  scheme,  it  is  desirable  to

incorporate  the following conditions in  paras 3.7.2 and 3.7.2.1  of  the

EXIM Policy 2002-2007 while issuing the duty free import  entitlement

certificate.

(ii)  White computing the incremental growth in FOB value of exports,

only the value of exports, which have been made directly by the status

holder  as involved in  the export  documents and for  which the export

proceeds have been realized in the name of the status holders shall be

taken into account.

68) Thereafter, on December 12, 2003, the Chief Commissioner of Customs,

Mumbai addressed a communication to the Joint Secretary (Drawback),

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Ministry of Finance, Department of Revenue indicating that:

“The  status  holders  as  well  as  status  holder  corporate groups are showing artificial incremental growth of 25% in Exports(.)   Even  a  Govt.  of  India  undertaking,  such  as S.T.C.  Limited  have  also  sold  their  exports  to  another status holder(.)

It is felt that the incentive scheme under DFCEC for 25% incremental  growth  in  Exports  during  2003-04  vis-a-vis 2002-03 has spurred this “artificial clubbing of exports”(.) However,  the  DGFTS  clarificatory  policy  circular  of 16/2002  dated  2.12.2002  envisages  that  allowing  third party export is a conscious decision of the Government(.) It appears that in the face of the current policy provisions, the benefits allowed to third party exports cannot be legally denied(.)  Hence it is proposed that Ministry may consider prevailing upon the Ministry of Commerce/DGFT to amend the  EXIM  Policy  provisions,  so  as  to  incorporate  Para 3.7.2.1  (g)  that  for  the  purpose  of  calculating  the incremental growth of 25% in exports in 2003-04, vis-a-vis 2002-03 the exports made on behalf of third parties will not be counted(.)

It  is  further  submitted  that  in  order  to  show  25% incremental  growth  in  the  exports  during  the  current financial year 2003-04 vis-a-vis exports made in 2002-03, unscrupulous elements may also resort to over invoicing of free shipping bill by inflating the FOB value in such exports as  the  same  are  not  subject  to  rigours  of  customs assessment and physical examination(.)  It may therefore be suggested to the Ministry of Commerce and DGFT that the value of  the exports  made under  Free Shipping Bill may not  be counted for  the purpose of  calculating 25% incremental growth in export under the DFCEC Scheme(.) Alternatively, the exporters claiming for incremental growth against  free  shipping  Bills  with  the  benefit  of  DFCEC Scheme should declare it in all such Shipping Bills, so that such exports  could  be put  to rigors of  customs scrutiny including valuation and physical examination(.)”

 69) Based  on  these  Reports  an  exercise  was  initiated  for  carrying  out

amendments in the Handbook of Procedure (Volume–I) with series of

meetings and Open Houses with the Apex Chambers of Commerce and

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Industry,  Export  Promotion  Councils,  Trade  Associations,  Commodity

Boards.   Based  on  these  interfaces  the  lists  of  suggestions  were

compiled  and  the  same  discussed  threadbare  during  internal

deliberations.

70) There were a series of interactions with the other Ministries involving

changes in the procedural aspects of the EXIM Policy as reflected in the

Handbook of Procedures (Volume-1).

71) The  individual  divisions  were  allocated  the  task  of  amending  the

procedural aspects of the EXIM Policy.  Inputs were received from the

EPCG division headed by Addl. DGFT (MLB) which carried out changes

in Chapter 5 of the Handbook of Procedures (Volume-1), PC II Division

carried out changes in the Deemed export chapter and DES IV Division

suggested  changes  in  Chapter  IV  of  the  Handbook  of  Procedures

(Volume-1).

72) Meetings were held with the (Drawback)  Directorates on January 09,

2004  and  January  21,  2004  culminating  into  a  presentation  to  the

Hon'ble  Prime  Minister  on  January  27,  2004  in  the  presence  of  the

Commerce and Industry Minister, Finance Minister, Secretary Finance,

Secretary  Revenue,  Secretary  DGFT, Additional  DGFT (Policy),  Joint

Secretary etc.  wherein it was decided that salient changes should be

brought in the Handbook of Procedure (Volume-1) to the following effect:

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“the duty free entitlement for status holders has been fine tuned to obviate any possible misuse such as mandating the insertion of the exporter and third party's name on  the export documents, need  

to have nexus for import under the certificate vis-a-vis the exports made etc.”

73) In the counter affidavit filed by the Union of India, details of the modus

operandi used by these exporters are given on the basis of which it is

projected  that  these  exporters  indulged  in  inflating  their  exports  by

achieving a growth rate from 300% to 3800% when during the same

period i.e. 2003-2004, the national growth of export was merely 18%.  It

is demonstrated by tabulating figures as follows:

S.No. Firm Turnover crores – 2002-03

Turnover crores – 2003-04

% Growth

1 Adani  Exports  Limited, Ahmedabad

377 4657 1135

2 Rajesh Exports, Bangalore 112 2372 2017 3 Kanak Exports, Mumbai 27 1070 3816 4 Survanshi  Exports,

Hyderabad 1007 5495 335

5 Vishal Exports, Ahmedabad 318 1495 370

“It is submitted that in case of M/s. Kanak Exports and M/s.  Rajesh  Exports,  their  export  growth  exceeded  a growth rate of 2000% and their entire export comprises of gold coins and plain Jewellery.  The relevant turnover of  these  companies  for  the  year  2002-2003  and 2003-2004 is as under:

Firm Turnover2002-03 Turnover 2003-04

% Growth

Share  of  Gold coins  and  Plain jewellery  in  total Exports

Rajesh  Exports, Bangalore

112 2372 2017 100

Kanak  Exports, 27 1070 3816 100

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Mumbai

That in case of M/s. Adani Exports, the Petitioner herein, their exports have grown by nearly 1135% and over 80% of their exports came from diamonds and supply taken from other status holders not meeting the minimum turn over of growth criteria.  The said fact is clear from the following chart:

Adani Exports Limited, Ahmedabad Exports (crores)

Total exports for the year 2003-04 of which 4657

1 Rough, and re-exported polished diamonds 2475 2 Supplies  taken  from  status  holders  not

meeting the minimum turnover and growth criteria

1316

Share of the above 2 categories in the total exports

81.4%

Export surge of 1135% for M/s. Adani Exports came in 2003-04 while for  the past  6 years their  exports  were declining.  

The above said growth rate of the companies who have challenged the Notifications and the Public Notices, has been achieved on account of the following:

I-Purchase of exports Purchase of the exports of other firms (who were

not  eligible  to  get  the benefit  of  the scheme) by M/s. Adani  Exports  Ltd.  to  inflate  their  turnover.   For  this

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contracts were signed between the petitioners and other exporters.   

II-Export of rough diamonds Export of rough diamonds by M/s. Adani Exports

Ltd.  Even  through  India  is  not  a  rough  diamond producing country.

These  exports  stopped  the  moment  DFCE benefits were disallowed.

 Export  of  such  rough  diamonds  earlier  never been part of the normal commercial operations and has taken place just to take advantage of the Scheme.

 According  to  Gems  and  Jewellery  export promotion  council,  “India  is  not  a  rough  exporting country.  Rough diamonds which are unsustainable for cutting in India are re-exported.”  Such exports stopped the moment benefit was explicitly withdrawn.

In  the present  case also the respondent  herein M/s  Adani  Exports  Limited  had stopped exporting  the rough diamonds the moment the Notification was issued in January, 2004 and according to Gems and Jewellery export promotion council, “Party has not exported rough diamonds during Jan/March 2004.”

III-Export  of  gold  coins,  Jewellery-Circular  trading and Exports to related companies

Most notorious misuse of the scheme was carried out  by  few  firms  who  exported  Gold  medallion  and studded  jewellery.   Key  firms  included  M/s.  Kanak Exports,  M/s.  Rajesh  Exports  Ltd.  And  M/s.  Adani Exports Limited. Petitioners exported to their own counterparts in Dubai and Sharjah.  Since the jewellery attracted 5% import duty at Dubai, the consignments which were declared as jewellery  in  India  were declared as scrap in  Dubai  to avoid the import duty.

The  export  goods  have  been  declared  as “Studded gold jewellery/CE Bangles” at the Indian port, whereas at the port of destination they were cleared as gold scrap.

In  few  consignments  belonging  to  M/s  Adani

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Exports  Ltd.  and produced by M/s Rajesh Exports  as supporting manufacturer, the export  products  declared as 'Bangles' were nothing but strips of gold formed into the shape of bangle and studded with cheap imitation stone.

That  as  it  was  difficult  for  them to  achieve  the value  addition  prescribed  by  the  Policy  through craftsmanship,  they added extra gold to get the value addition.  However, in this process strangely enough per unit  price of  the gold exported was less than per unit price of gold imported.   

Thereby  implying/demonstrating  that  there  is  a collusion between M/s. Adani Exports, Petitioner herein and  M/s.  Rajesh  Exports,  appellant  before  the Karnataka High Court in order to misuse the policy.

With the exports taking place within a day of the imports, gold can be circulated more than 100 times in a year.  That  means that  an unscrupulous exporter  can expect to earn Rs.1500 for every Rs.100 invested.  As these  are  not  commercial  operations  and  export  and import  takes  place  between  related  parties,  the illegitimate earnings are at the expense of the country.

IV-Export  of  cut  and  polished  diamonds-Circular trading and Exports to related companies

According to reliable information the same sets of diamonds  were  rotating  and  these  never  entered  the Indian  domestic  territory  or  to  the  end  consumers abroad.   The value of  such exports  in  the past  three years may exceed Rs.15,000 crores.  Government has detailed  report  of  the  modus  operandi  of  the  firms involved.   

Exports of cut and polished diamonds took place from small  rooms of  10X12 feet  where manufacturing activity was not allowed.

Firms  like  M/s.  Adani  Exports  imported  their consignments  on  re-export  basis  with  artificial  value addition and to buyers related to them.

Page 51 of Annual report 2001-02 of M/s. Adani Exports mentions the name of M/s. Gudami International

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of Singapore as the related party and associate entity. M/s. Adani Exports exported cut and polished diamonds to this entity.  This indicates that the suppliers, exporters and importers were linked and hence the possibility of manipulating value addition.   

According  to  one  estimate  the  same  set  of diamonds  were  rotating  and  these  never  entered  the Indian  domestic  territory  or  to  the  end  consumers abroad.”

74) It is also stated in the counter affidavit that the misuse of the scheme

had also come to the notice of DRI and other intelligence officials who

had  gathered  the  necessary  information  and  collected  supported

documents.  Based on the intelligence gathered, a note on the misuse of

Duty  From Credit  Entitlement  (DFCE)  and  Target  Plus  Scheme  was

prepared which is  annexed with the counter  affidavit.   At  the time of

arguments,  Mr. Adhyaru, learned senior counsel extensively read and

profusely relied upon this note with his passionate plea that all these writ

petitioners  have  indulged  in  sharp  practices  in  trying  to  take  undue

advantage of the scheme and, therefore, they should not be held entitled

to the benefit of the scheme.  It  was also submitted that this material

would clearly support the plea of the Government that the Notifications

were issued to curb the misuse and were clearly in public interest.  Exact

summary and details of misuse as mentioned in the said note are as

under:

“Executive Summary

The following  note  is  based on  the  intelligence

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gathered  by  the  government.   If  needed  copies  of supporting documents may be produced.

Since  the  Scheme  was  based  on  growth  of individual  exports,  many  unscrupulous  exporters resorted  to  inflating  their  export  turnover  mainly  by following type of activities.

M/s.  Adani  Exports  and  few  other  exporters purchased  the  exports  of  other  firms  to  inflate  their turnover.   Contracts  have  been  signed  between  the petitioners  and  other  exporters  that  petitioner  will provide marketing and other services and act as third party exporter. According to the Department of Revenue, Status Holders were purchasing exports made by other parties  by  paying  money  with  a  view  to  show incremental growth of 25% or more in their own exports. Claiming other firm's exports through such mechanism would  mean  that  the  country's  export  turnover  would remain  constant  while  applicant  firm's  turnover  will skyrocket.

Export  of  rough diamonds even though India is not a rough diamond producing country. These exports stopped the moment DFCE benefits were disallowed.

Few  firms  who  exported  Gold  medallion  and studded jewellery indulged in the most notorious misuse of the Policy.  Key firms included M/s. Kanak Exports, M/s. Rajesh Exports Overseas and M/s. Adani Exports Limited.   According  to  DRI  reports  many  of  these exporters  exported to  their  own counterparts  in  Dubai and  Sharjah.  Since  the  jewellery  attracted  5% import duty at Dubai, the consignments which were declared as jewellery  in  India  were declared as scrap in  Dubai  to avoid  the  import  duty.   Since  these  companies  were producing  shoddy  products  in  a  12  hour  operation,  it was  difficult  for  them  to  achieve  the  value  addition prescribed  by  the  Policy  through  craftsmanship  and hence they added extra gold to get the value addition. However, in this process strangely enough per unit price of the gold exported was less than per unit price of gold imported.   Government  has  secured  key  documents from UAE Customs.

