The Supreme Court has dismissed the Customs Department’s appeal against a CESTAT’s ruling that set aside a ₹29.62 crore customs duty demand against an exporter over alleged misclassification of chemicals and wrongful availment of benefits under the Merchandise Exports from India Scheme (MEIS).
The bench of Justice K.V. Viswanathan and Justice Arun Palli, in its order declined to interfere with the decision of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Kolkata, on the peculiar facts of the case. However, the Court expressly kept the question of law open for consideration in an appropriate case.
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The Customs Department challenged CESTAT’s July 10, 2025 decision, which had allowed the company’s appeal against an adjudication order passed by the Commissioner of Customs (Port), Kolkata.
After condoning the delay in filing the appeal and hearing counsel for both sides, the Supreme Court observed: “On the peculiar facts of the case, we are not inclined to interfere…”
The Court dismissed the appeal and disposed of the pending applications. Its order did not independently decide the classification dispute or finally settle the broader question concerning the respective powers of Customs and the Directorate General of Foreign Trade (DGFT).
The appellant/assessee is an Export Oriented Unit engaged in manufacturing water treatment chemicals at its facility in Pune, Maharashtra. It manufactures and sells organophosphorus compounds, comprising acids and salts, under the brand name “Aquacid”.
The company had classified these products under the tariff description “Other organo-inorganic compounds—Other”. It used tariff item 29310090 before January 1, 2012, and tariff item 29319090 thereafter for domestic sales and exports.
The company initially received export incentives under the Focus Market Scheme. Following the introduction of MEIS in April 2015, the licensing authority allowed its claim for incentives at 2% of the free-on-board value of eligible exports.
The controversy arose after the restructuring of Customs Tariff Heading 2931 with effect from January 1, 2017. The amendment introduced additional tariff items under the subheading “Other Organo-phosphorus derivatives”.
The company continued using tariff item 29319090, maintaining that its products were organophosphorus compounds rather than derivatives covered by the newly introduced entries.
Following an investigation by the Directorate of Revenue Intelligence, Cochin Zonal Unit, a show cause notice dated November 2, 2022 proposed denial of the import duty exemption claimed against 233 MEIS licences.
The Department alleged that products exported between January 1, 2017 and September 30, 2021 had been incorrectly classified under tariff item 29319090. According to the Revenue, the goods should have been classified under tariff item 29313900, falling within “Other Organo-phosphorus derivatives”.
The Commissioner’s adjudication order dated December 18, 2023 confirmed customs duty demands of ₹3,54,01,196 under Section 28 and ₹26,08,18,611 under Section 28AAA of the Customs Act, 1962, together amounting to ₹29,62,19,807, along with interest.
The order also imposed a penalty of ₹3,54,01,196 under Section 114A, ₹50 lakh under Section 114AA and ₹10 crore under Section 114AB. A further redemption fine of ₹5 crore was imposed in lieu of confiscation.
The CESTAT bench comprising Ashok Jindal, Member (Judicial), and K. Anpazhakan, Member (Technical) noted that the company had consistently disclosed the same product descriptions and classification in its shipping bills and invoices.
The tribunal observed that the Department was aware of the classification adopted by the company and had not previously objected to it.
It also found that the shipping bills against which the MEIS licences were issued had attained finality. If Customs intended to dispute those assessments, including the classification of the exported goods, it should have pursued reassessment or the statutory appeal mechanism.
Having failed to exercise those remedies, the Department could not sustainably raise the classification issue to deny MEIS benefits without challenging the finally assessed shipping bills, the tribunal held.
The company furnished expert opinions supporting its position that the products were organophosphorus compounds rather than organophosphorus derivatives.
One opinion discussed by the tribunal was from Dr. S. Sivaram, Honorary Professor Emeritus and INSA Honorary Scientist at IISER, Pune. The opinion explained that the two hydroxyl groups in the relevant molecules remained intact and had not been derivatised through a chemical synthesis process.
CESTAT disagreed with the adjudicating authority’s reasons for rejecting the expert evidence. It held that Revenue authorities lacked the scientific expertise to displace a qualified expert’s technical opinion merely through their own reasoning.
The tribunal relied on judicial decisions recognising the need for contrary technical evidence when rejecting an expert report.
The tribunal further noted that Customs had drawn samples and sent them to the Central Revenues Control Laboratory (CRCL), which issued a report dated April 8, 2021.
However, the report was not relied upon in the proceedings. CESTAT found that the adjudicating authority had not provided a valid reason for disregarding the departmental laboratory’s report.
Emphasising that the burden of establishing a classification different from that declared by the assessee rested on the Revenue, the tribunal concluded that the Department had failed to discharge that burden through evidence.
A separate ground for relief concerned the continued validity of the MEIS licences.
The company argued that Customs could not deny benefits under licences issued by DGFT while those licences remained uncancelled.
After examining the relevant authorities and administrative guidance, CESTAT held that the recovery proceedings were unsustainable because DGFT had not cancelled the licences in question.
The tribunal consequently set aside both the demand under Section 28 and the demand under Section 28AAA.
CESTAT also rejected the invocation of the extended limitation period.
It observed that the company had followed the classification consistently and had not changed it to obtain an undue benefit. The Department’s earlier acceptance of the declared classification did not justify a subsequent allegation of suppression of facts.
Finding no established suppression with intent to evade duty, the tribunal held that extended limitation could not be invoked.
It also set aside the penalties under Sections 114A, 114AA and 114AB. Having found no misdeclaration, it held that confiscation under Section 111(o) was unsustainable and removed the ₹5 crore redemption fine.
The company’s appeal was allowed with consequential relief, if any, in accordance with law.
The Supreme Court’s dismissal preserves the tribunal’s relief in this case. However, the express reservation of the question of law is significant: the order should not be read as a definitive Supreme Court ruling on every aspect of Customs’ powers concerning MEIS scrips or the disputed tariff classification.
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