The High Court of Gujarat at Ahmedabad has issued a definitive ruling in favour of Sanstar Bio Polymers Ltd., upholding the company’s eligibility for benefits under the Duty Free Import Authorisation (DFIA) scheme. By dismissing the appeal filed by the Commissioner of Customs, the Division Bench of Honourable Mr. Justice Bhargav D. Karia and Honourable Mr. Justice Nirzar S. Desai affirmed that the respondent correctly classified its export inputs under Standard Input Output Norms (SION) Entry E22, effectively rejecting the Revenue Department’s contention that the product should have been classified under Entry E76.

The dispute emerged from the company’s manufacturing and export activities regarding food-grade liquid glucose concentrate between February 2015 and July 2016. During this period, Sanstar Bio Polymers declared maize (corn) starch as an input under SION Entry E22 to avail of duty-free import benefits granted by the Directorate General of Foreign Trade (DGFT). Following an investigation, the Directorate of Revenue Intelligence (DRI) alleged that the company had engaged in wilful misstatement to secure these benefits, arguing that the appropriate classification for their production process was Entry E76, which pertains to raw maize.

Verification of Input Classification

The court’s scrutiny centred on the technical requirements of the SION entries and the actual manufacturing process employed by the company. It was established that the respondent utilised starch slurry—a direct intermediate in the production of liquid glucose—to manufacture its export goods. The court noted that while maize is the primary raw material for starch, the specific input used directly in the production of liquid glucose concentrate was starch in slurry form.

Addressing the core dispute regarding the competing entries, the court highlighted that SION Entry E22 was broader in scope, covering both liquid concentrate and powder forms of glucose, whereas Entry E76 was restricted to liquid glucose alone. Given that starch slurry is a form of starch, the judges found no discrepancy in the company’s reliance on Entry E22.

In its observation, the court stated, “Therefore, the CESTAT has rightly concluded that the correct SION Entry is E22 and since starch slurry is used as an immediate input by the assessee in manufacturing of the export item i.e. liquid concentrate, it cannot be said that starch was not an input for the export item.”

The Bench further emphasised that the classification claimed by the company was consistent with the definitions provided under the Foreign Trade Policy, which permits the inclusion of intermediate goods required for the production of resultant products. By affirming this technical classification, the court effectively dismantled the Revenue Department’s argument that the company had misclassified its goods to obtain undue commercial advantage.

Limits of Customs Department Authority

A significant portion of the High Court’s ruling focused on the jurisdiction of the Customs authorities to invoke Section 28AAA of the Customs Act, 1962, to recover duty from the company. The Revenue Department had argued that the company’s declarations in its shipping bills constituted a deliberate suppression of facts. However, the court pointed to the fact that the DFIA authorisations issued by the DGFT remained valid and subsisting throughout the period, with no proceedings initiated by the licensing authority to cancel or suspend these instruments.

The court drew parallels to previous judicial precedents, noting that in instances where the competent licensing authority—the DGFT—has accepted a classification and issued valid licenses, it is not the role of the Customs authorities to unilaterally challenge that status through coercive recovery measures unless clear evidence of fraud exists. Since the investigation failed to demonstrate wilful misstatement or suppression of facts that would undermine the validity of the licenses, the court ruled that the invocation of Section 28AAA was legally untenable.

Regarding the imposition of penalties, the court observed: “In such circumstances, the Revenue authorities were not justified in invoking the provisions of Section 113(i) read with Section 114(iii) of the Act, in view of the findings of fact recorded by the CESTAT that there was no willful misstatement or suppression of facts for obtaining the DFIA authorizations regarding inputs which were classified under SION Entry E22 by the assessee.”

The judgment provides a clear signal regarding the division of administrative authority between the DGFT and the Customs Department. By upholding the finality of the DFIA authorisations issued by the DGFT, the court has reinforced the protection of exporters who operate under valid, state-issued incentive schemes, preventing the customs authorities from bypassing established licensing frameworks to demand duty payments retrospectively.

This decision marks the conclusion of a multi-year legal battle that began with the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) setting aside the initial order of the Adjudicating Authority. With the High Court finding no substantial question of law to be addressed, the company’s eligibility for the disputed duty-free benefits remains intact, providing finality to the classification dispute that had persisted for over a decade. The dismissal of the appeal confirms that the tax authority’s attempts to re-litigate the classification of inputs, once accepted by the licensing body, will face rigorous judicial review, ultimately serving to protect the integrity of the DFIA scheme for legitimate trade participants.