Cut and polished diamonds were imported, stored inside  a  bond  and  re-exported  with  artificial  value addition.  Few large firms led by M/s. Adani Exports Ltd.

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exported  these  products  to  buyers  related  to  them. According to  one estimate the same set  of  diamonds were  rotating  and  these  never  entered  the  Indian domestic territory or to the end consumers abroad.  The value of such exports in the year 2003-04 and 2004-05 may exceed Rs.  15,000 crores.   This  report  contains observations  of  DRI,  which  describes  the  modus operandi and the firms involved in graphic details.

DETAILS OF THE MISUSE OF DUTY FREE CREDIT ENTITLEMENT (DFCE) & TARGET PLUS SCHEME BY THE PETITIONERS

Background of Policy changes

Intent of the Government has been to accelerate India's  exports  and towards  this  intent  DFCE scheme was  launched.   The  scheme  envisaged  rewarding genuine  export  growth  with  the  specific  objective  of accelerating the incremental  growth in  exports  and to facilitate  India  emerging as a  major  base for  different source of products and services for the rest of the world.

The reward was supposed to motivate and spur exporters in increasing their export turnover.  However, the scheme could not have envisaged at the time of its launch  that  certain  exporters  would  employ non-commercial  and unlawful  tactics in a manner that would be injurious to the revenue interest and to derive undeserved  benefits  without  actually  having  positive effect on the overall export effort of the country.

DGFT started getting the reports of misuse of the Scheme predominantly on account of buying of exports from the  parties  who  would  otherwise  not  be  eligible under  the  Scheme.   To plug  the  misuse  and  also  to provide  clarification  on  the  details  of  the  Scheme, Notification  28  and  Public  Notice  40  were  issued  on 28.1.2004.

I-Purchase of exports

One of the major misuses reported was that many Status holders were entering into contracts with various exporters for arrangements showing themselves as third party  exporters.   Such  contracts  were  executed  on stamp paper.  Ostensibly such status holders indicated themselves  as  third  party  exporters  helping  the  other

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party in obtaining export orders, production of goods as per international standards etc.  This legal contract has been  entered  merely  as  paper  arrangement  so  as  to claim the benefit of duty free import entitlement on the export of others.  M/s. Adani Exports Limited was one of the parties in many such contracts.

According to the Department of Revenue Status Holders were purchasing exports made by other parties at a premium with a view to show incremental growth of 25% or more in exports without having actually achieved such growth.

973 crores worth of exports of M/s. Adani Exports Limited  came  from  the  supplies  from  large  exporters (status  holders).   Status  holders  are  large  sized exporters who export their goods directly.  In this case the benefits of DFEC Scheme were not applicable to all status holders but only to those status holders who were meeting the incremental growth and turnover criteria.  It is  anybody  guess  that  if  the  status  holders  were  not meeting the growth criteria they would not have got any benefit  under the Scheme.  The petitioners channeled such supplies to gain benefit under the Scheme.

Claiming  other  firm's  exports  through  such mechanism  would  mean  that  the  country's  export turnover  would  remain  constant  while  applicant  firm's turnover  will  skyrocket.   If  the  firm  had  focused  on increasing their  exports, both the firm and the country would have gained in terms of export turnover, however, the firms chose to focus on people who were already exporting (but were not entitled for this benefit).  Thus, the firm's turnover in the past year grew at astronomical rate whereas country's export growth was just average.”

The Government has, thus, demonstrated that based on the

aforesaid exercise undertaken, Notification dated January 28, 2004 as

well as Public Notice of the even date were issued.

75) Notwithstanding strenuous efforts made by learned counsel for the wit

petitioners to show that the exports by them were genuine and there was

no misuse, we have no hesitation in accepting the plea of the Union that

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the purport behind Notifications was bona fide which was actuated with

the conditions of public interest in mind.  We answer the question in the

affirmative.

76) Let  us  now discuss the validity  of  the Notification dated January  28,

2004.  The issue that arises for determination is as to:

Whether Notification No.28 dated January 28, 2004 vide which Notes 1 to 5 to para 3.7.2.1 were inserted in the EXIM Policy 2002-2007 was only clarificatory in nature or it amounted to amendment of the provisions of para 3.7.2.1 of the EXIM Policy?

77) In  order  to  discuss  this  question  in  proper  perspective,  it  would  be

necessary to take note of those portions of the provisions contained in

the original Scheme which are relevant for our purposes.  Here, we are

concerned with para 3.7.2.1 of the Scheme, which we reproduce again

for ready reference:

“3.7.2.1  The  status  holders  shall  be  eligible  for  the following new/ special facilities:

(i)   Licence/certificate/permissions  and  Customs clearances for both imports and exports on self-declaration basis;

(ii)   Fixation of  Input-Output  norms on priority  within  60 days;

(iii)  Exemption from compulsory negotiation of documents through banks.  The remittance, however, would continue to be received through banking channels;

(iv)  100% retention of foreign exchange in EEFC account;

(v)  Enhancement in normal repatriation period from 180 days to 360 days;

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(vi)  Duty  free  import  entitlement  for  status holders having incremental growth of more than 25% in FOB value of exports (in free foreign exchange) subject to a minimum  export  turnover  of  Rs.25  crore  (in  free foreign exchange).  The duty free entitlement shall be 10%  of  the  incremental  growth  in  exports.   Such entitlement can be used for import of capital  goods, office equipment and inputs for their own factory or the  factory  of  the  associate/supporting manufacturer/job worker.  The entitlement/goods shall not be transferable.”

78) Vide Notification dated January 28, 2004, 5 Notes were added to the

aforesaid  para.   We  are  concerned  with  Note  1  which  contained  8

sub-notes, and it reads as under:

“Note  1 -  For  the  purpose  of  calculating  the  value  of exports,  the  following  exports  shall  not  be  taken  into account, namely:-

(i)  re-export of imported goods or exports made through transshipment;

(ii)  export  turnover  of  units  operating  under SEZ/EOU/EHTP/STPI Schemes or products manufactured by them and exported through DTA units;

(iii)  deemed exports (even when payments are received in Free  Foreign  Exchange)  and  payment  from  EEFC account;

(iv)  service exports;

(v)  supplies made by one status holder to another status holder;

(vi)   export  performance made by one status  holder  on behalf  of  other  status  holder  will  not  be  eligible  for entitlement under the scheme;

(vii)  Supplies made or export performance effected by a non-status  holder  (Merchant  exporter/  Manufacturer  with

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any export performance in 2003-2004) to a status holder if the applicant as well as the non status holder have less than 25 per cent incremental growth over their respective previous years direct export turnover;

(viii)  the exports made by an applicant within a group and the group to which it belongs has individually less than 25 per cent incremental growth of export.”

79) There  was  no  serious  challenge  to  sub-notes  (i),  (iii),  (iv)  and  (viii).

Before we discuss the effect and impact of the aforesaid sub-notes of

Note 1, let us find out as to how the Bombay High Court and Gujarat

High Court in their respective judgments have dealt with this issue.

80) So far as the Bombay High Court is concerned, after specifically posing

the question as to whether Notification dated January 28, 2004 has the

effect of introducing a new condition or term or it is merely in the nature

of clarification to the existing policy.  The High Court referred to the basic

objective  of  the  scheme  as  contained  in  Commerce  and  Industry

Minister's speech on introducing new EXIM Policy 2002-2007.  It reads

as under:

“We recognize that the status holders will continue to play  a  significant  and  increasing  role  in  boosting exports,  particularly  from  the  small  scale  sector,  as most of the small scale units will not be in a position to directly access the international markets.  Moreover, it will  be our endeavor to facilitate India emerging as a major base for out sourcing products and services for the  rest  of  the  world.   They  are  also  critical  to  our strategy for accelerating the rate of incremental growth of export.  Therefore, we intend to give a premium to the status holders who achieve high growth rate in their exports.  It is proposed to give a duty free entitlement to  them  for  import  of  capital  goods,  spares,  office

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equipments and consumables.  This will be available to status holders who achieve a growth rate of  25% or more  in  the  current  year  with  a  minimum  export performance of Rs.25 crores.  They would be entitled to a  duty free entitlement  of  10% of  the incremental growth in exports during the current financial year.  This entitlement  would be subject  to actual  user condition which can be passed on to associate manufactures”.

81) The High Court thereafter pointed out that after the aforesaid Scheme

was initiated, the Central Government learnt, on the basis of intelligence

gathered, that there was a rampant misuse of the scheme by entering

into contacts with various exporters showing themselves as third party

exporters.  These contracts were executed on stamp papers ostensibly

showing  such  status  holders  as  third  party  exporters  helping  other

parties in obtaining the orders.   It  was found that  these were merely

paper  arrangement  with  a  view  to  claim  benefits  of  duty  free  credit

entitlement on the export of others.  Insofar as case of writ petitioner

Kanak Exports  is  concerned,  the High Court  noticed that  in  the year

2002-2003, the export of this petitioner was hardly Rs.27 crores which

took a  big  leap and quantum jump in  the  year  2003-2004 when the

exports of this petitioner catapulted to more than Rs.1000 crores.  The

national export growth rate was only 22% over the last year whereas

exports of Kanak Exports grew at more than 3800%.  According to the

High Court, it  was merely a paper growth and not incremental growth

within the meaning of the scheme and the scheme was not to encourage

the  status  holder/export  house  to  pool  the  exports  made  by  other

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exporters for the purpose of showing incremental growth.  On that basis,

the High Court held that the Notification dated January 28, 2004 was

merely clarificatory and cannot be treated as amendment to the scheme

and backed this conclusion with the following reasons:

“....However,  the  basic  intention  of  the  amended scheme  was  to  encourage  the  export  of  products manufactured  by  small  scale  units  who  do  not  have access to the international market because of  lack of required international marketing expertise and optimum resources  to  have  presence  in  the  international marketing  arena.  The  scheme  was  not  intended  to encourage the status holder/export  house to pool  the exports  made  by  other  exporters  for  the  purpose  of showing  incremental  growth  in  the  export.   The clarification issued by the impugned Notification in so far  as  it  provides  that  supplies  made  by  one  status holder to another status holder or export performance made by one status holder on behalf of another status holder  shall  not  be  eligible  for  entitlement  is  in consonance with the basic object of the scheme.  The export  turnover  of  the  units  operating  under STZ/EOU/EHTP schemes was also excluded as these units are getting all facilities for import without payment of  duty  on  various  types  of  goods  including  capital goods  required  by  them  for  their  activities.   The intention of the makers of the scheme was not to confer double benefit under para 3.7.2.1. Further an exporter is required to export himself and not benefit from export capabilities of STZ/EOU/EHTP etc.  This would be only paper growth and amount to abuse of scheme. Reliance placed by the petitioners on Circular No. 16 dated 24th December  2002 is  also of  no assistance as the said Circular stating that 3rd party exports are eligible for all the export promotion schemes was issued long before the special  incentive scheme was announced on 31st March 2003.  In our opinion, the provisions contained in the impugned Notification dated 28th January 2004 are merely  clarificatory  and  cannot  be  treated  as amendment to the scheme.”

82) The Gujarat High Court, likewise, had come to the same conclusion in

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the writ petition of Adani Exports Limited.  In fact, paras 17 and 18 of the

judgment of the Gujarat High Court is reproduced by the Bombay High

Court in its judgment which reflects the mind of the Gujarat High Court in

coming to the same conclusion. These paras read as under:

“17.   Under  the policy  in  force prior  to  the impugned notifications and even thereafter the third party exports are permitted.  What was legal earlier is not made illegal at all.  For instance, exports of goods manufactured by units in EOU/SEZ zones through status holder are not prohibited  but  such  exports  even  made  between 1.4.2003  and  27.1.2004  are  excluded  because  the benefit  of duty free import was already availed for the export  of  such goods.   Chapter  6  of  the EXIM policy relates  to  Export  Oriented  Units  (EOUs).   Electronics Hardware  Technology  Parks  (EHTPs),  and  Software Technology Parks (STPs).  As provided in paras 6.1 and 6.8 of the EXIM Policy, these units undertake to export their  entire  production  of  goods  and  services,  except permissible sales in the Domestic Tariff Area as per the EXIM Policy.  Para 6.2(b) of the EXIM policy provides that  “an  EOU/EHTP/STP  unit  may  import  without payment  of  duty  all  types  of  goods,  including  capital goods,  as  defined  in  the  policy, required  by  it  for  its activities as mentioned in para 6.1...” Para 6.10 reads as under:

“6.10  As  EOU/EHTP/STP  unit  may  export  goods manufactured/software  developed  by  it  through  a merchant export/status holder recognized under this policy any other EOU/EHTP/SEZ unit”.

