The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), New Delhi, has set aside a customs order directing recovery of ₹3.30 crore in duty drawback from an exporter over allegations that garments shipped to Russia had been offloaded in Finland or Iran and never reached the Russian buyers.

The bench of Dr. Rachna Gupta (Officiating President) and P.V. Subba Rao (Technical Member) observed that export is complete once the goods leave India’s territorial waters and ownership passes to the buyer. It also rejected the department’s conclusion that payments received from the Reserve Bank of India (RBI), through Punjab National Bank (PNB), under a special arrangement for exports to Russia were unrelated to the disputed exports.

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The dispute concerned readymade garments exported by the appellant through Inland Container Depots at Tughlakabad and Patparganj, New Delhi, between August 2001 and March 2003. The exports were made under the Repayment of State Credit Scheme, and the exporter received duty drawback.

The Directorate of Revenue Intelligence (DRI), including through its Customs Overseas Intelligence Network officer in Moscow, investigated the transactions. According to the department, the containers were de-stuffed at Kotka in Finland or Bandar Abbas in Iran, and the goods never reached the intended buyers in Russia.

A show cause notice issued on October 31, 2008, alleged that the payments received by the exporter through PNB could not be treated as proceeds of the disputed exports. It proposed recovery of drawback with interest and imposition of penalties.

The Commissioner of Customs, ICD Tughlakabad, confirmed the proposals through an order dated March 31, 2012.

The Commissioner disallowed drawback of ₹2,07,94,934 for consignments exported through ICD Tughlakabad and ₹1,22,51,916 for consignments exported through ICD Patparganj, aggregating to ₹3,30,46,850.

The order directed recovery under Rules 16 and 16A of the Customs and Central Excise Duties Drawback Rules, 1995, read with Section 75(1) of the Customs Act, 1962. It also appropriated ₹1 crore deposited by the exporter and ordered recovery of interest.

The exported garments, collectively valued at ₹26,98,53,937, were held liable to confiscation. Since they had already been exported and were unavailable, the Commissioner did not impose a redemption fine. However, a penalty equal to the drawback amount—₹3,30,46,850—was imposed on the firm under Section 114, alongside separate penalties on individuals.

Exporter Contested Allegations of Non-Delivery

The appellants argued that the department had accepted that the goods left India and reached Finland or Iran. They maintained that delivery at the declared overseas destination was not a condition for treating the goods as exported under the Customs Act.

They further submitted that the consignments had moved onwards to Russia through multimodal transport after reaching Kotka or Bandar Abbas. The exporter also questioned the reliability and admissibility of overseas material relied upon by the department.

On the payment issue, the appellants emphasised that export proceeds had been received from RBI through PNB. They contended that recovery for non-realisation of export proceeds could not be sustained when those proceeds had already been received.

The department defended the Commissioner’s order, arguing that the Russian buyers had not received the goods and that advance payments made by them had been refunded by Russian banks. It maintained that receipt of money alone did not establish entitlement to drawback unless the payment represented proceeds of the exported goods.

The tribunal examined the special rupee trade arrangement applicable to the exports.

Under that scheme, the Indian exporter received payment in rupees through its bank. RBI reimbursed the Indian bank and adjusted the amount against the Government of India’s debt to Russia, informing its Russian counterpart, the Bank for Foreign Economic Affairs (BFEA).

The bench found that the Commissioner’s conclusion had implications extending beyond the exporter’s bank account. Treating the remittances as unrelated to the exports would mean that RBI had wrongly paid the amount, wrongly adjusted India’s sovereign debt, and that BFEA had wrongly accepted the adjustment.

The tribunal found no evidence supporting those conclusions. Nothing on record showed that PNB or RBI had confirmed that the remittances were wrongly made and recovered them.

It held that if DRI’s investigation raised doubts about delivery in Russia and the correctness of the payments, the matter should have been referred to RBI for examination. Any reversal would also have required corresponding correction of the adjustment against India’s debt to Russia.

The bench concluded that neither DRI nor the adjudicating Commissioner could sit in judgment over the remittances made by RBI under the scheme in the manner adopted in the challenged order.

Drawback Depends on Export, Not the Destination Alone

The tribunal explained that duty drawback reimburses duties incurred in relation to exported goods. Its rate depends on the nature of the goods and the incidence of duties on inputs, rather than the country or port to which the goods are shipped.

It distinguished Rule 16, which concerns erroneous or excess payment of drawback, from Rule 16A, which provides for recovery where export proceeds have not been realised within the permitted period.

The bench clarified that completing an export does not remove the exporter’s obligation to realise sale proceeds. However, subsequent diversion of goods by a buyer does not, by itself, defeat drawback entitlement or extinguish the obligation to receive payment.

Relying on the Supreme Court’s decision in Collector of Customs, Calcutta v. Sun Industries, the tribunal held that export is complete when goods leave India’s territorial waters and title passes to the buyer.

Applying that principle, it concluded that even if the garments had not reached Russia and had instead landed at Kotka or Bandar Abbas, that circumstance would not, by itself, disentitle the exporter to drawback. The denial and recovery of drawback therefore could not be sustained on that ground.

The tribunal separately examined the Commissioner’s finding that the garments were liable to confiscation under Section 113 of the Customs Act.

It noted that Section 2(19) defines “export goods” as goods that are to be taken out of India to a place outside India. The bench distinguished these from goods that had already been exported.

For the transactions under consideration, it held that the garments had already left India and were no longer “export goods” liable to confiscation under Section 113. It also noted that, during the relevant period, the Customs Act did not extend beyond India; its territorial scope was expanded through an amendment in 2018.

Since the penalties under Section 114 rested on alleged acts or omissions rendering the goods liable to confiscation under Section 113, the tribunal held that those penalties could not survive once the confiscation finding was set aside.

The tribunal allowed all six appeals and set aside the challenged order, granting consequential relief to the appellants.

It also rejected the Revenue’s miscellaneous applications seeking to separately implead the Commissioner of Customs (Export), ICD Tughlakabad. The bench observed that the Commissioner of Customs, Tughlakabad, was already a respondent and that subsequent bifurcation of the commissionerate did not require separate impleadment.

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