Mumbai: The Bombay High Court has quashed a show cause notice (SCN) issued by the Director General of Foreign Trade (DGFT) against Essar Shipping Ltd., ruling that it was an arbitrary attempt to reopen a settled matter.

The court held that the SCN, issued on January 13, 2023, was based on a misinterpretation of a prior judgment delivered by a division bench in 2022. The SCN alleged that Essar had wrongfully availed benefits under the Foreign Trade Policy (FTP) 2004-2009 by providing misleading information.

A division bench of Justices BP Colabawalla and Somasekhar Sundaresan, on February 7, held that the SCN was untenable as it attempted to reopen an issue that had already been settled by the court’s ruling in Essar’s earlier petition on February 8, 2022. The court noted that the SCN was primarily based on a misreading of that judgment, which had quashed earlier recovery notices issued to Essar by the DGFT.

Essar Shipping had availed benefits under the “Served from India Scheme” (SFIS), which was introduced to promote the export of services and create a “Served from India” brand. Under this scheme, companies earning foreign exchange through service exports were entitled to duty credit scrips equivalent to 10% of their earnings, which could be used to offset customs duty on imports.

Essar, engaged in providing shipping services, had sought duty credit scrips for earnings generated from transporting freight not only between India and foreign destinations but also between two foreign countries. Initially, these earnings were considered eligible under SFIS.

However, on January 1, 2008, DGFT issued a Circular which clarified that only services originating from or touching India would qualify for the benefit. This led DGFT to issue recovery notices against Essar in 2010, seeking to reclaim duty benefits availed on earnings from routes that did not touch India.

Essar challenged these recovery notices in the HC, arguing that the policy circular amounted to a retrospective amendment, which was not legally permissible. In its 2022 ruling, the High Court upheld the validity of the circular but clarified that it could only apply prospectively. As a result, Essar’s duty credit scrips, which had already been granted and utilized before the policy clarification, could not be revoked. The court had, therefore, quashed the recovery notices.

The court observed that despite the 2022 judgment becoming final, with no appeal filed against it, the DGFT issued a fresh SCN in 2023, attempting to disqualify Essar’s benefits on grounds that had already been settled.

The DGFT relied on a Paragraph of the 2022 judgment, which had allowed for penal action if Essar had misrepresented facts while obtaining benefits. However, the court noted that the SCN did not allege any misrepresentation beyond Essar’s assertion that its claims complied with the SFIS guidelines. Since the previous ruling had already determined that such claims were legitimate before the policy clarification, the court held that the fresh SCN was an “arbitrary attempt to reopen an issue already closed.”

Declaring the SCN to be covered by the doctrine of res judicata (which prevents re-litigation of settled matters), the court ruled that the DGFT’s action was unreasonable and a circumvention of its prior decision. It quashed the SCN, reaffirming that Essar’s duty credit scrips were lawfully obtained under the FTP in effect at the time.