The amendments do not impinge upon the right of any  party  to  export  its  goods  in  accordance  with  the EXIM  policy.   The  clarification  only  excludes  exports which  were  never  intended  in  the  first  place  to  be covered by the Special Scheme under consideration.   

18.  Secondly, the misuse of the scheme by mere paper growth in exports is not to be countenanced.  Hence, it is but natural that the notification dated 28.1.2004 would apply to the exports made from 1.4.2003 onwards.  In so far as this court holds that the Notes 1 and 2 read with Note 4 introduced by the notification dated 28.1.2004

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are  merely  clarificatory,  the  exports  made  by  the petitioners  between  1.4.2003  and  27.1.2003  would certainly be covered by the said notes.  Two views are possible  about  the  expression  “incremental  growth  in exports  by  25%”  and  the  Government  adopted  the interpretation  as  reflected  in  the  notification  dated 28.1.2004 which is quite in consonance with the object of the Act, EXIM policy and the incentive scheme rather than  the  interpretation  canvassed  by  the  petitioner. Hence,  there  is  no  substance  in  the  challenge  to  a Notes 1 and 2 read with note 4.”

83) Sub-note  (ii)  of  Note  1  now  provides  that  export  turnover  of  units

pertaining to SEZ/EOU/EHTP/STP or products manufactured by them

and exported through DTA units are not to be included and taken into

account for the purpose of calculating the value of exports.  Both the

High Courts in the impugned judgments have held it to be clarificatory on

the  ground  that  such  export  turnover  was  excluded  as  these  units,

namely, those pertaining to SEZ/EOU/EHTP/STP schemes are getting

all facilities for import without payment of duty on various types of goods

including capital goods required by them for their activities and there was

no intention in the original scheme also to confer double benefit under

para 3.7.2.1.  This question by the writ petitioners by referring to paras

6.10, 7.1 and 7.8 of the EXIM Policy which permitted,  inter alia, export

through status holders.   On that  basis,  it  was argued by the learned

counsel appearing for these writ petitioners that sub-note (ii) of Note 1

which stipulated that such exports would not be counted for the purpose

of entitlement was not clarificatory but an amendment to the scheme.  It

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is  difficult  to  accept  the  aforesaid  submission.   No  doubt,  such

EOU/EHTP/STP schemes are allowed to export goods manufactured by

them through a merchant exporter/status holder recognised under the

EXIM  Policy.   Likewise,  SEZ  is  also  authorised  to  export  its  goods

through a status holder.  The permission to make exports through status

holder  is  one thing.   Taking into account these exports by the status

holders for the purpose of calculating the value of exports for availing the

benefits of the entitlement given under the scheme is altogether different

thing.  The counsel for the petitioners could not refute or deny that such

SEZ/EOU//EHTP/STP are getting the benefit  of  the exports  made by

them  in  the  form  of  facilities  for  import  without  payment  of  duty  on

various types of goods including capital goods required by them for their

activities.   Therefore,  exactly  the same benefit  which is  sought to be

given to the status holders for achieving incremental growth as provided

in the scheme was already conferred upon.  Obviously, purpose of the

scheme was not to give double benefit for same exports.  In fact, if that

is allowed, it would be a clear case of misuse of the scheme inasmuch

as  for  the  same  export  turnover  units  operating  under

SEZ/EOU/EHTP/STP would  get  the  certain  incentives  and  the  status

holders also manage to extract the same benefits exploiting the scheme

by  exporting  the  goods  manufactured  by  these  STZ/EOU  etc.   On

considering the issue in this hue, we agree with the opinion of the High

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Court that such a sub-note (ii) was merely clarificatory in nature.

84) Sub-note (v) to Note 1 stipulates that if the supply were made by one

status holder to another status holder, these shall also be excluded while

calculating  the  value  of  exports.   Likewise,  sub-note  (vi)  of  Note  1

excludes the export performance made by one status holder on behalf of

other status holder.  High Courts have treated it as clarificatory on the

ground  that  the  Scheme  was  not  intended  to  encourage  the  status

holders/export house to pool the exports made by other exporters for the

purpose of showing incremental growth in the exports and, therefore, the

addition of  sub-note (v)  to  Note 1 was in  consonance with the basic

objective of the scheme as originally envisaged.  Having regard to the

nature of this sub-note (v) and when we keep in mind the fact that the

two status-holders if they carry out the exports and made the target as

per the Scheme were entitled to the benefit of the Scheme, we agree

with the High Courts that even insertion of these clauses is clarificatory

in  nature  inasmuch  as  it  only  states  that  the  supply  made  by  one

status-holder  to  another  status-holder  will  not  be  counted.   This

clarification was issued, as rightly pointed out  by the High Courts,  to

ensure that  two status-holders belonging to the same group may not

start pooling and try to take undue advantage.   

85) Insofar as sub-note (vii) of Note 1 is concerned, it stipulates that supplies

made or export performance affected by a non status holder to a status

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holder will not be taken into account for the purpose of calculating the

value of exports, if the applicant as well as the non status holder have

less than 25% incremental growth over their respective previous years.

This  appears  to  be  clearly  clarificatory  in  nature  inasmuch  as  the

purpose of the Scheme was to give benefit  to those who are able to

achieve incremental growth of 25%.  Thus, each such status holder has

to  independently  attain the growth target  stipulated in  the scheme to

avail  the benefit.   Obviously, if  it  has not  been able  to  achieve 25%

incremental growth, such export house cannot take the advantage by

including exports of a non status holders to show that it has achieved

25% incremental growth.

Aforesaid  discussion  leads  us  to  conclude  that  the  Notification

dated January 28, 2004 was clarificatory in nature and its validity stands

upheld.

86) Next issue relates to the validity of the Public Notice dated January 28,

2004.  The question that is posed for determination on this issue is as to:

Whether Public Notice dated January 28, 2004, issued by  the  DGFT,  which  sought  to  exclude  the  export performance  related  to  class  of  goods,  is  without jurisdiction?

87) The  main  submission  of  the  petitioners,  which  was  before  the  High

Courts as well and reiterated before us, was that Public Notice dated

January 28, 2004 seeks to amend the EXIM Policy and DGFT does not

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have any such power inasmuch as this EXIM Policy is statutory which is

issued  under  Section  5  of  the  Act  by  the  Central  Government  and,

therefore,  it  is  only  the  Central  Government  which has the power  to

make  amendments  to  the  EXIM  Policy.  Therefore,  the  Public  Notice

issued by DGFT dated January 28, 2004 was without jurisdiction.  An

additional  ground  of  retrospectivity  was  also  taken  to  challenge  the

Public Notice.  It was also argued that DGFT by the said Public Notice

was seeking  to  impose additional  conditions,  not  forming  part  of  the

original policy which was again impermissible.

88) Mr. Adhyaru, learned senior counsel appearing for the Union of India, on

the other hand, submitted that the paramount consideration in issuing

the Public Notice was to check unscrupulous exporters including the writ

petitioners  for  inflating  their  export  turnover  by  adopting  dubious

methods.  He emphasized the rational for inclusion of four items by this

Public Notice which has already been taken note of.  His endeavour was

to demonstrate that issuance of the Public Notice in question became

paramount  to  cluck  unscrupulous  methodology  adopted  by  certain

exporters  with  the  objective  to  wrongfully  acquire  the  benefits  of  the

Schemes that could not be countenanced and had to be checked.  We

are not delving with those alleged malpractices and hold back the same

at this juncture.  They will be spelled out while discussing the validity of

the Notification dated April  21,  2004 as the subject  matter  thereof  is

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same.  Here, we are concerned with the powers of DGFT to issue such a

Public Notice.

89) In order to answer this question, we have to first determine as to whether

this  Public  Notice  dated January  28,  2004 is  only  an  amendment  to

Handbook of Procedure or it tinkers with the EXIM Policy.  To answer this

question, we may first go into the Scheme of the Act.  For this purpose,

Section 5 as well as Section 6 of the Act are to be taken note of in the

first instance and read as under:

“5.  Foreign  Trade  Policy.-The  Central  Government may,  from  time  to  time,  formulate  and  announce,  by notification  in  the  Official  Gazette,  the  foreign  trade policy and may also, in like manner, amend that policy:

Provided that the Central Government may direct that, in respect  of  the  Special  Economic  Zones,  the  foreign trade  policy  shall  apply  to  the  goods,  services  and technology  with  such  exceptions,  modifications  and adaptations, as may be specified by it by notification in the Official Gazette.]

6.   Appointment  of  Director  General  and  his functions.-(1)  The  Central  Government  may  appoint any person to be the Director-General of Foreign Trade for the purposes of this Act.

(2)  The  Director-General  shall  advise  the  Central Government  in  the  formulation  of  the  [foreign  trade policy]  and  shall  be  responsible  for  carrying  out  that policy.

(3) The Central Government may, by Order published in the Official Gazette, direct that any power exercisable by it under this Act (other than the powers under sections 3, 5, 15, 16 and 19) may also be exercised, in such cases and subject to such conditions, by the Director-General or such other officer subordinate to the Director General,

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as may be specified in the Order.”

90) From the aforesaid, it is clear that Section 5 provides that the Central

Government may, from time to time, formulate and announce, the EXIM

Policy.  This has to be done by issuing/announcing this Policy by way of

notification in the Official Gazette.  The Central Government also has the

power  to  amend  the  Policy  so  announced  by  adopting  the  same

procedure i.e. by issuing notification in the Official Gazette.  It is not in

dispute  that  EXIM  Policy  in  question  was  issued  by  notification  in

exercise of powers conferred under Section 5 of the Act.  This Policy,

thus, is infested with statutory flavour.   

91) For the purpose of carrying out the objectives of the Act which includes

implementation  of  the  Policy,  Central  Government  is  authorised  to

appoint DGFT as per Section 6 of the Act.  Main functions of the DGFT

are advising the Central Government in formulation of the Policy and he

is also responsible for carrying out the said Policy.  Sub-section (3) of

Section  6  provides  that  Central  Government  may delegate  its  power

exercisable under the Act.  However, powers under Sections 3, 5, 15, 16

and 19 are specifically excluded which means these powers cannot be

delegated.  Thus, power to announce the Policy and to amend the same

remains with the Central Government.  Likewise, power to make rules

under Section 19 which vests with the Central Government, cannot be

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delegated.

92) Keeping  in  mind  the  aforesaid  legal  position,  we  reproduce  certain

portion  of  the  EXIM  Policy  announced  vide  Notification  No.1  dated

March 31, 2003 which have bearing on the issue at hand.  These are:

Para 1.1 of the Export and Import Policy provided that:

“In  exercise of  the powers conferred under Section 5 of The  Foreign  Trade  (Development  and  Regulation  Act), 1992  (No.22  of  1992),  the  Central  Government  hereby notifies  the  Export  and  Import  Policy  for  the  period 2002-2007.  This Policy shall come into force with effect from April 01, 2002 and shall remain in force upto March 31, 2007 and will be co-terminus with the Tenth Five Year Plan (2002-2007).

However,  the  Central  Government  reserves  the right  in  public  interest  to make any amendments to this Policy in exercise of the powers conferred by Section 5 of the  Act.   Such  amendment  shall  be  made  means  of  a Notification published in the Gazette of India”.

Para 1.2 of the said Policy provides that:

“Any  Notifications  made  or  Public  Notices  issued  or anything done under the previous Export/Import Policies, and in force immediately before the commencement of this Policy shall, insofar as they are not inconsistent with the provisions of this Policy, continue to be in force and shall be deemed to have been made, issued or done under this Policy.  License/Certificate/ Permissions issued before the commencement of this Policy shall continue to be valid for the purpose for which such licence/Certificate/permission was issued unless otherwise stipulated”.

Para 2.4 of  the Import  and Export  Policy dealing with the Procedure

provides that:

“The Director General of Foreign Trade may, in any case or class of cases, specify the procedure to be followed by an exporter or importer or by any licensing or any other

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competent authority for the purpose of implementing the provisions  of  the  Act,  the  Rules  and  the  Order  made thereunder  and  this  Policy.  Such  procedures  shall  be included  in  the  Handbook  (Vol.  1),  Handbook  (Vol.2), Schedule of DEPB Rate and in ITC (HS) and published by means of a Public Notice.  Such procedures may, in like manner, be amended from time to time.

The Handbook (Vol.1) is a supplement to the EXIM Policy and contains relevant procedures and other details. The procedure of availing benefits under various schemes of the Policy are given in the Handbook (Vol.1)”.

