Customs, DGFT and Section 28AAA: A clarification that creates confusion

Introduction

The issuance of Instruction No. 17/2026-Cus. dated 21 September 2026 (‘Instruction’) by the Central Board of Indirect Taxes and Customs (‘CBIC’) marks a significant shift in the administration of proceedings under Section 28AAA of the Customs Act, 1962 (‘Act’). Issued with the stated objective of addressing difficulties faced by Customs in recovering duties where ineligible licences or duty credit scrips have been utilised, the Instruction raises important questions regarding the jurisdictional balance between the Customs authorities and the Directorate General of Foreign Trade (‘DGFT’). The article seeks to examine whether the Instruction merely clarifies the existing legal framework or, instead, introduces uncertainty into an area already marked by considerable jurisdictional controversy and litigation.

Legislative framework of Section 28AAA

The Foreign Trade Policy (‘FTP’), at various points in time, introduced schemes such as Merchandise Exports from India Scheme (‘MEIS’), Services Exports from India Scheme (‘SEIS’), and Remission of Duties and Taxes on Exported Products (‘RoDTEP’) Scheme, with the objective of promoting exports and offsetting infrastructural inefficiencies faced by Indian exporters. These schemes broadly operated through issuance of duty credit scrips to eligible exporters at prescribed rates. Significantly, the determination of eligibility and entitlement under these schemes fell exclusively within the jurisdiction of the DGFT. The duty credit scrips so issued could thereafter be utilised for payment of customs duties on imports.

Section 28AAA of the Act was introduced by the Finance Act, 2012, to empower Customs to recover duties from the holder of an instrument, licence, certificate, duty credit scrip, or similar authorisation (collectively referred as ‘instruments’) where such instrument had been obtained through collusion, wilful misstatement, or suppression of facts and had subsequently been utilised for payment of customs duties.

Traditionally, proceedings under Section 28AAA have followed a two-step process undertaken by distinct statutory authorities:

1. Determination by the DGFT as to whether the instrument under scrutiny was validly issued; and

2. Recovery proceedings by the Customs under Section 28AAA, together with any consequential action arising from the cancellation, suspension, or invalidation of such instrument by the DGFT.

This two-step framework has been considered necessary because the power to issue, amend, suspend, or cancel any instrument is exclusively vested in the DGFT under the Foreign Trade (Development and Regulation) Act, 1992 (‘FTDR Act’).

This division of power, and the authority of the DGFT to adjudicate upon the validity of instrument was also recognised by the Ministry of Finance vide D.O. Letter F. No. 334/1/2012-TRU, dated 1 June 2012 (‘Circular’). The Circular clarified that with the introduction of Section 28AAA, while Customs could issue demands under the provision as soon as DGFT initiates action for cancellation of instrument, the adjudication could only be undertaken after the DGFT has cancelled the scrip. This was further fortified by the CBIC by issuance of Instruction No. 11/2023-Customs dated 13 March 2023 (‘2023 Instruction’) wherein the CBIC directed Customs to keep the matter in abeyance till the validity of scrips was decided by the DGFT.

Disputes on power of DGFT vis-à-vis Customs under Section 28AAA and the issuance of the Instruction

Notwithstanding the issuance of the Circular and the 2023 Instruction, Customs continued, in several cases, to initiate and adjudicate proceedings under Section 28AAA even in the absence of any prior determination by the DGFT regarding the validity of the instrument. At the same time, there were also instances where, upon the relevant circulars being brought to the attention of the Customs, the proceedings were transferred to the call book to await a determination by the DGFT.

Against this backdrop, the Board has issued the present Instruction, purporting to provide further ‘clarification’ on the manner in which proceedings under Section 28AAA are to be dealt with by Customs in the following three distinct situations.

1. Where the instrument is alleged to have been obtained through misdeclaration, including misclassification, Customs may investigate and adjudicate under Section 28AAA, with consequential action under the FTDR Act left to the DGFT.

2. Disputes involving policy interpretation, eligibility, or entitlement within the DGFT’s domain must be referred to it, and its decision will govern proceedings under Section 28AAA.

3. Where legal or technical constraints prevent the DGFT from cancelling, suspending, or invalidating the instrument, Customs may adjudicate under Section 28AAA in accordance with law.

The article seeks to analyse the key legal and jurisdictional implications of the Instruction.

1. Instruction seeks to dilute the settled principle that DGFT must first decide validity of the instrument

A consistent line of judicial authorities has recognized that Customs cannot independently question the validity of an instrument so long as the same continues to remain valid in the records of the issuing authority. The underlying rationale is simple. The authority empowered to issue an instrument viz. DGFT is also the competent authority to determine whether such instrument was wrongly obtained.

The Instruction, however, contemplates situations where Customs may proceed with adjudication under Section 28AAA even though the instrument has not been cancelled by DGFT for either legal or technical grounds. This represents a substantial departure from the earlier understanding reflected in administrative practice and appears to undermine the authority of DGFT in policy matters.

The strongest challenge to the Instruction arises from the judgment of the Supreme Court in Titan Medical Systems Pvt. Ltd. v. CC. The Supreme Court categorically held that where an instrument issued by the competent authority remains valid and has not been cancelled, Customs cannot refuse to honour the instrument or proceed on the assumption that it ought not to have been granted.

The Court recognized that:

• Customs cannot sit in judgment over an instrument issued by the DGFT;

• The instrument remains operative and binding until cancelled;

• Questions regarding validity of the instrument must first be examined by the DGFT.

The ratio of Titan (supra) is founded upon allocation of statutory powers. Customs officers are not vested with powers under the FTDR Act to determine whether export obligations were correctly discharged or whether a licence was rightly issued.

