Interest on FTP Dues: S.28AA Customs Act Needs FTDR Act Sanction, Policy Clause Insufficient, Rules High Court - 2025-06-16

High Court: Policy Clause Not Enough to Levy Interest on Incorrectly Availed Export Sops Without Statutory Backing

KOCHI: In a significant ruling clarifying the powers of revenue authorities, a High Court has held that interest cannot be demanded under Section 28AA of the Customs Act, 1962, on benefits incorrectly availed under the Foreign Trade Policy (FTP) solely based on a clause within the policy itself. The court emphasized that such a levy of interest requires explicit authorization from the parent statute, the Foreign Trade (Development and Regulation) Act, 1992.

The court allowed a writ petition filed by a private limited company, quashing the demand for interest on a duty credit scrip amount that the company had already repaid after being found ineligible.

Background of the Dispute

The petitioner, a company engaged in 'placement and supply services of personnel,' was initially granted a duty credit scrip valued at Rs. 8,91,934 under the Service Exports from India Scheme (SEIS), part of the Foreign Trade Policy (2015-2020). However, following audit objections, the competent authority determined that the company's services did not qualify under the scheme, rendering it ineligible for the benefit.

The company promptly remitted the principal amount of the scrip without dispute. The current legal challenge arose when the authorities, through communication Ext.P8, subsequently demanded interest on this amount, invoking Section 28AA of the Customs Act, 1962.

Arguments in Court

Petitioner's Contention: Sri. John Varghese, counsel for the petitioner, argued that while the principal amount was repaid without demur, the demand for interest was unsustainable. He contended that Section 28AA of the Customs Act, 1962, had not been made applicable to such situations by any provision within the Foreign Trade (Development and Regulation) Act, 1992 (FTDR Act). Relying on landmark Supreme Court judgments, including J.K. Synthetics Ltd. V Commercial Tax Officer and V.V.S. Sugars v. Government of Andhra Pradesh , the petitioner asserted that the right to collect interest must be supported by plenary legislative provisions, not merely by policy stipulations.

Respondents' Defence: The learned Standing Counsel for the respondents maintained that paragraph 3.19(a) of the applicable Foreign Trade Policy (2015-2020) explicitly provided for the repayment of wrongly availed benefits along with applicable interest as contemplated by Section 28AA of the Customs Act, 1962. They argued that the policy's clear stipulation bound the petitioner to pay the interest.

Court's Reasoning: Policy Cannot Override Statute

The High Court, after hearing both sides, found merit in the petitioner's arguments. The judgment noted that the respondents failed to point to any provision within the FTDR Act, 1992 – the legislation under which the Foreign Trade Policy is framed – that incorporates or applies Section 28AA of the Customs Act for levying interest on ineligible benefits under FTP schemes.

The court acknowledged the existence of the clause in the Foreign Trade Policy but held that policy provisions alone cannot authorize the levy of interest. The judgment firmly stated, "going by the law laid down in the decisions referred to above, I must hold that the provisions of the Foreign Trade Policy cannot by itself authorise the levy of interest under Section 28AA of the 1962 Act as such levy must be supported by plenary legislation."

The court extensively quoted the Constitution Bench of the Supreme Court in J.K. Synthetics Ltd. :

"It is well-known that when a statute levies a tax it does so by inserting a charging section... Provision is also made for charging interest on delayed payments, etc. ...any provision made in a statute for charging or levying interest on delayed payment of tax must be construed as a substantive law and not adjectival law."

Further reinforcing this principle, the court cited V.V.S. Sugars , where the Supreme Court held that "interest can be levied and charged on delayed payment of tax only if the statute that levies and charges the tax makes a substantive provision in this behalf."

The Verdict

Concluding that the demand for interest lacked the necessary statutory backing, the High Court allowed the writ petition and quashed the impugned demand (Ext.P8). The court declared that the petitioner is not liable to pay interest under Section 28AA of the Customs Act, 1962, on the amounts repaid after being found ineligible for the SEIS benefit.

This judgment underscores a crucial legal principle: the power to impose financial burdens, such as interest, must stem from substantive provisions in primary legislation enacted by Parliament or State Legislatures, and cannot be created by subordinate rules or policies unless explicitly authorized by the parent Act.