2014 (4) TMI 982 - HC - Customs

Restriction of Letter of Permission Constitutional Validity of para 7 of Appendix 14IC of Exim policy Curtailment of period of licence Change of policy No policy change in SEZ areas - Derecognizing of unit as EOU Double Grant of extension of permission Articles 14, 19(1)(g) of the Constitution of India Manufacture of textile products like fibers and clips - 100% EOU - Held That - Under the policy, scheme has been made available granting permission to the intending units to start their manufacturing activities in EOU scheme - For such purpose, the unit would have to apply for Letter of Permission - In terms of para 2.4, DGFT would specify procedure to be followed by an exporter or importer or by any licensing or regional authority for the purpose of implementing provisions of the Act or the rules and the orders made thereunder, as also the Foreign Trade policy - It was in exercise of such powers that the Handbook of Procedures and Appendixes annexed to the handbook came to be published by the DGFT. Allowability of Reprocessing of garments/used clothings/secondary textiles materials Held That - Clause (7) provides that the activities pertaining to reprocessing of garments/used clothings/secondary textiles materials, etc., will not be allowed under EOU/SEZ schemes - Such restrictions are not invalid or unauthorized - The source and origin of power for imposing such conditions have been traced - It would be improper to suggest that such conditions could not have been imposed altogether and that the applications would be governed merely by the Act of 1992 and the Foreign Trade policy promulgated by the Government of India - It was in terms of such powers flowing from para 2.4 of the Foreign Trade Policy 20092014 that such Handbook of Procedures alongwith Annexures was published - This Court has referred to this position from the Foreign Trade Policy and the Handbook published by the DGFT which are currently applicable - The same position would obtain for the earlier period under similar circumstances. Could such policy be applied to the existing units Held That - Assessees were granted LoP in the year 1997, when such restriction was not existing - Such restriction was applied for the first time in the Policy with effect from 1st September 2004 - Even a unit which has been granted LoP, enjoys the same permission for a limited period - No unit would have a right to enjoy LoP in perpetuity only on fulfilling the conditions contained in the first licence, irrespective of any change in the Government policy - Atleast at the end of the period of validity of the LoP, the unit must yield to the Government of India policy changes - Language used in para 7 that in specified conditions permission will not be granted must be construed as applying equality to any existing unit seeking extension under the Government of India policy - Its applicability cannot be curtailed to only to the new units seeking fresh permission. Is change in policy hit by Articles 14, 19 (1)(g) Held That - It cannot be accepted - In the affidavit in reply, the respondents stated that the import of used clothing classified under Customs Chapter heading No. 6309 is restricted - Whereas, the used clothes which are mutilated are not restricted and would fall under Customs Chapter Heading No. 6310 - It is noticed that a letter dated 17th September 2013 of the Director, SEZ Division, Government of India contains a policy to regulate functioning of worn and used clothing units in SEZs, in which, regarding reprocessing of used garments, detailed provisions have been made - While still permitting SEZ units to deal in such used garments for manufacture of yarn for export, strict conditions have been laid down - In the context of permitting such imports to SEZ units, in the affidavit in reply, it is contended that such policy is exclusively for SEZ units and not for those situated outside SEZ areas - Such units are situated in a demarked area which is surrounded by high walls, operating in SEZ areas under constant watch and monitoring by the Governmental agencies - On such basis, the differentiation for SEZ units and units under EOU scheme is made. Reasonable purpose of change Held That - When the purpose of change in the policy is otherwise reasonable, vulnerability of such policy of the Government in view of Articles 14 and 19 (1)(g) would not be lightly attached - In economic and fiscal matters, the Courts recognize considerable leverage in Government s discretionary powers Relying upon PTR Exports (Madras) Private Limited & Anr. vs. Union of India & Ors. 1996 (5) TMI 413 - SUPREME COURT - Government or Legislature has power to evolve its new fiscal policy in public interest which includes its power to withdraw the old policy - This Court has based the EOU and SEZ units on the same platform in this context because as per the earlier Government policy, in case of both the units, restriction for import of worn or used clothings, etc. was commonly applied - In a period post 13th September 2013 when the Government policy clearly restricts such activities at the hands of EOU units but continues to recognize the same for SEZ units on stricter and more stringent conditions. Could the validity of LoP be curtailed Held That - Answer is to be in the negative - After granting LoP in the year 1997, the same was extended from time to time - When this extension was granted on 25th May 2005, the change in policy had already been brought into effect despite which, for the reasons best known to the respondents, extension for a period of five years was granted - Even after completion of these five years, fresh extension was granted by an order dated 29th November 2010 - Thus, being fully aware of the limitations of the new policy, two extensions were granted - By the last extension, the period or LoP was extended upto 23rd October 2015. Assessees were granted LoP for manufacturing yarn as an EOU, which permission is effective upto 23rd October 2015 - Though right from the year 2004, two extensions were granted to the petitioners, after such a change in the policy - Thus, as a conscious decision, the respondents twice permitted the petitioners to carry on the same activity as an EOU - It was only when another unit engaged in the same activity, also an EOU, applied for fresh extension in the year 2012 that the competent authority decided to terminate all such licenses of similar industries, even without granting them opportunity of hearing. Derecognizing of unit as EOU - Grant of an extension of permission Held That - When investment, expansion of the facilities for manufacturing and deployment of manpower is based on a licence extended at a time for a period of five years, its abrupt curtailment without there being any change in policy or any public interest involved in doing so, would be hit by the principle of promissory estoppel - The only excuse offered for curtailment of the period is that though the policy had already changed years back, in the year 2004, the same was not implemented with any rigour - When two extensions were granted to assessee even after the change in the policy, such reason put forth by the respondents would hold no validity - Petition is allowed to limited extent of striking down the order of the authority dated 8th October 2013 and by further providing that the LoP in case of the present petitioners shall continue to be valid till 23rd October 2015 ie., the full period of its validity and upto such period, respondents shall not prevent the petitioners from carrying out its above mentioned activities Decided partly in favour of Assessee.