93) It  is  explained  by  the  learned  counsel  for  the  Union  of  India  that  a

Notification issued under Section 5 of  the Act  or any change brought

about by the DGFT in exercise of  the powers under Para 2.4 of  the

Import and Export Policy in the Handbook Procedure, by way of a Public

Notice the same are Gazetted and Notified in the Gazette of India.  It is

also pointed out that the Notification/ Public Notices issued relating to

Non-Statutory Rules, Regulations, Order and Resolutions issued by the

Ministries of Government of India, (other than the Defence Ministry) and

by the Supreme Court of India are published under Part 1 Section 1 of

the Gazette of  India.   On the other hand, Notifications issued by the

Ministries of Government of India (other than the Defence Ministry) are

published under Part 2 Section 3 and sub-section 2 of the Gazette of

India.   On  that  basis,  justification  is  sought  to  be  given  that  the

Notification  No.28(RE-2003)/2002-2007  dated  January  28,  2004,

Notification  No.38/(RE-2003)  2002-2007  dated  April  21,  2004  were

published in the Gazette of India under Part 2 and 3(II),  while Public

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Notice No.40 dated January 28, 2004  was published in the Gazette of

India under Part 1 Section 1 of the Gazette of India and as such, as both

the Notifications as well as the Public Notices are officially gazetted in

the Gazette of India.  Thus, there is no distinction between the two as

the same carry the same impact and effect.   

94) From the aforesaid explanation, we take it that the Public Notice dated

January 28, 2004 was published in the Gazette of India in accordance

with the requirement of law.  The question, however, is as to whether by

this Public Notice, DGFT was only carrying out the EXIM Policy or this

Public Notice amounted to change in the said EXIM Policy.  It is crystal

clear  that  the  Public  Notice  alters  the  provisions  of  EXIM Policy.  It

would,  therefore,  amount  to  amending  the  EXIM  Policy,  whether

clarificatory or otherwise.  There may be a valid justification and rational

for exclusion of four items contained therein, as pleaded by the Union.

However, it had to be done in accordance with law.  When the DGFT had

no power in this behalf, he could not have excluded such items from the

purview of EXIM Policy by means of Public Notice.  The power of DGFT

is only to be exercised for procedural purposes and both the High Courts

have  rightly  remarked that  para  3.2.6  inserted  by  public  notice  goes

beyond the procedural conditions.

95) In fact, the Government itself realised the same, namely, the DGFT had

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no such power.  It is for this reason that what was sought to be achieved

by the said Public Notice, was formalised by the Central Government by

issuing Notifications dated April 21 and 23, 2004 in exercise of powers

conferred on the Central Government by Section 5 of the Act and the

same four items were excluded.  

96) Therefore, we hold that public notice dated January 28, 2004 issued by

DGFT, so far it excludes the aforesaid four items, is ultra vires.

97) Now, we advert  to  the issue pertaining to Notification dated April  28,

2004.  The question here is as to:

Whether subsequent Notification dated April 21, 2004, read with Notification dated April 28, 2004, seeking to exclude  the  export  performance  related  to  class  of goods covered by para 2 of  the Public Notice dated April 28, 2004, by way of Notes 6 to para 3.7.2.1 of the EXIM Policy, would relate back to the date of Public Notice  dated  January  28,  2004  or  is  to  be  given prospective  effect  from  the  date  of  issuance  of Notifications on April 21 and 23, 2004.

98) It is no doubt that the Central Government has the power to amend the

Policy and, therefore, it could do so vide Notifications dated April 21 and

23, 2004.  The only question is as to whether these Notifications are bad

in law on the ground that they seek to apply retrospectively.

99) We  start  with  the  premise  that  there  was  complete  justification  for

excluding the four  items insofar  as  grant  of  benefit  under  scheme is

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concerned.  The Union of India has been able to demonstrate the same

in full measure.  This aspect has already been discussed in detail at the

outset itself.

100) However, at  the same time,  as already been pointed out  above,  this

Notification is not clarificatory in nature unlike Notification dated January

28,  2004.   Therefore,  the issue of  retrospectivity  becomes important.

The contention of Mr. Adhyaru is that the Notification is not retrospective

but retroactive in nature.  In the alternative, it is submitted that even it is

treated as retrospective, the Government has right to do so under the

given circumstances inasmuch as grant of concession or incentive is the

privilege of the Central Government which can always be withdrawn and

in the present case, it is withdrawn for justifiable reasons and in public

interest which is the paramount consideration and over rights all private

considerations. Therefore, it is argued, the question of retrospectivity of

Policy by the impugned Notification does not arise at all.  Mr. Adhyaru

also argued that  there was an implied power vested with the Central

Government to amend the Policy retrospectively.   

101) We may state, at the outset, that the incentive scheme in question, as

promulgated  by  the  Government,  is  in  the  nature  of  concession  or

incentive which is a privilege of the Central Government.  It is for the

Government to take the decision to grant such a privilege or not.  It is

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also trite law that such exemptions, concessions or incentives can be

withdrawn any time.  All these are matters which are in the domain of

policy decisions of the Government.  When there is withdrawal of such

incentive and it is also shown that the same was done in public interest,

the Court would not tinker with these policy decisions. This is so laid

down  by  catena  of  judgments  of  this  Court  and  is  now  treated  as

established and well grounded principle of law.  In such circumstances,

even the Doctrine of Promissory Estoppel cannot be ignored.   

102) We may suitably refer to the judgment of this Court in Kasinka Trading

v.  Union  of  India6.   In  that  case,  Government  of  India  had  issued

Notification  under  Section  25(1)  of  the  Customs  Act,  1962  in  'public

interest' granting exemption from whole of the customs duty on import of

PVC resin.  This Notification was to remain in force till March 31, 1981.

However,  even  before  the  said  date,  by  another  Notification  dated

October 16, 1980, the full exemption from custom duty was withdrawn

and it was reduced to the exemption from custom duty as is in excess of

40%  ad  valorem.   The  importer  had  contended  that  relying  on  the

exemption notification dated March 15, 1979, it had placed orders for the

import  of  PVC resins  on  the  understanding  that  the  commodity  was

totally exempt from customs duty, the Government must be held bound

by  the  representations  contained  in  the  notification  dated  March  15,

6 (1995) 1 SCC 274

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1979 and the Government  was estopped on the basis  of  promissory

estoppel  to  go  back  on  its  promise.   The  Government  justified  the

withdrawal of exemption on the ground that the Government had issued

notification dated March 15, 1979 with a view to equalizing sale prices of

the indigenous and the imported material and to make the commodity

available to the consumer at a uniform price, keeping in view the trends

in  the supply  of  the material.   Subsequently, it  was realized that  the

international  prices  of  the  product  were  falling  and  consequently  the

import  prices  had  become  lower  than  the  ex-factory  prices  of  the

indigenous  material.   Hence,  it  was  decided  in  “public  interest”  to

withdraw the exemption notification.

This  Court  held  that,  “the  reasons  given  by  the  Union  of  India

justifying withdrawal of the exemption notification, in our opinion, are not

irrelevant to the exercise of the power in public interest nor are the same

shown to be insufficient  to support  the exercise of  that  power”.   The

Court also observed that, the power to grant exemption from payment of

duty flows from the provisions of Section 25(1) of the Customs Act.  The

power to exempt includes the power to modify or withdraw the same.

Such an exemption by its very nature is susceptible of being revoked or

modified  or  subjected  to  other  conditions.   The  supersession  or

revocation  of  an  exemption  notification  in  the  public  interest  is  an

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exercise of the statutory power of the State under the law itself as is

obvious not merely from the language of Section 25 of the act, but also

from the General Clauses Act under which the authority which has the

power  to  issue a  notification has the undoubted power  to  rescind or

modify the notification in the like manner.  The Court also examined the

case of the appellant-petitioners that relying upon the notification dated

March  15,  1979,  they  had  acted  and  the  Government  could  not  be

permitted to go back on its assurance otherwise they would be put to

huge loss.  The Court dealt with this contention in the following words:

“The Courts have to balance equities between the parties and indeed the Courts would bind the Government by its promise to prevent manifest injustice or fraud”.

The Court  also quoted with  approval  the following observations

from Malhotra & Sons v. Union of India7:

“The Courts will only bind the Government by its promises to prevent manifest injustice or fraud and will not make the Government a slave of its policy for all times to come when the  Government  acts  in  its  Governmental,  public  or sovereign capacity.”

103) The  above  decision  was  followed  by  this  Court  in  Shrijee  Sales

Corporation v. Union of India8 where also the same notifications were

considered.  In that case also, the appellants-petitioners had alleged that

they would not have imported the PVC resin without the exemption as

that would have been unviable and uneconomical and further that many

7 AIR 1976 J&K 41 8 (1999) 3 SCC 398

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persons took full advantage of the exemption.  The Court held that the

facts of the economic situation explained in the judgment rendered in

Kasinka Trading's  case were not contravened nor was it alleged that

public interest did not call for supersession of the exemption notification.

The  Court  also  examined  the  question  whether  the  fact  that  the

notification dated 15.03.1979 mentioned the period during which it was

to remain in force would make any difference to the situation.  The Court

then held that -  'once public interest is accepted as the superior equity

which can override individual equity, the principles should be applicable

even in cases where a period has been indicated'.

104) Therefore,  it  cannot  be  denied  that  the  Government  has  a  right  to

amend, modify or even rescind a particular Scheme.  It is well settled

that in complex economic matters every decision is necessarily empiric

and it is based on experimentation or what one may call trial and error

method and therefore  its  validity  cannot  be  tested  on  any  rigid  prior

considerations or on the application of any straight-jacket formula.  In

Balco  Employees  Union  (regd.)  v.  Union  of  India  and  Ors.9,  the

Supreme Court  held  that  Laws,  including  executive  action relating to

economic  activities  should  be  viewed  with  greater  latitude  than  laws

touching civil  rights such as freedom of speech, religion etc., that the

legislature should be allowed some play in the joints because it has to

9 (2000) 2 SCC 333

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deal with complex problems which do not admit of solution through any

doctrine or straightjacket formula and this is particularly true in case of

legislation dealing with economic matters, where having regard to the

nature  of  the  problems  greater  latitude  require  to  be  allowed  to  the

legislature.   The question,  however, is  as  to whether  it  can be done

retrospectively,  thereby  taking  away  some  right  that  had  accrued  in

favour of another person?

105) The case of the exporters is that by achieving the target contained in the

Scheme in  respect  of  incremental  exports,  these  exporters  had  right

accrued in their favour to claim the benefits provided for achieving this

target.  It was submitted in this behalf that the Scheme came into force

w.e.f.  April  01,  2003 and from April  01,  2003 to  March 31,  2004 i.e.

during these 12 months, the status holders were entitled to make the

exports and once the targets as set out in the clause 3.2.7.1 (vi) were

achieved, the exporters became entitled to get duty free import to the

extent of 10% of the incremental growth in exports.  According to them,

the moment a particular exporter fulfilled the target of incremental growth

of more than 25% of FOB value in exports with minimum export value

turnover of 25 crore, said exporter got right to have duty free entitlement

equivalent to 10% of incremental growth in exports.  The only condition

was that this entitlement was to be used w.e.f. April 01, 2004 for import

of items specified in the said clause.  On that basis, it was argued that

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the effect of the impugned Notification was to take away this vested right

accrued  away  in  their  favour  and  it  amount  to  giving  retrospective

operation  to  the  said  circular  which  was  not  permissible.  Following

judgments  were  cited in  support  of  the plea  that  there  was no such

power to make provision with retrospective effect in exercise of power of

delegated legislation:

(i) Union of India & Ors. v. Asian Food Industries10

“48.   The  Delhi  High  Court,  however,  in  our  view correctly  opined  that  the  Notification  dated  4-7-2006 could  not  have been  taken  into  consideration  on  the basis of the purported publicity made in the proposed change in the export policy in electronic or print media. Prohibition promulgated by a statutory order in terms of Section 5 read with the relevant provisions of the policy decision in the light of sub-section (2) of Section 3 of the 1992 Act can only have a prospective effect.  By reason of a policy, a vested or accrued right cannot be taken away.  Such a right, therefore, cannot a fortiori be taken away by an amendment thereof.”

(ii)   State of Rajasthan & Ors. v. Basant Agrotech (India) Ltd.11

“21.   There  is  no  dispute  over  the  fact  that  the legislature  can  make  a  law  retrospectively  or prospectively  subject  to  justifiability  and  acceptability within  the  constitutional  parameters.   A  subordinate legislation can be given retrospective effect if a power in this  behalf  is  contained  in  the  principal  Act.   In  this regard  we  may  refer  with  profit  to  the  decision  in Mahabir  Vegetable  Oils  (P)  Ltd.  v.  State  of  Haryana (2006) 3 SCC 620, wherein it has been held that:

“41.  We  may  at  this  stage  consider  the  effect  of omission of the said note.  It is beyond any cavil that a subordinate legislation can be given a retrospective effect and retroactive operation, if  any power in this behalf is contained in the main Act.  The rule-making

10 (2006) 13 SCC 542 11 (2013) 15 SCC 1

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power  is  a  species  of  delegated  legislation.   A delegatee  therefore  can make rules  only  within  the four corners thereof.

