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Indirect Tax Alert - Circulars determining eligibility of Duty Credit Scrip under SEIS Scheme is ultra vires the Foreign Trade Policy 2015-2020 - Bombay High Court

23 March 2021

Facts of the case

The Atlantic Shipping Private Limited (taxpayer) is a shipping agent providing port services, logistical services, and other ancillary services to oil or chemical tanker owners or foreign clients.

The Director General of Foreign Trade (DGFT) through Public Notice no:03/2015 dated 01 April 2015 notified list of eligible services, rates and conditions for rewards under Service Export Incentive Scheme (SEIS) vide Appendix-3D in terms of para 3.08 of the FTP and vide Public Notice no. 07/2015-2020 dated 04 May 2016 the list of services in Appendix-3E in which cases payment when received in Indian Rupees can be deemed as received in ‘Foreign Exchange’ as per the guidelines of the Reserve Bank of India (RBI).

The taxpayer filed an application for issuance of SEIS benefit for Financial Year (FY) 2016-17. However, taxpayer received an email from Cochin Port Trust (CPT), wherein it was stated that the CPT being the actual service provider of the services provided to foreign vessels during FY 2016-17 is entitled to SEIS at the rates notified and calling upon the petitioner not to avail benefit under SEIS and provide ‘No Objection Certificate’ (NOC) to enable CPT to avail the said benefit. The taxpayer refused to accept the contention of CPT and refused to issue NOC.

The taxpayer sought release of SEIS benefit for FY 2016-17 and after given a personal hearing, Joint Director General of Foreign Trade (JDGFT) with the approval DGFT issued policy circular no. 06/2018 (PC6) dated 22 May 2018, which stated, among other things, that the actual service providers (and not Ports) are eligible for SEIS benefit in respect of their shares of earnings made by performing the notified services under SEIS scheme and ports cannot claim benefit of foreign exchange earnings simply routed through them as receipt of service charges with regard to services rendered by other actual service providers.

Thereafter, JDGFT with the approval of DGFT issued Policy Circular no. 08/2018 (PC8) dated 21 June 2018 clarifying the eligibility of Streamer Agents for receiving benefit under SEIS for the services exclusively rendered by them and for which foreign exchange earnings (or INR payments allowed under the scheme) are received and retained by them in their accounts. This circular clarified that the actual service provider i.e., whether it is the Port Trust or any other entity is required to get the certificate of receipt of payment from the entity, which had received the foreign exchange earnings in their account in India.

In view of PC8, Zonal Additional Director General of Foreign Trade, Mumbai (ZADGFT-Mum) issued order dated 25 October 2018 for refusal and renewal of further licenses, inter alia, stating that show cause notice (SCN) was issued to the taxpayer to refund the amount received by it as SEIS benefit against scrip. Subsequently, Additional Director General of Revenue Intelligence, Chennai (ADGRI-Chen) issued SCN demanding refund for being SEIS benefit received by the taxpayer.

Aggrieved, the taxpayer filed a writ petition before the Bombay High Court.

Questions before the High Court

The taxpayer has challenged the validity of PC6 and PC8 as its ultra vires the FTP in terms of determining the eligibility of service providers for SEIS to claim benefit to the extent of free foreign exchange earnings (or INR payments as allowed under the scheme) routed through them as receipt of service charges. The taxpayer has also challenged refusal order and consequential SCN issued by ZADGFT-Mum and SCN issued by ADGRI-Chen.

Observations and decisions by the High Court

The High Court noted that the Section 5 of the Foreign Trade (Development and Regulation) Act 1992 (FT (D & R) Act) provides that the Central Government may from time to time formulate and announce the EXIM Policy by issuing notification in the official gazette. Thus, it is Central Government which has power to amend the policy by adopting the procedure as outlined in the Act, the power to announce the policy and to amend as such solely remains in the hand of Central Government and cannot be delegated.

The Court observed that the PC8 clearly supersedes the authority of the RBI and an attempt is made to introduce a provision for issuance of a certificate by the taxpayer enabling the local domestic service provider, such as, ports to deem their INR billing as in foreign exchange. Such overriding policy decisions in our view would require an amendment in the FTP and would have to be carried-out solely by the Central Government as mandated under the provisions of Section 5 of the FT (D&R) Act.

The Court further observed that two impugned policy circulars clearly restrict the right of the petitioner as an independent foreign exchange earner for the purposes of FTP and consequentially the SEIS benefits in conformity with para 3.08(d) of the FTP. The designation or description of the petitioner as "aggregator" of services purchased by them is inconsistent with the underlying ethos of the FTP read with the FT (D&R) Act.

It is evident that the legislature intended to restrict the policy in determining the eligibility and entitlement condition. As a result, it is not possible for the Bench to restrict the benefit of SEIS with reference to the notion of net foreign exchange as canvassed by the Central Government as the same would lead to alteration of the policy.

The Bombay High Court held that both the impugned circulars are ultra vires the FTP. The Court further ordered that Impugned order of refusal passed by the ZADGFT-Mum cannot be sustained and is accordingly quashed and set-aside. Further, the Court quashed and set-aside both the impugned SCN issued by ZADGFT-Mum and ADGRI-Chen.

[Atlantic Shipping Pvt Ltd. vs. Union of India & Ors., WP no. 1827/2019, dated 9 March 2021 High Court- Bombay]