‘CBEC circular on 1% duty drawback not prospective’; SC clarifies retrospective entitlement under All Industry Rate Scheme

Supreme Court: In a civil appeal against Madras High Court’s decision whereby the applicability of Customs Circular No. 35/2010-Cus. Dated 17-09-2010 for the purposes of All Industry Rate (AIR) Duty Drawbacks was held to be prospective in nature, the Division Bench of B.V. Nagarathna and Satish Chandra Sharma*, JJ. relating to the applicability of duty drawback provisions for exporters, held that the Circular issued by the Central Board of Excise and Customs (CBEC), must be retrospectively applied. The Court ruled in favour of Suraj Impex (India) Pvt. Ltd. (appellant) restoring their entitlement to 1% AIR customs duty drawback for Soyabean Meal (SBM) exports made prior to 20-09-2010.

Background

The appellant is a merchant exporter of Soyabean Meal, a product classified under Chapter 23 of the Customs Tariff Act, 1975. Under successive customs notifications—Nos. 81/2006, 68/2007, 103/2008, and 84/2010—the AIR duty drawback was prescribed at 1%, irrespective of whether the exporter had availed the CENVAT facility. The appellant had been regularly availing this benefit until 2008, when the Directorate General of Central Excise Intelligence (DGCEI) took the view that exporters who had already claimed rebate under Rule 18 or Rule 19(2) of the Central Excise Rules, 2002, were not entitled to further benefit under AIR duty drawback.

As a result, duty drawback claims of the appellant were withheld, prompting a representation to CBEC and ultimately the issuance of Circular No. 35/2010-Cus., which clarified that the customs portion of the AIR duty drawback would be available even when excise rebates had been availed. However, CBEC and the Commissioner of Customs refused to give retrospective effect to the Circular, insisting that it would apply prospectively from 20-09-2010. The appellant’s writ petition challenging this denial was dismissed by the High Court, which held that the circular was prospective. This decision was further upheld in review, compelling the appellant to approach the Court.

Issues

1. Whether Circular No. 35/2010-Cus., dated 17-09-2010, issued by CBEC, is clarificatory or substantive in nature?

2. Whether the said Circular can be applied retrospectively to allow AIR duty drawback to exporters who had availed CENVAT credit prior to 20-09-2010?

Analysis and Decision

The Court, after extensively reviewing the text of various notifications and the impugned circular, concluded that the substance and scheme of the AIR duty drawback notifications from 2006 to 2010 were consistent and did not bar the customs component of drawback to exporters who had availed CENVAT credit. The Court emphasised that the notifications uniformly used the same language and that the rate of 1% was based entirely on the customs component, with no differentiation arising due to CENVAT status.

The Court stated that the language of the Circular did not expand or alter the scope of the previous Notifications, but cements the claim of the merchant exporters, who were entitled to receive the benefit of AIR customs duty drawback since 2007. The Circular dated 17-09-2010 per se clarified and made it explicit that the customs duties which remained unrebated to the manufacturers concerned, should be provided through the AIR drawback route, with or without the rebate of Central Excise Duties at the time of processing in terms of Rule 18 or 19 of the Central Excise Rules, 2002.

The Court noted that the clarification issued by CBEC did not create a new right or impose a new obligation; rather, it explained and reaffirmed the intention underlying earlier notifications. Since the denial of drawback benefits had arisen from an erroneous understanding at the departmental level, the issuance of the circular served a remedial and explanatory purpose. Citing binding precedents including Commissioner of Income Tax I, Ahmedabad v. Gold Coin Health Food (P) Ltd., (2008) 9 SCC 622; the Court reiterated that clarificatory circulars—especially when beneficial—ought to be applied retrospectively unless stated otherwise.

The Court also addressed the argument advanced by the Union that the effective date stated in the circular (20-09-2010) barred retrospective application. Rejecting this, the Court emphasised that mere mention of a date of effect does not automatically imply a prospective operation if the circular, in essence, is declaratory or clarificatory. Furthermore, the Court held that a purposive interpretation, guided by principles of fairness, must favour exporters who were unjustly denied legitimate benefits due to administrative confusion.

The Court opined that the High Court erred in its analysis by treating the circular as a substantive modification rather than a clarificatory instrument. It had failed to appreciate the historical context and legislative continuity behind successive drawback notifications and adopted a narrow view focused solely on the stated effective date, without evaluating the nature of the circular.

Allowing the appeal, the Court set aside the impugned judgment, as well as the order in Review Petition. The Court held that Circular No. 35/2010-Cus., dated 17-09-2010, is clarificatory in nature and shall operate with retrospective effect.

The High Court did not appreciate the rationale of the CBEC Circular nor the purport of the Notifications and passed the Impugned Order in undue haste.

Accordingly, the appellant was held entitled to claim 1% AIR customs duty drawback for its exports of Soyabean Meal from the year 2008 onwards, notwithstanding the availment of central excise rebate under Rule 18 or Rule 19(2) of the Central Excise Rules, 2002. The CBEC was directed to process and disburse the eligible drawback amount in accordance with this interpretation.