42.  It is a fundamental rule of law that no statute shall be construed to have a retrospective operation unless such a construction appears very clearly in the terms of  the  Act,  or  arises  by  necessary  and  distinct implication.”

(iii)  Keshavlal Jethalal Shah v. Mohanlal Bhagwandas & Anr.12

“13. Counsel  for  the  respondent  also  submitted  that Section  29(2)  as  amended  was  intended  to  have retrospective operation, because the Amending Act was in the nature of explanatory legislation. There is nothing in the language of  Section 29(2)  as  amended,  which may indicate that it was intended to be retrospective in operation. Section 29(2) as amended in terms confers jurisdiction upon the High Court to call for the record of a  case  for  the  purpose  of  satisfying  itself  that  the decision in appeal was according to law, which the High Court did not possess before the date of the Amending Act. The amending clause does not seek to explain any pre-existing  legislation  which  was  ambiguous  or defective. The power of the High Court to entertain a petition for exercising revisional jurisdiction was before the amendment derived from Section 115 Code of Civil Procedure, and the legislature has by the Amending Act attempted to explain the meaning of that provision. An explanatory  Act  is  generally  passed  to  supply  an obvious  omission  or  to  clear  up  doubts  as  to  the meaning of the previous Act. Section 29(2) before it was enacted, was precise in its implication as well as in its expression: the meaning of the words used was not in doubt,  and there was no omission in  its  phraseology which was required to be supplied by the amendment.”

(iv) Commissioner of Income Tax v. Vatika Township Private Ltd.13

“28.  Of the various rules guiding how a legislation has to be  interpreted,  one  established  rule  is  that  unless  a contrary intention appears, a legislation is presumed not to be intended to have a retrospective operation.  The idea behind the rule is that a current law should govern current

12 (1968) 3 SCR 623 13 (2015) 1 SCC 1

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activities.  Law passed today cannot apply to the events of the past.  If we do something today, we do it keeping in view the  law  of  today  and  in  force  and  not  tomorrow’s backward adjustment of it.  Our belief in the nature of the law is founded on the bed rock that every human being is entitled to arrange his affairs by relying on the existing law and  should  not  find  that  his  plans  have  been retrospectively upset.  This principle of law is known as lex prospicit non respicit : law looks forward not backward.  As was  observed  in  Phillips  vs.  Eyre14,  a  retrospective legislation  is  contrary  to  the  general  principle  that legislation  by  which  the  conduct  of  mankind  is  to  be regulated when introduced for the first  time to deal with future  acts  ought  not  to  change  the  character  of  past transactions carried on upon the faith of the then existing law.

29. The  obvious  basis  of  the  principle  against retrospectivity is the principle of  'fairness’, which must be the  basis  of  every  legal  rule  as  was  observed  in  the decision reported in  L’Office Cherifien des Phosphates v. Yamashita-  Shinnihon  Steamship  Co.  Ltd.15 Thus, legislations which modified accrued rights or which impose obligations or impose new duties or attach a new disability have to  be treated as prospective unless the legislative intent  is  clearly  to  give  the  enactment  a  retrospective effect; unless the legislation is for purpose of supplying an obvious omission in  a  former  legislation or  to  explain  a former legislation.  We need not note the cornucopia of case law available on the subject because aforesaid legal position clearly emerges from the various decisions and this  legal  position was conceded by the counsel  for  the parties.   In  any  case,  we  shall  refer  to  few  judgments containing this dicta, a little later.

xx xx xx

33.   A  Constitution  Bench  of  this  Court  in  Keshavlal Jethalal Shah  v. Mohanlal Bhagwandas & Anr.16, while considering the nature of amendment to Section 29(2) of the  Bombay  Rents,  Hotel  and  Lodging  House  Rates Control  Act  as  amended  by  Gujarat  Act  18  of  1965, observed as follows:

“The amending clause does not seek to explain any 14 (1870) LR 6 QB 1 15 (1994) 1 AC 486 16 (1968) 3 SCR 623

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pre-existing  legislation  which  was  ambiguous  or defective.  The power of the High Court to entertain a petition  for  exercising  revisional  jurisdiction  was before the amendment derived from s. 115, Code of Civil  Procedure,  and  the  legislature  has  by  the amending  Act  attempted  to  explain  the  meaning  of that provision.  An explanatory Act is generally passed to supply an obvious omission or to clear up doubts as to the meaning of the previous Act.”

(v) Trimbak Damodhar Rajpurkar v. Assaram Hiraman Patil & Others17  

“8. Besides, it is necessary to bear in mind that the right of  the appellant  to eject  the respondents would arise only  on  the  termination  of  the  tenancy,  and  in  the present case it  would have been available to him on March 31, 1953 if the statutory provision had not in the meanwhile extended the life of  the tenancy. It  is  true that  the appellant  gave notice to  the respondents  on March 11, 1952 as he was then no doubt entitled to do; but his right as a landlord to obtain possession did not accrue merely on the giving of the notice, it accrued in his favour on the date when the lease expired. It is only after the period specified in the notice is over and the tenancy has in fact expired that the landlord gets a right to eject the tenant and obtain possession of the land. Considered  from  this  point  of  view,  before  the  right accrued  to  the  appellant  to  eject  the  respondents amending Act 33 of 1952 stepped in and deprived him of that right by requiring him to comply with the statutory requirement as to a valid notice which has to be given for ejecting tenants.

9. In  this  connection  it  is  relevant  to  distinguish between an existing right and a vested right. Where a statute  operates  in  future  it  cannot  be  said  to  be retrospective merely  because within the sweep of  its operation all existing rights are included. As observed by  Buckley,  L.J.  in  West v.  Gwynne retrospective operation is one matter and interference with existing rights is another. “If an Act provides that as at a past date the law shall be taken to have been that which it was not, that Act I understand to be retrospective. That is not this case. The question here is whether a certain

17 (1962) Supp. 1 SCR 700

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provision as to the contents of leases is addressed to the case of all leases or only of some, namely, leases executed after the passing of the Act. The question is as to the ambit and scope of the Act, and not as to the date as from which the new law, as enacted by the Act, is  to  be  taken  to  have  been  the  law.”  These observations were made in dealing with the question as to  the  retrospective  construction  of  Section  3  of  the Conveyancing and Law of Property Act, 1892 (55 & 56 Vict. c. 13). In substance Section 3 provided that in all leases containing a covenant, condition or agreement against  assigning,  underletting,  or  parting  with  the possession, or disposing of the land or property leased without licence or consent, such covenant, condition or agreement  shall,  unless  the  lease  contains  an expressed provision to the contrary, be deemed to be subject to a proviso to the effect that no fine or sum of money in the nature of a fine shall be payable for or in respect of such licence or consent. It was held that the provisions  of  the  said  section  applied  to  all  leases whether executed before or after the commencement of the  Act;  and,  according  to  Buckley,  L.J.,  this construction  did  not  make  the  Act  retrospective  in operation;  it  merely  affected  in  future  existing  rights under all leases whether executed before or after the date of the Act. The position in regard to the operation of Section 5(1) of the amending Act with which we are concerned appears to us to be substantially similar.

10.  A similar question had been raised for the decision of  this  Court  in  Jivabhai  Purshottam v.  Chhagan Karson-  Civil  Appeal  No  153  of  1958  decided  on 27-3-1961 in  regard to the retrospective operation of Section 34(2)(a) of the said amending Act 33 of 1952 and this Court has approved of the decision of the Full Bench  of  the  Bombay  High  Court  on  that  point  in Durlabbhai Fakirbhai v. Jhaverbhai Bhikabhai (1956) 58 BLR  85.  It  was  held  in  Durlabbhai  case  that  the relevant provision of the amending Act would apply to all proceedings where the period of notice had expired after the amending Act had come into force and that the effect of the amending Act was no more than this that it imposed a new and additional limitation on the right of the  landlord  to  obtain  possession  from his  tenant.  It was  observed  in  that  judgment  that  “a  notice  under Section 34(1) is merely a declaration to the tenant of the intention of the landlord to terminate the tenancy;

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but it is always open to the landlord not to carry out his intention. Therefore, for the application of the restriction under sub-section 2(a) on the right of the landlord to terminate the tenancy, the crucial date is not the date of notice  but  the  date  on  which  the  right  to  terminate matures; that is the date on which the tenancy stands terminated”.

(vi) Sakuru v. Tanaji18

“4. Our attention was drawn to the fact that subsequent to the decision of the High Court, the State Legislature has enacted the Andhra Pradesh Tenancy Laws (Amendment) Act, 1979 – Act 2 of 1979, whereby Section 93 of the Act has been amended and the provisions of Section 5 of the Limitation  Act,  1963  have  now  been  expressly  made applicable  to  appeals  and  revisions  preferred  under Sections 90 and 91 of the Act.  We see no force in the contention advanced on behalf  of  the appellant  that  the said amendment is clarificatory in nature.  The provisions of Section 93 as they stood prior to this amendment were free from any ambiguity and called for no clarification.  The Legislature  has  also  not  given  any  indication  of  any intention to clarify but, on the other hand, what has been done by it is to amend the section with only prospective effect.   The  amended  provisions  of  Section  93  are, therefore,  of  no assistance to the appellant  in  this  case which  is  governed  by  the  section  as  it  was  originally enacted.”

(vii) Union of India v. N.R. Parmar19

“35.  Having examined the matter thus far, it is necessary to  refer  to  the  Ministry  of  Finance,  Department  of Revenue's Letter dated 11-5-2004 (hereinafter referred to as “the Letter dated 11-5-2004”).  The aforesaid letter is being reproduced below:

“ New Delhi, 11-5-2004 To, The Chief Commissioner of Income Tax (CCA), Chandigarh

18 (1985) 3 SCC 590 19 (2012) 13 SCC 340

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Subject:  Fixation  of  inter  se  seniority  of  DR  and promotee Income Tax Inspectors in view of clarification given by DoP&T in r/o OM dated 3-7-1986

Sir,

I  am  directed  to  refer  to  your  Letter F.No.CC/CHD/2003-04/935  dated  4-12-2003  on  the above  subject  and  to  say  that  the  matter  has  been examined in  consultation with DoP&T and necessary clarification in the mater is given as under:

Point/query raised Clarification Whether  direct  recruit Inspectors  should  be given  seniority  of  the year in which selection process  initiated  or vacancy  occurred  or otherwise.

'It  is  clarified  by  DoP&T that  direct  recruits' seniority  via-a-vis  the promotees  is  reckoned from the year in which they are  actually  recruited. DRs cannot claim seniority of  the  year  in  which  the vacancies had arisen.  The question  of  grant  of seniority  to  DRs  of  the period when they were not even  in  service  does  not arise.'

3.   The  representations  may  please  be  disposed  of accordingly.

Yours faithfully, sd/-

Under-Secretary to the Government of India”

36.  A perusal of the Letter dated 11-5-2004 reveals that it  adopts  a  position  in  clear  conflict  with  the  one expressed in the OMs dated 7-2-1986 and 3-7-1986, as well as, in the OMs dated 20-12-1999 and 2-2-2000.  In the aforesaid Letter dated 11-5-2004 it was sought to be “clarified”,  that  the seniority  of  direct  recruits  vis-a-vis promotees, would be determined with reference to the year  in  which the  direct  recruits  are  appointed.   And further, that  direct  recruits  cannot  claim seniority  with reference to  the year  in  which the  vacancies  against which they are appointed had arisen.  In our considered view  reliance  on  the  Letter  dated  11-5-2004,  for  the determination  of  the  present  controversy,  is  liable  to

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outright rejection.  This is so because, the Letter dated 11-5-2004  has  been  styled  as  a  “clarification”  (see heading in right  hand column).   One of  the essential ingredients  of  a  clarification  is,  that  it  “clarifies”  an unclear, doubtful, inexplicit or ambiguous aspect of an instrument.  A “clarification” cannot be in conflict with the instrument  sought  to  be  clarified.   The  Letter  dated 11-5-2004 breaches both the essential ingredients of a “clarification” referred to above.  That apart, the Letter dated 11-5-2004 is liable to be ignored in view of two subsequent  Letters  of  the  Ministry  of  Finance, Department of Revenue dated 27-7-2004 and 8-9-2004.

37.   The  Letter  dated  27-7-2004  is  reproduced hereunder:

“ New Delhi, 27-7-2004

To, The Chief Commissioner of Income Tax (CCA), Chandigarh

Subject:  Fixation  of  inter  se  seniority  of  DR  and promotee Income Tax Inspectors in view of clarification given by DoP&T in r/o OM dated 3-7-1986.

