Drawback Repeal & Savings

The Duty Drawback scheme is a fundamental component of India's export promotion strategy, designed to neutralise the impact of customs and central excise duties on inputs used in exported products. This mechanism ensures that domestic taxes do not hinder the competitiveness of export goods, aligning with international trade practices and World Trade Organization (WTO) commitments by effectively zero-rating exports through duty rebates. The legal framework for this scheme is primarily established under Section 75 of the Customs Act, 1962, and Section 37 of the Central Excise Act, 1944.

However, the evolution and transition of these rules have given rise to significant legal complexities and contentions, particularly concerning the recovery of erroneous payments and the applicability of various statutory provisions.

I. The 1995 Drawback Rules: Foundational Framework and Key Deficiencies

The Customs, Central Excise Duties and Service Tax Drawback Rules, 1995 ("1995 Rules"), notified on 26 May 1995, laid the groundwork for duty drawback administration. A crucial provision within this framework was Rule 16, which addressed the repayment of erroneous or excess drawback and interest.

Challenges with Rule 16 (1995 Rules):

• Lack of Explicit Determination Mechanism: While Rule 16 mandated repayment upon demand, it did not explicitly outline a comprehensive mechanism for the determination and demand of such erroneous or excess drawback. This procedural ambiguity led to arguments that demands could not be sustained without a clearly prescribed method for quantifying the amount, drawing support from Supreme Court judgments.

• Absence of a Specific Limitation Period: A significant deficiency of Rule 16 was its silence on a specific limitation period for initiating recovery proceedings.

  • Unlike duty recovery under Section 28 of the Customs Act, which prescribes limitations, judicial consensus held that Section 28 was not directly applicable to Rule 16 recoveries.

  • In the absence of a statutory limit, courts consistently invoked the principle that recovery action must be initiated within a "reasonable period," often considered to be three to five years. Demands issued significantly beyond this judicially determined period were frequently quashed as time-barred. However, judicial interpretation also found no limitation period in cases with strong suspicions of fraud or misrepresentation.

• Contrast with Rule 16A: The subsequent insertion of Rule 16A into the 1995 Rules, specifically for recovery where export proceeds were not realised, highlighted the perceived lack of procedural clarity in Rule 16 for other types of erroneous payments due to Rule 16A's more defined procedure.

These ambiguities in Rule 16 (1995) created significant drafting issues, necessitating heavy reliance on judicial interpretations to provide clarity.

II. Transition to the 2017 Drawback Rules: New Framework and Persistent Issues

The Drawback Rules, 2017 ("2017 Rules"), came into effect on 1 October 2017, fundamentally replacing the 1995 Rules. A key change in the 2017 Rules was the explicit exclusion of Integrated Tax (IGST) and Compensation Cess from the definition of "drawback", which now primarily pertains to the rebate of Basic Customs Duty (BCD) and other import duties, as well as Central Excise duties on specified items outside GST. Rule 17 of the 2017 Rules, which is analogous to Rule 16 of the 1995 Rules, suggests that similar challenges regarding determination and limitation periods might persist.

Legal Uncertainties Arising from the Transition (Rule 20, 2017 Rules): Rule 20 of the 2017 Rules serves as the critical transitional provision, repealing the 1995 Rules while establishing savings clauses for ongoing matters. Its interpretation and scope have become a major source of legal controversy, particularly concerning its adequacy in protecting proceedings initiated under the 1995 Rules and completed transactions that occurred before 1 October 2017.

• Saving Clauses under Rule 20(2): Rule 20(2) explicitly saves:

  • Pending applications for determination or revision of drawback rates for goods exported before the 2017 Rules' commencement, if not disposed of by 1 October 2017 (to be handled under 1995 Rules).

  • Pending claims for payment of drawback for goods exported before the 2017 Rules' commencement, if not disposed of by 1 October 2017 (to be handled under 1995 Rules).

• Interpretation of "Pending": The interpretation of "pending" is paramount. It has been argued that a departmental investigation pending at the repeal date did not necessarily mean the exporter's claim was pending for Rule 20(2)(b) purposes if the drawback had already been released. This suggests a narrow construction of "pending," primarily protecting exporter-initiated matters actively being processed, not departmental actions to recover already-paid drawback.

• Gap in Recovery Provisions: Recovery proceedings initiated after the 2017 Rules for cases closed under the 1995 Rules may need to find their legal basis outside Rule 20(2)'s specific savings. This highlights a significant gap: Rule 20 provided for cessation but did not comprehensively address all ongoing proceedings, especially recovery actions for claims already sanctioned under the previous regime.

• Illustrative Case (Nandan Denim): The Nandan Denim case exemplifies the complexity of this transition. Authorities sought recovery for exports from May-August 2010 via a show cause notice issued on 4 September 2017. This was argued to be beyond a reasonable time and the five-year limitation period, aligning with judicial precedents that invalidate Rule 16 recovery notices issued significantly after five years. The case also revealed procedural irregularities where notices issued under the 1995 framework were adjudicated after its repeal, creating a paradoxical situation.

Recommendations for enhanced legal clarity include:

• Future rule changes should incorporate comprehensive transitional provisions with detailed saving clauses addressing potential scenarios.

• The Government should establish clear guidelines on applying general customs enforcement provisions (like Section 159) to drawback matters, clarifying when specialised drawback procedures take precedence.

In conclusion, the transition from the 1995 to the 2017 Drawback Rules has created a complex legal landscape, marked by challenges in applying recovery provisions, interpreting saving clauses, and determining the applicability of general customs enforcement provisions like Section 159. The distinct legislative intent behind drawback rules—to facilitate exports through duty neutralisation—supports a cautious and tailored approach to enforcement, rather than a blanket application of general enforcement provisions. Resolving these issues requires careful judicial interpretation and potentially clarifying legislation or administrative guidance to restore predictability and confidence in this critical trade-related fiscal system.