Delhi HC restores Rs 67 crore drawback recovery on 1,650 garment exports and sets aside CESTAT order

Justice Anil Kshetarpal and Justice Shail Jain held that Customs may examine whether third-party remittances are sale proceeds of the exported goods, that a civil decree against a bank does not bind Customs, and that a missing Section 14 valuation does not bar a fraud inquiry.

Garments shipped from Delhi to Dubai were paid for, the Revenue says, by shell firms in Hong Kong whose directors knew nothing of the trade. A tribunal set aside the recovery of export incentives. On 4 November 2026 the Delhi High Court reversed the tribunal and restored the Customs order.

Justice Anil Kshetarpal wrote the judgment for a bench with Justice Shail Jain. It disposed of 22 appeals under Section 130 of the Customs Act, 1962, against one Final Order of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) dated 25 November 2024.

The High Court said it was not finally opining on the correctness of the adjudicating authority’s findings. It held that the Tribunal erred on several points of law and set aside its order.

13,008 shipping bills, five exporters

Five Delhi exporters, G.D. Manglam Exim (now Welldone Exim), Yogmaya Traders, Konark Exim, Sidh Designer and DSM International, exported readymade garments to the UAE between 2008-09 and March 2014. Under 13,008 shipping bills they claimed drawback under Section 75 and benefits under the Focus Product and Focus Market Schemes (FPS/FMS).

The Directorate of Revenue Intelligence found, the judgment records, that values in the shipping bills were far above actual values. It also found that more than US$ 76 million came from third parties in Hong Kong, the British Virgin Islands and the UAE through Punjab National Bank, though the goods were shown as sold to buyers in Dubai.

The investigation recorded that the Hong Kong firms were fronted by low-income individuals who were only nominal owners. Some Dubai consignees denied buying the goods or said they paid far less. A Jodhpur firm with no import or export activity received funds from the exporters and passed them on.

In sample comparisons with foreign customs records, one set of consignments declared at Rs 2,17,18,036 in India was shown at Rs 26,69,161 in the Netherlands. Belize records showed Rs 39,47,078 against Rs 2,50,19,667 declared in India. Poland showed Rs 4,81,788 against Rs 63,12,492.

The DRI sent details of 964 consignments to the Consulate General of India at Dubai on a sample basis. The reply covered 12 Bills of Entry for 39 shipping bills in 12 containers, and the excess drawback on those alone was put at Rs 1,52,54,678.

The lead appeal is G.D. Manglam’s. Between 2 May and 26 October 2013 it filed 842 shipping bills across ICD Tughlakabad, ICD Patparganj, the IGI Airport Air Cargo Complex and JNPT. At the Air Cargo Complex alone, 392 shipping bills carried a drawback claim of Rs 14,26,96,040.

The Order-in-Original also recorded that Sahdev Gupta, who controlled the five firms, accepted that some payments came from persons not named in the export documents, on his buyers’ instructions. He said he did not know the Hong Kong entities.

It added that the Enforcement Directorate at Surat had probed diamond firms over remittances above Rs 4,000 crore against allegedly fake import documents. The Commissioner linked that circular movement of money to the third-party payments received as export proceeds.

What the Commissioner confirmed and dropped

The Bank Realisation Certificates, or BRCs, issued by PNB in November 2013 certified that export proceeds were realised. After the DRI informed it of the inquiry in 2015, PNB cancelled them for 1,650 shipping bills, worth USD 12,77,16,228.59. Its reasons, given in 2016, were that third-party realisation did not meet RBI Circulars of 8 November 2013 and 4 February 2014.

The Commissioner of Customs (Export), ICD Tughlakabad, decided all the show cause notices in Order-in-Original No. 07/2023 of 30 May 2023. For the 1,650 shipping bills he confirmed recovery of drawback of Rs 67,46,26,135 under Rule 16A of the Drawback Rules, and duty credit scrips of Rs 39,19,69,078 under Section 28AAA.