Sir,

I  am  directed  to  refer  to  the  Board's  letter  of  even number dated 11-5-2004 on the above subject and to request that the application of this clarification may be kept in abeyance till further orders.

Yours faithfully, sd/-

Under-Secretary to the Government of India A perusal of the Letter dated 27-7-2004 reveals that the allegedly clarificatory Letter dated 11-5-2004 had been kept in abeyance.   

xx xx xx

41.  Before examining the merits of the controversy on the basis of the OM dated 3-3-2008, it is necessary to examine one related submission advanced on behalf of the direct recruits.  It was the contention of the learned counsel,  that  the  OM  dated  3-3-2008  being  an executive order issued by the Department of Personnel and Training,  would apply  only  prospectively.  In  this

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behalf  it  was  pointed  out,  that  the  disputed  seniority between rival  parties before this Court  was based on the appointment to the cadre of Income Tax Inspectors, well  before  the  OM dated  3-3-2008 was  issued.   As such, it was pointed out, that the same would not affect the merits of controversy before this Court.  We have considered the instant submission.  It is not possible for us to accept the aforesaid contention advanced at the hands of the learned counsel.  If the OM dated 3-3-2008 was in  the  nature  of  an  amendment,  there  may well have  been  merit  in  the  submission.   The  OM dated 3-3-2008 is in the nature of a “clarification”.  Essentially, a clarification does not introduce anything new, to the already existing position.  A clarification, only explains the true purport of an existing instrument.  As such, a clarification  always  relates  back  to  the  date  of  the instrument which is sought to be clarified.”

106) In nutshell, it  was submitted that once there is a vested right and not

merely  existing  right,  taking  away  that  right  amounts  to  giving

retrospective effect to the Notification which was impermissible. In the

same  breath,  it  was  argued  that  it  cannot  be  treated  as  retroactive

operation of the Notification.

107) Learned senior counsel appearing for the Revenue, on the other hand,

argued that no such right got crystallized in favour of the exporters as

entitlement for  export  was to take effect  from April  01,  2004.  It  was

submitted that  at  the most  with  achieving of  the export  targets,  they

became eligible to avail the benefit of the Scheme but before this benefit

could  be availed of,  for  which the effective  date  was April  01,  2004,

impugned Notification was issued on January 28, 2004.  On this basis, it

was argued that  the Notification given only  retroactive effect  and not

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retrospective effect.   

108) We  may,  in  the  first  instance,  make  this  legal  position  clear  that  a

delegated or  subordinate  legislation can only  be prospective  and not

retrospective, unless rule making authority has been vested with power

under a statute to make rules with retrospective effect. In the present

case, Section 5 of the Act does not give any such power specifically to

the Central  Government  to  make rules  retrospective.   No doubt,  this

Section  confer  powers  upon  the  Central  Government  to  'amend'  the

policy which has been framed under the aforesaid provisions.  However,

that  by  itself  would  not  mean  that  such  a  provision  empowers  the

Government  to  do  so  retrospective.   This  legal  position  is  rightly

discussed by the Bombay High Court in the impugned judgment in the

following words:

“We are unable to accept the submissions of learned Additional Solicitor  General.   The  word  “amend”  does  not  give  power  to make amendment  retrospectively  if  it  is  used in  relation to  the power to make a piece of delegated legislation.  The connotation of the word “amend” when it is used for the exercise of power by a legislature cannot be pressed to construe the word “amend” in relation to the power to make delegated legislation.  In this regard the following observations of the Supreme Court in  Accountant General  and  another v.  Doraiswamy  (1981)  4  SCC  93  are pertinent:

“The  next  question  is  whether  clause  (5)  of  Article  148 permits  the  enactment  of  rules  having  retrospective operation.  It is settled law that unless a statute conferring the power to make rules provides for the making of rules with retrospective operation, the rules made pursuant to that  power  can  have  prospective  operation  only.   An exception, however, is the proviso to Article 309.  In B.S. Vadera  v.  Union of India  AIR 1969 SC 118, this Court held that the rules framed under the proviso to Article 309

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of  the  Constitution  could  have  retrospective  operation. The conclusion  followed from the  circumstance that  the power  conferred  under  the  proviso  to  Article  309  was intended to fill a hiatus, that is to say, until Parliament or a State Legislature enacted a law on the subject-matter of Article 309.  The rules framed under the proviso to Article 309 were transient in character and were to do duty only until  legislation  was  enacted.  As  interim  substitutes  for such  legislation  it  was  clearly  intended  that  the  rules should  have the  same range of  operation  as  an  Act  of Parliament  or  of  the  State  Legislature.  The  intent  was reinforced by the declaration in the proviso to Article 309 that “any rules so made shall  have effect  subject  to the provisions of any such Act”. Those features are absent in clause (5) of Article 148. There is nothing in the language of that clause to indicate that the rules framed therein were intended  to  serve  until  parliamentary  legislation  was enacted. All that the clause says is that the rules framed would be subject to the provisions of the Constitution and of  any  law  made  by  Parliament.  We  are  satisfied  that clause (5) of Article 148 confers power on the President to frame rules operating prospectively only. Clearly then, the Rules of  1974 cannot  have retrospective operation,  and therefore sub-rule (2) of Rule 1, which declares that they will be deemed to have come into force on July 27, 1956 must be held ultra vires.”

The reliance placed on the power to regulate under Section 3 of the Act is equally misconceived.  Section 5 gives express power to formulate the policy and to amend it.  This is specific power.  The power  to  regulate  therefore  cannot  be  read as  a power to amend when a specific power to amend is given.  If the power  to  regulate  does  not  include  the  power  to  amend retrospectively such a power cannot be read into Section 3 of the Act.   

Section 21 of the General Clauses Act on which reliance is placed  by  learned  Additional  Solicitor  General  is  also  of  no assistance  to  sustain  the  retrospective  operation  of  the notification.  Section 21 of the General Clauses Act embodies a rule  of  construction,  nature  and  extent  of  application  of  which must  inevitably  be  governed  by  the  relevant  provisions  of  the statute which confers power to issue the notification.  The said power  must  be  exercised  within  the  limits  prescribed  by  the provisions conferring the said power.  (See Gopichand v. Delhi Administration, AIR 1959 SC 609, Lachmi Narayan and Ors. v. Union of India and Ors. (1976) 2 SCC 953 and State of Kerala and Ors. v. K.G. Madhavan Pillai and Ors. (1988) 4 SCC 669.

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The ratio in H.C. Suman's case also cannot be applied because in that case it was found that Section 88 of the Delhi Cooperative Societies  Act,  1972 contained the  power  to  exempt  and if  the provisions of Section 12 of the said Act were to be exempted the provisions which provided that byelaws are effective from the date of registration.  The notification issued under Section 88 would exempt  it  and  Section  88  would  contain  the  power  to  exempt retrospectively.  Similarly, Section 14 of the General Clauses Act has no application as it merely provides that where any power is conferred on the Government, then that power can be exercised from time to time as occasion requires.

Under that Scheme the status holder is eligible for benefits upon achieving the incremental growth of 25% of the FOB value of exports in the current year over the previous year.  It therefore follows  that  no  sooner  the  status  holder  achieves  25% incremental  growth,  the  status  holder  would  be  entitled  to  the benefits  under  the  Scheme.   Immediately  upon  attaining  the prescribed incremental growth, the status holder becomes eligible to certificate for duty free import and thereby a right vests in the exporter to receive the same.”

109) So far so good.  The effect of the aforesaid discussion would be that if

the Status Holders had achieved 25% incremental  growth in exports,

they acquired the right to receive the benefit under the Scheme, which

could not be taken away.  The pertinent and crucial question is as to

whether these exporters/writ petitioners acquired any such right?  Let us

sharpen this question before we answer the same by formulating it in the

following words:

Whether,  in  the  cases  of  these  exporters,  the exports shown by them can be treated as actual exports entitling them to avail  the benefit  of  the Scheme?

110) This  issue  would  be  inter-twined  with  other  related  issue,  namely,

whether the notification has retroactive operation or it is retrospective in

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nature.  Both these aspects are to be dealt with simultaneously in order

to provide suitable and right answer to the question posed.  The case of

the exporters, as noticed above, is that since they had already fulfilled

the  requirement  of  'incremental  growth  in  exports'  which  they  were

require to fulfill between April 01, 2003 to March 31, 2004, a vested right

accrued  in  their  favour  to  get  the  special  incentive  in  terms  of  the

scheme which, of course, was to be availed from April 01, 2004.  The

case of the Government, on the other hand, is that the benefit was to

accrue to these exporters only from April 01, 2004 and before that it was

withdrawn and, thus, no vested right accrued in their favour.  It was also

argued that  in  the policy, which provides special  incentives to  status

holder, the term “incremental growth in export” was not defined/clarified

at the time when the policy was issued.  By the impugned notification,

the blanks/gaps were filled and the term incremental growth in export

was defined and it  was clarified as to how the incremental  growth in

export  is  to  be actually  worked out.   This  was also done before  the

question of actual working out of the incremental growth in exports arose

and hence, no retrospective effect.

111) An astute and penetrative examination of the record, with reference to

the  results  of  the  investigation,  which  had  prompted  the  Central

Government to issue these Notifications, provides a very tidy answer to

the question posed above is that the so-called targets achieved were

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only on paper through fraudulent means and, therefore, it cannot be said

that any vested right accrued in favour of these exporters.

112) We  have  referred  to  such  material  in  detail  while  upholding  the

contention of the Union that Notifications were issued in public interest to

ensure  that  their  misuse  is  not  allowed.   To recapitulate,  the  inquiry

conducted by the Government revealed that there were exports of rough

diamonds even though India is not a rough diamond producing country.

These exports stopped the moment DFCE benefits in respect of rough

diamond  were  disallowed.   It  was  also  found  that  cut  and  polished

diamonds  were  imported,  stored  inside  a  bond  and  re-exported  with

artificial value addition.  Many of these exporters exported to their own

counterparts in Dubai and Sharjah and when this consignments reached

those destinations, they were declared as scrap to avoid import duty.

Following  statistics  given  by  the  Government  in  respect  of  so-called

exports by these exporters makes out startling revelations:

Growth exceeding 2000% for two petitioners came from 100% export of gold coins and plain jewellery

Firm Turnover 2002-03

Turnover 2003-04

% Growth

Share  of  Gold  coins and  Plain  jewellery  in total exports

Rajesh Exports, Bangalore

112 2372 2017 100

Kanak  Exports, Mumbai

27 1070 3816 100

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For M/s Adani Exports, over 80% of export turnover came for diamonds and Supplies from status holders not meeting the minimum turnover and growth criteria

Adani Exports Limited, Ahmedabad Exports (crores)

Total exports for the year 2003-04 of which 4657

1 Rough, and re-exported polished diamonds 2475 2 Supplies taken from status holders not meeting the

minimum turnover and growth criteria 1316

Share  of  the  above  2  categories  in  the  total exports

81.4%

Export surge of 1135% for M/s. Adani Exports came in 2003-04 while for the past six years their exports were declining.

It  is

pertinent  to  note  that  except  the  above mentioned persons  no  other

exporter  in  the  country  has  challenged  the  said  Notifications  or  the

Public Notices dated January 28, 2004 and April 21, 2004 respectively.

It  was also brought to the notice of the DGFT that some of the

exporters have procured rough diamonds from local firms and exported

the same by a 5% loss as they were confident of covering up the loss by

receiving the 10% DFCE incentives offered by the Government.    All

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these aspects are discussed in much details earlier and need not be

repeated.   We  would  like  to  recapitulate  the  following  stark

features/practices  which  have  surfaced  on  record  as  a  result  of

investigation:

113) Mr. Adhyaru has successfully demonstrated that the following methods

were found to be resorted to by these exporters to inflate their export

turnovers:-

(i)  Export  of  rough  diamonds  even  though  India  is  not  a  rough  diamond

producing country.  These exports stopped the moment DFCE benefits

were disallowed.

Export of such rough diamonds earlier has never been part of the

normal commercial operations and has taken place just to take advantage of

the Scheme.

According to Gems and Jewellery Export Promotion Council, “India

is not a rough exporting country.  Rough diamonds which are unsustainable

for cutting in India are re-exported.”  Such exports stopped the moment benefit

was explicitly withdrawn.   

(ii) In the present case also the respondent M/s Adani Exports Limited had

stopped exporting the rough diamonds the moment the Notification was

issued in January, 2004 and according to Gems and Jewellery Export

Promotion  Council,  “Party  has  not  exported  rough  diamonds  during

January/March 2004”.

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(iii)  Cut  and  polished  diamonds  were  imported,  stored  inside  a  bond  and

re-exported with artificial value addition.  Few large firms including the

petitioners exported these products to buyers directly related to them.

(iv)  According to reliable information the same sets of diamonds were rotating

and these never entered the Indian domestic territory or to the end consumers

abroad.  The value of such exports in the past two years may exceed Rs.

