Supreme Court Clarifies Retrospective Applicability of Duty Drawback Circular: Justice Satish Chandra Sharma Holds Circular No. 35/2010-Cus. as Clarificatory, Not Prospective

Introductory Remarks

A significant decision on the retroactive legality of a government circular concerning the All Industry Rate (AIR) Duty Drawback for exporters was handed down by the Supreme Court of India on May 22, 2025.

In the case known as “M/s Suraj Impex (India) Pvt. LTD. vs. Union of India & Ors.,” the question at hand was whether or not Circular No. 35/2010-Cus., which was issued by the Central Board of Excise and Customs (CBEC), could be applied retroactively to entitle exporters to customs duty drawback, even if they had previously benefited from other excise rules.

The Court’s investigation focused on the nature of the circular, namely whether it was explanatory or substantive, as well as the manner in which such terms may be interpreted in accordance with Indian law.

The background of the facts

M/s Suraj Impex (India) Pvt. Ltd., the appellant, is a merchant exporter that primarily deals in soyabean meal, which is a product harvested from the agricultural sector. Between the years 2006 and 2008, the company frequently claimed a 1% AIR duty discount on its shipments, as was stated by a number of customs notices.

Regardless of whether or not they used the CENVAT facility, which is a program that falls within the purview of central excise law for input tax credits, exporters are able to claim this benefit thanks to these warnings.

On the other hand, in 2008, the Directorate General of Central Excise Intelligence (DGCEI) in Indore made the decision that exporters who claimed refunds under Rule 18 or purchased things under Rule 19(2) of the Central Excise Rules were not eligible for the AIR tax reduction. It was because of this interpretation that the advantages that were owed to the appellant were taken away.

Exporters replied by going to the Customs and Border Enforcement Commission (CBEC) and arguing that the components of customs and excise were distinct from one another, and that the denial of a drawback based on this was incorrect.

CBEC eventually released Circular No. 35/2010-Cus. on September 17, 2010, which confirmed that the 1% AIR customs drawback would be accessible even if the exporter has earned excise refunds under Rule 18 or 19(2). This was done in order to ensure that the drawback would be readily available.

However, the circular said that it will begin on September 20, 2010, notwithstanding this circumstance. In light of this, a legal argument ensued about the question of whether the circular was prospective, which meant that it only applied to future exports, or retroactive, which meant that it covered previous transactions as well.

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Important Provisions and Concerns Regarding the Law

The primary element that was being contested was the AIR duty drawback process, which was governed by a large number of customs notifications that were delivered in accordance with the Customs Act of 1962. This strategy provides exporters with a predetermined rate of drawback to compensate for taxes paid on inputs that are utilized in the production of exported goods.

Basic legal concerns were addressed by the Supreme Court, including the following:

1. The question of whether Circular No. 35/2010-Cus. is clarificatory in nature or if it constitutes a significant change to the legislative process.
2. Would it be possible to reverse-apply such a clarifying circular in order to assist exporters who have already completed transactions?
3. Did exporters who claimed benefits under either Rule 18 or Rule 19(2) of the Central Excise Rules, 2002 discriminate against themselves by refusing to take advantage of the AIR drawback?
4. If the High Court had made the decision that the circular was prospective without taking into account its history and its purpose, it would have made a mistake.

investigation of the circular conducted by the court

Taking into consideration previous notifications from customs, the Supreme Court examined the language of Circular No. 35/2010-Cus as well as its intended purpose. It was highlighted by the Court that all previous notifications, regardless of whether they were issued in 2006, 2007, 2008, or 2010, used identical language.

This was done to indicate that the AIR drawback at 1% was available regardless of whether the exporter had participated in CENVAT. As a result, the circular just provided an explanation of the initial purpose of these mailings; it did not provide any further benefits.

According to the conclusion of the Court, clarifying circulars do not give rise to any new rights or obligations. They focus on the meaning of the law as it has traditionally been understood. As a result, circulars of this kind have the opposite effect, unless they expressly state differently or impose new requirements.

In this particular case, the use of similar phrasing over a number of announcements demonstrated that the 1% decrease in AIR duty was always anticipated to be available to exporters like Suraj Impex.

Another legal principle that was emphasized by the Supreme Court was that favorable clauses, which are provisions that give relief or remedy, should typically be construed in a manner that is advantageous to the party that has been wronged. Rather than denying anybody the opportunity to profit, the CBEC circular aimed to clarify any misunderstanding that had arisen as a consequence of various interpretations from different departments.

As a result, it ought to be seen as bolstering the legal stance that was previously taken rather than as a change to it.

A reversal of the approach that was taken by the High Court

There was only one reason for the High Court to dismiss the writ petition filed by the appellant, and that was the fact that the circular stated that the effective date was September 20, 2010. It was said that any benefits that were granted prior to this date were not permitted by law.

The Supreme Court criticized this viewpoint, arguing that it was too formalistic and restricted. The highest court in the land asserts that the High Court failed to take into account the fact that the circular was intended to clarify something and that it did not alter the law but rather reaffirmed the meaning of earlier pronouncements.

In this decision, the Court emphasized that the substance should not take precedence over the fashion. It is necessary to give full effect to a notification or circular that explains rather than changes the law. This includes making the notification or circular retroactive in cases when the substance of the notice or circular corresponds to the true legislative intent.

Final Thought and Permission to Begin Release

The appeal was allowed by the Supreme Court, which reversed the ruling that had been made by the High Court. Circular No. 35/2010-Cus was required to be applied retrospectively, according to the document.

As long as the shipments were in compliance with the standards that were indicated in the relevant customs notices, the appellant, M/s Suraj Impex, was eligible to get a drawback of 1% of the AIR customs tax for exports that were made before to September 20, 2010.

By granting this remedy, the Court ensured that exporters who were eligible for drawback based on the conditions of the original statute would not be unfairly penalized as a result of administrative misinterpretations.

Additionally, it emphasized the need of retroactively applying clarificatory circulars, particularly those that promote a benefit, in order to ensure that justice is being served in the most effective manner possible.

The end result

This decision by the Supreme Court is a significant reaffirmation of two fundamental ideas in administrative and tax law: first, that clarificatory circulars, particularly those that benefit citizens, must be interpreted to apply retrospectively unless they explicitly state otherwise; and second, that courts must interpret such provisions by looking at their substance and purpose rather than being guided solely by formal language. Both of these ideas are fundamental to accounting and tax law.

Exporters are protected against the arbitrary denial of benefits as a result of the ruling, which assures consistency in the handling of fiscal warnings. Additionally, it clarifies to administrative officials that the court will and may correct interpretations that are in conflict with the aim of the legislative body.

Above all else, it preserves the basic premise that fairness and justice are very important in the administration of taxes, particularly in regard to incentives that are intended to stimulate economic growth and exports.

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