He dropped the demand for the other 11,358 shipping bills because their BRCs had not been cancelled and there was no further material. For 43 shipping bills with overseas inquiry material he also confirmed excess drawback under Rule 16.

Separately, he held that Konark, DSM and Sidh had shown FMS countries as destinations but the goods went to Turkey and Korea, with false landing certificates issued by Nitin Gupta of Oak Shipping Services. Penalties and confiscation were also ordered.

How the Tribunal reversed him

The CESTAT allowed the exporters’ appeals and dismissed the Revenue’s. It said the real controversy was that payments came from persons other than the named buyers, not whether goods were exported or money received.

On drawback, it read the second proviso to Section 75 as giving Customs no independent power to judge the source of a remittance that came through banking channels. It cited Aura Creations v. Reserve Bank of India to say third-party payments are not absolutely prohibited.

It held that any change in the declared value of export goods needed the Section 14 mechanism and the 2007 Valuation Rules, which was never used. It also held that Section 28AAA was not made out, since the scrips were never invalidated and their users were never proceeded against.

A civil court decree of 13 March 2020 weighed with it as well. G.D. Manglam had sued PNB in Patiala House Courts, with Customs not a party, and the decree declared the cancellation of the BRCs null and void.

What each side argued

Mr Anurag Ojha, Senior Standing Counsel, for the Revenue said the appeals raised substantial questions of law. The case, he argued, was about fraudulent availment of incentives through inflated declarations, fictitious domestic suppliers and funds routed through intermediaries, not a routine dispute over assessable value.

He added that Section 75 requires a genuine nexus between the amount realised and the goods, and that a civil decree between an exporter and a bank cannot extinguish Customs’ independent jurisdiction. The Tribunal, he said, had examined each piece of evidence in isolation.

Mr Tarun Gulati, Senior Advocate, for the exporters said the appeals were barred under Section 130, which excludes orders about the value of goods for assessment. The Revenue’s own grounds alleged overvaluation by two to twenty times, he argued, so valuation was integral to the dispute.

On the merits, he said the Tribunal had weighed the overseas inquiry reports, BRCs and remittance material and found against the Revenue. RBI Circular No. 70 was not an absolute bar on third-party payments, and PNB had restored the BRCs during execution of the civil decree.

The four issues the court framed

The bench set out four issues. They were whether the appeals were maintainable despite the overvaluation plea, whether Customs could examine third-party remittances, whether a civil decree binds a non-party, and the reach of Section 28AAA.

“Whether declaratory judgment and decree passed in a civil suit binds the parties to the suit or it also binds those who are not party to the civil suit?” (para 44)

Why the appeals were maintainable

Section 130 excludes appeals against orders that determine questions relating to the rate of duty or to the value of goods for assessment. The exporters said overvaluation put the case outside it. The court disagreed, relying on Alupro Building Systems and Navin Chemicals: the words for purposes of assessment control the exclusion.

The Revenue was not challenging an assessment or seeking a fresh Section 14 valuation. The CESTAT itself had said the original assessment was undisturbed and no re-determination of value had been made.

It would be anomalous, the bench said, to bar the appeals for involving a valuation that the Tribunal itself recorded had not taken place. Differences in value were being used as evidence of fraudulent availment, which is a different question from assessable value.

The court distinguished Kishin S. Loungani from the Kerala High Court, where valuation had actually been adjudicated and was integral to confiscation and drawback recovery. The preliminary objection was rejected.

Customs can test whether proceeds match goods

On Section 75, the court said it was not holding that every third-party remittance is barred. The narrower question was whether Customs, in testing entitlement to drawback, may examine whether the money shown as realised was sale proceeds in respect of the goods claimed.

It answered yes. The statute’s phrase, sale proceeds in respect of such goods, requires a nexus between the amount and the exports. Customs does not thereby exercise the RBI’s powers under FEMA. It is examining entitlement to keep a benefit under the Customs Act.

The Tribunal had treated the case as an attempt to adjudicate a foreign exchange transaction, the bench said. The Revenue’s case relied on who the remitters were, who the declared buyers were, inquiry statements and the movement of funds.