15,000 crores. Government has detailed report of the modus operandi of the

firms involved.   

(v)  Most notorious misuse of the Scheme was carried out by few firms who

exported  Gold  medallion  and  studded  jewellery.   Key  firms  included  M/s.

Kanak Exports, M/s. Rajesh Exports Ltd. and M/s. Adani Exports Ltd.

(vi)  Many of these exporters exported to their own counterparts in Dubai and

Sharjah.   Since  the  jewellery  attracted  5%  import  duty  at  Dubai,  the

consignments which were declared as jewellery  in  India  were declared as

scrap in Dubai to avoid the import duty.   

(vii)  As it was difficult for them to achieve the value addition prescribed by the

Policy through craftsmanship, they added extra gold to get the value addition.

However, in this process strangely enough per unit price of the gold exported

was less than per unit price of gold imported.

(viii)   Few exporters including petitioners have purchased exports  of  other

firms  to  inflate  their  turnover.   Contracts  have  been  signed  between  the

petitioners and other exporters that petitioner will provide marketing and other

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services and act as third party exporter.  According to reports status-holders

were purchasing exports made by other parties at a premium with a view to

show incremental growth of 25% or more in exports without having actually

achieved such growth.

114) In such a scenario, a sagacious approach with practical sense leads us

to conclude that these writ petitioners/exporters had actually achieved

the targets set down in the original Scheme and thereby acquired any

“vested right”.  It was pernicious and blatant misuse of the provisions of

the Scheme and periscopic viewing thereof establishes the same.  Thus,

the impugned decision reflected in the notifications dated April 21 and

23, 2004, did not  take away any vested right  of  these exporters and

amendments  were  necessitated  by  over-whelming  public  interest/

considerations to prevent the misuse of the Scheme.

Therefore, we are of the opinion that even when impugned Notification

issued  under  Section  5  could  not  be  retrospective  in  nature,  such

retrospectivity  have not  deprived the writ  petitioners/exporters of  their  right

inasmuch  as  no  right  had  accrued  in  favour  of  such  persons  under  the

Scheme.  This Court, or for that matter the High Court in exercise of its writ

jurisdiction, cannot come to the aid of such petitioners/exporters who, without

making actual exports, play with the provisions of the Scheme and try to take

undue advantage thereof.  To this extent, direction of the Bombay High Court

granting these exporters benefit of the Scheme for the past period is set aside.

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115) One  incidental  issue  remains  to  be  discussed.   This  pertains  to

imposition of fee sought to be levied by Public Notice No. 18 dated July

24, 2003.  The exporters are right in their submission that fee could not

be imposed by a Public Notice and it was necessary to have recourse to

Section 5 of the Act to impose such a fee.  Notification dated July 24,

2003 insofar as it relates to imposition of fee is, therefore, set aside.

116) Thus, appeals and transfer cases stand disposed of in terms of aforesaid

answers provided by this Court to the various questions formulated.  To

put it precisely, the effect of the aforesaid discussion would be to uphold

the  decision  of  the  Gujarat  High  Court,  though on  different  grounds,

thereby  dismissing  the  appeals  of  the  exporters  against  the  said

judgment  except  to  the extent  indicated in  para 114 above while  the

appeals of the Government are allowed.  Likewise, appeals of the Union

of India against the judgment of the Bombay High Court are allowed to

the aforesaid extent and the appeals of the exporters/writ petitioners are

dismissed.   

Writ Petition (Civil) No. 27 of 2008 Transfer Case (Civil) No. 32 of 2007 Transfer Case (Civil) No. 33 of 2007 Transfer Case (Civil) No.       of 2015 (arising out of Transfer Petition (Civil) No. 568 of 2014)

117) For the reasons mentioned in Transfer Petition (Civil) No. 568 of 2014,

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the same is allowed and LPA No. 290 of 2007, entitled 'Union of India &

Ors. v. M/s. Welspun India Limited', pending in the High Court of Gujarat

at Ahmedabad is transferred to this Court.  Since the challenge laid in

the case is identical with that involved in the rest of the batch matters,

summoning of the records of the case is dispensed with and the matter

is heard on the basis of the record already available before the Court.

118) In these cases, challenge is to the constitutional validity of para 3.7.8 of

the EXIM Policy 2004-2009 as well as Notification No. 48/2005 dated

February 20, 2006 and Notification No. 8/2006 dated June 12, 2006 by

which certain  amendments  in  the aforesaid  EXIM Policy  were made.

Though it involves a different  Scheme, known as 'Target Plus Scheme',

since the provisions and amendments are again primarily challenged on

the ground that these amendments are given retrospective effect from

April 01, 2005, these matters were also analogously heard with the other

batch of cases which have already been dealt with above.

119) As already noted above, the Government had announced EXIM Policy

2004-2009.  In this Policy various schemes and incentives to promote

exports were promulgated.  One such scheme was known as  'Target

Plus Scheme'  (TPS) for the aforesaid period of EXIM Policy, i.e. April

2004 to March 2009.  This TPS was contained in para 3.7 of the said

EXIM Policy and reads as under:

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“3.7  TARGET PLUS SCHEME

3.7.1  Objective The objective of  the scheme is to accelerate growth in

exports  by  rewarding  Star  Export  Houses  who  have achieved a quantum growth in exports.  High performing Star Export Houses shall be entitled for a duty credit based on  incremental  exports,  substantially  higher  than  the general annual export target fixed (Since the target fixed for  2005-06  is  17%,  the  lower  limit  of  performance  for qualifying for  rewards is  pegged at  20% for  the current year).

3.7.2  Eligibility Criteria All  Star  Export  Houses  (including  Status  Holders  as defined  in  Para  3.7.2.1  of  Exim  Policy  2002-07)  which have achieved a minimum export turnover in free foreign exchange of  Rs.10 crores in the previous licensing year are  eligible  for  consideration  under  the  Target  Plus Scheme.

3.7.3  Entitlement The entitlement under this scheme would be contingent on the  percentage  incremental  growth  in  FOB  value  of exports  in  the  current  licensing  year  over  the  previous licensing year, as under:

Percentage incremental growth

Duty Credit Entitlement (as a % of the incremental

growth) 20% and above but below

25% 5%

25% or above but below 100%

10%

100% and above 15% (of 100%)

Note:  (1)   Incremental  growth  beyond  100%  will  not qualify for computation of duty credit entitlement.

(2)   For  the  purpose  of  this  scheme,  the  export performance shall not be transferred to or transferred from any other exporter.  In the case of third party exports, the name  of  the  supporting  manufacturer/manufacturer exporter shall be declared.

(3)   Exporters shall  have the option to apply for benefit either under the Target Plus Scheme or under the Vishesh

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Krishi  Upaj  Yojana, but not both in respect of  the same exported  product/s.   Provided  that  in  calculating  the entitlement under Para 3.7.3 the total eligible exports shall be  taken  into  account  for  computing  the  percentage incremental growth but the duty credit entitlement shall be arrived at on the eligible exports reduced by the amount on which the benefit is claimed under para 3.8.2.

(4)  All  exports including exports under free shipping bill verified  and  authenticated  by  Customs  and  Gems  & Jewellery  shipping  bills  but  excluding  exports  specified under para 3.7.5, shall  be eligible for benefits under the Target Plus Scheme.

(5)  In respect of export of Cut & Polished diamonds only those  shipments  would  be  taken  into  account  for computation of eligible exports under the scheme where a minimum of 10% value addition has been achieved.

3.7.4  Applicant Companies Companies which are Star Export Houses as well as part of a Group company shall have an option to either apply as  an  individual  company  or  as  a  Group based on  the growth  in  the  Group's  turnover  as  a  whole.   (For  the purpose of this scheme the definition of Group Company as given in Chapter 9 will be applicable.  Furthermore, only such companies of the Group as are Star Export Houses will be considered).

If a Group company chooses to apply based on the export of  one  or  more  of  its  individual  Star  Export  House companies,  the  entitlement  would  be  calculated considering  the  export  performance  of  the  applicant company during the previous licencing year  and current licencing  year.   It  shall  be  necessary  that  the  adjusted export  performance  of  all  the  Star  Export  House companies of the Group during the current licencing year does not fall below the combined performance of all Star Export  House  companies  of  the  Group  in  the  previous licencing year.

In case the Group chooses to apply based on the overall growth in Group's turnover (i.e. the turnover of all the Star Export  House  companies),  any  one  of  the  Star  Export House companies of the Group may file an application on behalf  of  all  the  Star  Export  House  companies  of  the Group.

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3.7.5 The  following  exports  shall  not  be  taken  into account  for  calculation  of  export  performance  or  for computation of entitlement under the scheme:

(a)  Export of imported goods covered under Para 2.35 of the  Foreign  Trade  Policy  or  exports  made  through transshipment.

(b)   Export  turnover  of  units  operating  under SEZ/EOU/EHTP/STPI/BTP  Schemes  or  products manufactured by them and exported through DTA units.

(c)  Deemed exports (even when payments are received in Free Foreign Exchange and payment is made from EEFC account).

(d)  Service exports.

(e)  Rough, uncut and semi polished diamonds and other precious stones.

(f)  Gold, silver, platinum and other precious metals in any form, including plain and studded Jewellery.

(g)  Export performance made by one exporter on behalf of another exporter.

3.7.6  Imports allowed The Duty  Credit  may  be  used for  import  of  any  inputs, capital  goods  including  spares,  office  equipment, professional  equipment  and office  furniture provided the same is freely importable under ITC (HS) Classification of Export  and  Import  items,  for  their  own  use  or  that  of supporting  manufacturers  as  declared  in  'Aayat  Niryaat Form'.

Import of agricultural Products listed in Chapter 1 to 24 of ITC (HS) Classification of Export and Import items except the following shall be allowed:

(i)  Garlic, Peas and all  other Vegetables with a Duty of more than 30% under Chapter 7 of ITC (HS) Classification of Export and Import items.

(ii)  Coconut, Areca Nut, Oranges, Lemon, Fresh Grapes, Apple and Pears and all other fruits with a Duty of more than 30% under Chapter 8 of  ITC (HS) Classification of Export and Import items.

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(iii)  All spices with a Duty of more than 30# under Chapter 9 of  ITC (HS) Classification of  Export  and Import  items (except Cloves).

(iv)  Tea, Coffee and Pepper as per Chapter 9 of ITC (HS) Classification of Export and Import Items.

(v)   All  Oil  Seeds  under  Chapter  12  of  ITC  (HS) Classification of Export and Import Items.

Further, Natural  Rubber  as per Chapter  40 of  ITC (HS) Classification of Export and Import items shall also not be allowed for import under the Scheme.

Import of all edible oils classified under Chapter 15, shall be  allowed  under  the  scheme  only  through  STC  and MMTC.

3.7.7  Cenvat/Drawback Additional  customs  duty/excise  duty  paid  in  cash  or through  debit  under  Target  Plus  shall  be  adjusted  as CENVAT Credit or Duty Drawback as per rules framed by the Department of Revenue.

3.7.8  Special Provision Government reserves the right in public interest, to specify from  time  to  time  the  category  of  exports  and  export products,  which  shall  not  be  eligible  for  calculation  of incremental growth/entitlement.

Further the Government shall have the right to change the eligibility criteria and rate of entitlement under the scheme effective from the date of notification of this policy.

Similarly, Government  may from time to time also notify the  list  of  goods,  which  shall  not  be  allowed for  import under the duty credit  entitlement certificate issued under the scheme.

120) Provisions relating to star export houses were contained in para 3.5 of

Chapter 1A of the said Policy, which enumerated the Status Category as

well  as the privileges which were to be enjoyed by these star  export

houses.  Said para 3.5 is as under:

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“3.5  STAR EXPORT HOUSES

3.5.1  Star Export House Merchant  as  well  as  Manufacturer  Exporters,  Service Providers, Export Oriented Units (EOUs) and Units located in  Special  Economic  Zones  (SEZs),  Agri  Export  Zone (AEZ's), Electronic Hardware Technology Parks (EHTPs), Software  Technology  Parks  (STPs)  and  Bio  Technology Parks (BTPs) shall  be eligible for  applying for status as Star Export Houses.

3.5.2  Status Category The applicant shall be categorized depending on his total FOB/FOR export performance during the current plus the previous three years:

Category Performance(Rupees in Crores) One Start Export House 15 Two Star Export House 100

Three Star Export House 500 Four Star Export House 1500 Five Star Export House 5000

Note:  1.   Manufacturer  exporters  in  Small  Scale Industry/Tiny Sector/Cottage Sector, Units registered with KVICs/KVIBs,  Units  located  in  North  Eastern  States, Sikkim  and  J&K,  Units  exporting handloom/handicrafts/hand  knotted  or  silk  carpets, exporters  exporting  to  countries  in  Latin America/CIS/sub-Saharan Africa as listed in  Appendix-9, units  having  ISO  9000  (series)/ISO 14000(series)/WHOGMP/HACCP/SEI  CMM  level-II  and above  status  granted  by  agencies  listed  in  Appendix-6, exports of services and exports of agro products shall be entitled for double weightage of exports made for grant of Start Export House status.