The High Courts in Adyar Gate Hotel, Jeena & Company, ECL PuyVast (India) Pvt. Ltd., Seaswan Shipping & Logistics and Designco  have repeatedly followed the same principle in matters concerning licences and authorizations issued under the FTP.

The jurisdictional distinction assumes critical importance because the FTP involves technical considerations that are specifically entrusted to DGFT. Allowing Customs to independently proceed under Section 28AAA without a prior finding from DGFT risks creating conflicting conclusions by two statutory authorities.

Yet, by relying on the Instruction, Customs may effectively proceed on the assumption that an instrument was obtained through fraud, even in the absence of any determination by the DGFT. In substance, the Instruction appears to permit Customs to achieve indirectly what the Supreme Court has held they cannot do directly, namely, question the validity of a subsisting instrument.

The authors are also mindful of the Supreme Court’s decision in Shesank Sea Foods. In Sheshank, the Hon’ble Court examined a breach of post-import conditions prescribed under a Customs Notification—an issue falling exclusively within the domain of Customs. The present Instruction, however, stands on a different footing, as it seeks to confer jurisdiction on Customs to determine matters that, as recognised in the judicial precedents referred to above, have historically fallen within the exclusive domain of the DGFT.

Further, Customs investigating agencies are often seen not only initiating investigations into matters concerning instruments issued by the DGFT but also directing the manner in which the DGFT should act. For instance, action by the DGFT may itself be initiated at the behest of an investigating agency, accompanied by directions not to renew a licence or to cancel the scrips. Such interference has been deprecated in various judicial decisions, including that of the Madras High Court in MIOT Hospitals. In MIOT, the High Court expressly held that the DGFT must take an independent decision, free from interference by either the investigating agency or the Customs department.

In the present case, however, the Instruction appears to undermine the DGFT’s independent decision-making authority by effectively divesting it of the power to determine the validity of the instruments. This approach appears to be inconsistent with the judicial precedents referred to above.

1. Instruction creates serious difficulties in cases involving service incentive scrips

Unlike goods export schemes where Customs traditionally addresses classification, entitlement under service incentive schemes depends on complex questions concerning the nature and classification of services. For example, disputes may arise regarding:

• Whether a particular activity constitutes an eligible service;

• Whether the service falls within a notified service category;

• Whether the claimant satisfied eligibility requirements under the relevant FTP.

These are fundamentally issues relating to interpretation of the FTP rather than Customs law.

Customs has no institutional role in classifying services

Customs officers primarily administer laws relating to import and export of goods. They are neither responsible for administration of service incentive schemes nor vested with statutory powers to determine entitlement under such schemes.

If Customs is permitted to adjudicate Section 28AAA proceedings without a prior determination by DGFT, they may be compelled to answer questions such as:

• Whether software consultancy qualifies as an eligible service;

• Whether engineering design services fall within a specified FTP category; or

• Whether support services rendered overseas qualify for benefits under the SEIS Scheme.

These questions fall outside Customs’ ordinary functions. Its primary role relates to the assessment and enforcement of duties on imported and export goods, and it may lack the requisite institutional experience and sector-specific expertise necessary to adjudicate service-related eligibility disputes.

However, by virtue of clauses (a) and (c) of the Instruction, in effect, Customs would be required to undertake an exercise that properly falls within the specialized regulatory jurisdiction of DGFT.

Conclusion

Although the Instruction seeks to clarify the manner in which proceedings under Section 28AAA are to be conducted, it may instead give rise to greater uncertainty and litigation. By permitting Customs authorities to proceed without a prior determination by the DGFT, it risks blurring the jurisdictional boundaries between the two authorities and increasing the likelihood of inconsistent findings. Such an approach also appears difficult to reconcile with the principle laid down in Titan (supra), namely that a subsisting licence must be honoured unless and until it is invalidated by the competent authority. The Instruction should therefore be applied with caution so as to preserve DGFT's primacy in matters concerning the validity of licences and scrips and to avoid unnecessary jurisdictional conflicts.

Further, in its present form, the Instruction appears to dilute the DGFT's independent decision-making role by enabling Customs authorities to proceed on issues touching upon the validity of instruments without first obtaining a determination from the DGFT. A more balanced approach would be to establish a streamlined inter-agency mechanism under which relevant material gathered by Customs is placed before the DGFT for an independent determination regarding the validity of the instrument, following which Customs may initiate consequential action under Section 28AAA, where warranted. Such a sequenced framework would preserve the statutory functions of both authorities, minimise the possibility of conflicting findings, and align with the principles recognised by the Madras High Court in MIOT Hospitals (supra).

[The authors are Principal Associate and Partner, respectively, in Customs practice at Lakshmikumaran & Sridharan Attorneys]

2003 (151) E.L.T. 254 (S.C)

Adyar Gate Hotel Ltd. v. Commissioner [Final Order dated 3 June 2025 in CMA 71 & 131 of 2025].

Jeena & Company v. UOI [(2024)15 Centax 55 (Mad.)].

ECL Puyvast (India) Pvt. Ltd. v. UOI & Ors. [2024 (4) TMI 1310 - Karnataka High Court].

Seaswan Shipping & Logistics v. Commissioner [2026 (4) TMI 1013 - Madras High Court].

Designco & Ors. v. UOI [2024 (11) TMI 1150 - Delhi High Court].

Sheshank Sea Foods Pvt. Ltd. v. Union of India [1996 (88) E.L.T. 626 (S.C.)].

MIOT Hospitals Pvt. Ltd. v. Union of India [2018 (362) E.L.T. 437 (Mad.)].