“Receipt of money in a bank account is a fact” (para 67)

Whether the receipt amounts to sale proceeds of the goods, the court added, depends on the surrounding circumstances and the evidence. The Tribunal could not insist that the RBI or another authority first declare the remittances invalid.

A tribunal must test the findings below

The bench then set out what an appellate authority must do. It must critically analyse the findings and the material behind them, and explain why they are wrong before substituting its own view. A bare statement that it takes a different view is not enough.

The court recounted the Order-in-Original at length for this purpose. It covered the flow of funds from the five exporters to the Jodhpur firm, vacant addresses of supposed suppliers, overseas denials and the Hong Kong inquiries.

It also noted PNB officials’ admission that tripartite agreements for 8 November 2013 to 4 February 2014 were not on file, and the RBI’s letter of 7 April 2014 that third-party payments were examined case by case before 8 November 2013.

The case, the court said, was not built on one statement or on the remitters being third parties. The question was whether the Tribunal critically examined that material when it reversed the Commissioner, and the bench held that on valuation, the civil decree and Section 28AAA it had not.

Cross-examination and who must rebut

The exporters had argued that the proceedings were vitiated because they could not cross-examine the makers of statements relied on. The court noted that the adjudication also rested on overseas Bills of Entry, SWIFT messages, banking records and inquiries, not statements alone.

Section 138B(2) of the Customs Act allows cross-examination only so far as the adjudicating authority permits. Kanungo and Company, the court said, cannot be read as saying cross-examination is never needed, so the Tribunal had to ask whether the findings rested materially and exclusively on such statements.

Once the Revenue placed documentary material on record, the exporters had to rebut it. The Revenue did not have to prove its case to a criminal standard, the bench added, though it still had to establish the statutory ingredients.

Overvaluation, Section 14 and the civil decree

The Tribunal had rejected the overvaluation case mainly because no re-valuation had been done under Section 14 and the 2007 Rules. The High Court said the Tribunal blurred two inquiries: fixing assessable value, and examining whether an exporter deliberately inflated declarations to obtain a benefit.

Comparison with values in foreign import records, the court said, can serve the second inquiry without amounting to a fresh assessment. The fact that the original assessment was never reopened is not an absolute bar to testing the consequences of deliberate misdeclaration.

On the civil decree, the court held that a declaratory decree

“operates, in the ordinary course, in personam and not in rem” (para 126)

It binds the parties and those claiming through them. Customs was not impleaded in Civil Suit No. 1114/2018, was not shown to claim through PNB or the exporter, and was not bound. The Tribunal should have weighed the decree alongside the other material, citing Razia Begum and Deccan Paper Mills.

Section 28AAA and the scrips

The Tribunal was right that Section 28AAA has its own requirements and that a bare allegation of fraud will not do. But it went wrong, the court said, by holding the exporters’ liability unsustainable because the scrips were not separately invalidated and later users were not proceeded against.

If scrips were obtained by collusion, wilful misstatement or suppression, as alleged, liability could not wait on proceedings against every later user unless the statute made them a condition precedent. The Tribunal had to examine whether the ingredients were established on the record.

The one penalty that stays quashed

Nitin Gupta of Oak Shipping Services was penalised for arranging false landing certificates for the FMS claims. The Tribunal found that he had no notice, was not given the documents and was not heard, and the High Court left that finding undisturbed.

Section 124 of the Act bars a penalty without written notice of the grounds and a reasonable hearing. Relying on Kothari Filaments, the bench said the allegations in the Order-in-Original could not cure the lack of notice, so his penalty stays set aside.

Order

The 22 appeals were allowed. The CESTAT’s Final Order Nos. 59488-59509/2024 of 25 November 2024 were set aside, except that the penalty on Nitin Gupta of Oak Shipping Services stays set aside for want of notice and hearing.

The Order-in-Original of 30 May 2023 was restored in all other respects. Pending applications were disposed of. Judgment had been reserved on 17 September 2026.