2.  Exports made on re-export basis shall not be counted for the purpose of recognition.

3.   Exports  made by a subsidiary of  a limited company shall be counted towards export performance of the limited company for the purpose of recognition only if the limited company has a majority  share holding in the subsidiary

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company.

4.   In  case  the  recognition  is  claimed  based  upon  the current  year's  export  performance,  same  shall  be considered  only  in  case  the  exporter  has  export performance during any one of the preceding three years as well.

3.5.2.1  Privileges A Star  Export  House  shall  be  eligible  for  the  following facilities:

(i)   Licence/certificate/permissions  and  Customs clearances for both imports and exports on self-declaration basis;

(ii)   Fixation of  Input-Output  norms on priority  within  60 days;

(iii)  Exemption from compulsory negotiation of documents through banks.  The remittance, however, would continue to be received through banking channels;

(iv)  100% retention of foreign exchange in EEFC account;

(v)  Enhancement in normal repatriation period from 180 days to 360 days;

(vi)   Entitlement  for  consideration  under  the  Target Plus Scheme; and

(vii)   Exemption  from  furnishing  of  Bank  Guarantee  in Schemes under this Policy.”

121) Chapter 3 of the EXIM Policy mentions various 'promotional measures'

and in para 3.2.5 thereof, it contained,  inter alia, procedure for availing

the benefit under TPS.  Among other things, it was stipulated that the

last date for filing of such applications shall be 31st of December and that

the duty credit certificate shall be valid for a period of twenty four months

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from the date of issue, with a clear stipulation that revalidation of duty

credit entitlement certificate shall not be allowed.

122) As  is  clear  from  the  aforesaid  provisions  of  TPS,  the  Central

Government had announced an export incentive scheme under which

star export houses were entitled to a duty free entitlement certificate at

varying  rates,  depending  on  the  quantum  of  incremental  growth  in

exports achieved by them over their  exports in the previous year.  In

terms  of  para  3.7.6,  the  Central  Government  issued  Notification  No.

32/2005 dated April 08, 2005 whereby it notified the duty credit of TPS

which could be availed of in the course of import of any inputs, capital

goods, including spares, office equipment, professional equipment and

office furniture,  provided the same is  freely importable under  the ITC

(HS) classification of export and import items for their own use and that

of supporting manufacturers, as declared in the application 17D.  The

exporters in these cases claim that relying on the aforesaid Scheme,

they ensured that they achieved incremental exports.

123) Thereafter,  however,  the  Central  Government,  in  exercise  of  powers

conferred by Section 5 of the Act issued Notification bearing No. 48 (RE

2005)/2004-2009 dated  February  20,  206.   Vide  this  Notification,  the

Government amended the list of exports enumerated in para 3.7.5 of the

FTP thereby excluding the exports of  all  types of  forms of  petroleum

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products covered under ITC (HS) codes 2706-2715 for the purpose of

calculation of TPS and computation of its entitlement.  This amendment

was made effective from April  01, 2005 in respect of exports effected

during April 01, 2005 to March 31, 2006.  The relevant portion of the said

Notification, with which we are concerned, reads as under:

“6.  In para 3.7.5, the following shall be inserted after sub para 3.7.5(f)

(g).  Ores and Concentrates, of all types and in all forms.

(h)  Cereals, of all types.

(i)  Sugar, of all types and in all forms.

(j)   Crude/Petroleum  Oil  &  Crude/Petroleum  based Products covered under ITC HS codes 2709 to 2715, of all types and in all forms.”

124) It may be recollected that in para 3.7.5, certain items are specified which

are not to be taken into account for calculation of exports performance or

for computation of entitlement under the TPS. The effect of the aforesaid

amendment  was  to  exclude  the  aforementioned  four  items  as  well

insofar  as  calculation  of  export  performance  or  computation  of

entitlement under the TPS is concerned.

125) Another amendment to the TPS was made vide Notification No. 8(RE

2006)/2004-2009 dated June 12, 2006.  It also pertained to the exports

effected during April 01, 2005 to March 31, 2006.  By this Notification,

para 3.7.3 was substituted by the following para:

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“The entitlement under this scheme would be contingent on the minimum percentage incremental growth of 20% in FOB value of exports in the current licensing year over the previous licensing year, and the rate of entitlement shall be 5% of the incremental growth.”

126) Original para 3.7.3, which is in respect of  'entitlement'  under the TPS

mentioned that the said entitlement would be contingent on the minimum

percentage incremental growth in FOB value of exports in the current

licensing  year  over  the  previous  licensing  year.   The  percentage

incremental  growth was subsequently  stipulated in  the table provided

under the said para.  As per that, if the incremental growth was 20% and

above to below 25%, duty credit entitlement provided was 5%.  In case

of incremental growth of 25% or above, but below 100%, the duty credit

growth entitlement was to the tune of 10%.  On incremental growth of

100% and above, duty credit entitlement stipulated was 15% (of 100%).

However, by way of amendment, the minimum percentage incremental

growth was specified as 20% in the FOB value of exports in the current

year over the previous year and entitlement was made uniform @ 5% of

the incremental growth.

127) These  Notifications  are  challenged  on  the  ground  that  these  export

houses had achieved the desired target by making necessary exports

within the stipulated period, i.e. April 01, 2005 to March 31, 2006 and

thus got vested right to avail the entitlement as contained in para 3.7.6,

which  could  not  be  reduced  to  5%.   It  was  also  submitted  that  the

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various items exported included all types of forms of petroleum products

covered under ITC (HS) codes 2706-2715 and these items could not be

excluded by the aforesaid amendment.  In nutshell, submission was that

by giving retrospective effect to the amendment, which was in any case

impermissible, even the vested right of these exporters was taken away.

It  can,  thus,  be  seen  that  the  arguments  on  vested  right  and

retrospectivity  are  the same and the counsel  who appeared in  these

matters advanced identical legal submissions.

128) We have already discussed these aspects in detail.  To recapitulate, it is

held by us that Section 5 of the Act does not empower the Government

to make amendments with retrospective effect, thereby taking away the

rights which have already accrued in favour of the exporters under the

Scheme.  No doubt, the Government has, otherwise, power to amend,

modify  or  withdraw  a  particular  Scheme  which  gives  benefits  to  a

particular  category of  persons under  the said Scheme.  At  the same

time, if some vested right has accrued in favour of the beneficiaries who

achieved  the  target  stipulated  in  the  Scheme  and  thereby  became

eligible for grant of duty credit entitlement, that cannot be snatched from

such persons/exporters by making the amendment retrospectively.  In

the present case, we find that Section 5 of the Act does not give any

specific  power  to  the  Central  Government  to  make  the  Rules  with

retrospective  effect.   The  Central  Government  is  authorised  to  make

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Rules/Schemes under the said provision as a delegatee, which means

that the EXIM Policy/Scheme framed under the said provision is by way

of delegated legislation.  There has to be specific power to make the

amendments with retrospective effect, which are lacking in the instant

case.   Moreover, even if  there is  such a power, it  cannot  take away

vested  rights  which  have  accrued  in  favour  of  particular

persons/exporters.  We have already enlisted number of  judgments of

this  Court  taking  such  a  view.   A few  such  cases  laying  down  the

aforesaid principle are:

(i)  Regional Transport Officer, Chittoor & Ors.  v.  Associated Transport

Madras (P) Ltd. & Ors.20

(ii)  Accountant General & Anr. v. S. Doraiswamy & Ors.21

(iii) A.A. Calton v. Director of Education & Anr.22

(iv)  Chairman, Railway Board & Ors. v. C.R. Rangadhamaiah & Ors.23

129) Keeping  in  view  the  aforesaid  legal  position,  we  embark  on  the

discussion relevant for the purposes of these cases, namely, pertaining

to TPS.

130) TPS, which was introduced in EXIM Policy 2004-2009 on August 31,

2004, adopted some of the features of the earlier Schemes in the EXIM

Policy 2002-2007 and introduced the concept of Multi-Entitlement Rates, 20 (1980) 4 SCC 597 21 (1981) 4 SCC 93 22 (1983) 3 SCC 33 23 (1997) 6 SCC 626

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thus,  allowing  higher  entitlement  rates  for  higher  growth.   The

Multi-Entitlement  Rates  depended  upon  the  quantum  of  incremental

growth achieved by particular  exporters.  As taken note of  above, the

TPS prescribed three rates of entitlement based on growth.  It shows

that TPS was in the nature of  a reward Scheme and was somewhat

different from the earlier Schemes which seek to neutralize the duty paid

by the exporter. It intended to accelerate growth in export by rewarding

star export houses who have achieved a quantum growth in exports.

131) Vide  Notification  No.  32/2005  dated  April  08,  2005,  the  Central

Government  amended  para  3.7.8  and  instead  of  three  rates  of

entitlement based on growth, it prescribed one single rate, i.e. 5% of the

incremental growth.  In replies given by the Government, no cogent or

valid reason is given for this move.  Interestingly, comments are made

about the misuse of earlier Scheme in the EXIM Policy 2002-2007 and

the evidence that surfaced during the said investigation, particularly with

respect to the alleged dubious practices adopted by some exporters who

had inflated their turnover in respect of gold and diamond exports and it

is mentioned that under these circumstances, for 'anticipating misuse',

the  Government  came  out  with  the  aforesaid  Notification.   The

amendment Notification is justified on the ground that  in the Scheme

itself it had preserved the right to change the eligibility criteria and rate of

entitlement effective from the beginning of the year, in public interest.

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Thus,  the  action  is  justified  on  the  ground  that  such  a  power  was

reserved in the TPS itself and that measure was taken to avoid misuse

by unscrupulous exporters.  Nowhere it is stated that there was misuse

by any of these parties.

132) Pertinently,  it  is  also  not  denied  that  these  petitioners/exporters  had

achieved  the  quantum/incremental  growth,  as  stipulated  in  the  TPS,

which made them eligible to get the rewards under the said Scheme.

These exporters, therefore, had fulfilled the conditions contained in the

TPS.  The Scheme was floated to accelerate quantum growth in exports

and when those star  export  houses achieved the quantum growth in

exports, as stated in para 3.7.3, they would naturally become entitled to

a particular percentage of duty credit  entitlement depending upon the

quantum of growth achieved.  These exporters, thus, got vested right to

avail  the duty credit  entitlement  and achieve higher  rate,  i.e.  10% or

15%, as the case may be.   Reducing the same to 5% would clearly

amount  to  taking  away  their  vested  right  with  the  issuing  of  the

Notification and making them effective retrospectively.

133) Likewise, no cogent explanation is coming forward for adding four items

by amending para 3.7.5 vide Notification No. 48 (RE 2005)/ 2004-2009

dated February 20, 2006.  The only argument advanced at the time of

hearing was that the Government felt that benefit of TPS should not be

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extended to the exporters of these items.  That may be a policy decision

and the Government is empowered to take such a decision.   It may be

noted that in para 3.7.5 of TPS, as was originally provided, certain items

of exports were specifically mentioned, which were not to be taken into

account  for  calculation  of  export  performance  or  for  computation  of

entitlement under the Scheme and the items now added vide Notification

No.  48  (RE  2005)/2004-2009  dated  February  20,  2006  were  not

mentioned therein.  If the Government realised  afterwards that export of

these  items  should  not  have  been  given  the  benefit  of  TPS  and

extending the benefit to now excluded items was an ill-considered move,

though the Central  Government  was free to withdraw it  in  respect  of

such items but it could do so only prospectively, but was not entitled to

do so with effect from the back date, i.e. April 01, 2005, by taking away

the vested right that had already accrued in favour of exporters of these

items.

134) As a result, we hold that Notification No. 48/2005 dated February 20,

2006 and Notification No. 8/2006 dated June 12, 2006 cannot be applied

retrospectively and they would be effective only from the dates they were

issued.

135) Writ Petition (Civil) No. 27 of 2008, Transfer Case (Civil) Nos. 32 and 33

of 2007 (which were the writ petitions filed by exporters before the High

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Court)  are,  thus,  allowed in the aforesaid terms.   The Transfer  Case

arising out of Transfer Petition (Civil) No. 568 of 2014, which was the writ

appeal  filed  by  DGFT  before  the  High  Court  is  dismissed  thereby

confirming the order of the Gujarat High Court allowing the writ petition

filed by the exporter, namely, M/s. Welspun India Limited.

.............................................J. (A.K. SIKRI)

.............................................J. (ROHINTON FALI NARIMAN)

NEW DELHI; OCTOBER 27, 2015.