Summary

Issues Involved:
1. Restriction of Letter of Permission (LoP).
2. Validity of Board of Approval's decision.
3. Constitutionality of para 7 of Appendix 14IC of the Exim Policy.
4. Application of new policy to existing units.
5. Principle of promissory estoppel.
6. Differential treatment between EOU and SEZ units.

Detailed Analysis:

1. Restriction of Letter of Permission (LoP):
The petitioners challenged the respondents' action in restricting the LoP granted to them and the Board of Approval's decision dated October 8, 2013, which refused to withdraw these restrictions. The petitioners argued that the LoP was initially granted on October 1, 1997, and extended periodically until October 23, 2015. Despite this, a letter from the Deputy Development Commissioner dated September 28, 2012, abruptly curtailed the validity of the LoP to March 31, 2013. The court found this abrupt restriction unjustified, particularly because the extension was granted with full knowledge of the existing policy.

2. Validity of Board of Approval's Decision:
The Board of Approval's decision, which limited the validity of the LoP to September 30, 2012, was based on the explicit provision in Chapter 6 of the Foreign Trade Policy (2009-2014) that activities involving reprocessing of garments and other used textile materials are not allowed under EOU schemes. The court noted that the petitioners had made a detailed representation to the Board, which was rejected. The court found the Board's decision to be procedurally unfair as it was made without proper hearing and consideration of the petitioners' substantial investments and commitments.

3. Constitutionality of Para 7 of Appendix 14IC of the Exim Policy:
The petitioners contended that para 7 of Appendix 14IC, which restricts reprocessing activities under EOU schemes, was ultra vires Articles 14 and 19(1)(g) of the Constitution of India. The court examined the policy framework and found that the restriction imposed was valid and authorized. The court held that the policy was reasonable and aimed at preventing the import of unmutilated used clothing, which is restricted under Customs regulations.

4. Application of New Policy to Existing Units:
The court addressed whether the new policy could be applied to existing units. It noted that the petitioners were initially granted LoP in 1997, and the restriction was introduced in 2004. The court held that even existing units must comply with current policies at the time of seeking extensions. The court rejected the petitioners' argument that the restriction should only apply to new units, emphasizing that renewals must align with the prevailing policy.

5. Principle of Promissory Estoppel:
The petitioners argued that the principle of promissory estoppel should prevent the respondents from curtailing the LoP's validity. The court agreed, noting that the petitioners had made significant investments and commitments based on the extended validity of the LoP. The court cited several precedents, including M/s. Motilal Padampat Sugar Mills Company Limited v. State of Uttar Pradesh and MRF Limited, Kottayam v. Asstt. Commissioner (Assessment), Sales Tax, to support the application of promissory estoppel. The court concluded that the abrupt curtailment of the LoP was unfair and violated the principle of promissory estoppel.

6. Differential Treatment Between EOU and SEZ Units:
The petitioners contended that the policy was discriminatory as it imposed restrictions on EOU units but not on SEZ units. The court noted that SEZ units operate under stricter and more stringent conditions, which justified the differential treatment. The court held that the policy differentiation was reasonable and not violative of Articles 14 and 19(1)(g) of the Constitution.

Conclusion:
The court allowed the petition to the extent of striking down the Board of Approval's order dated October 8, 2013, and ruled that the LoP's validity should continue until October 23, 2015. The respondents were directed not to prevent the petitioners from carrying out their activities under the LoP until its full period of validity, subject to compliance with other rules and regulations.