CESTAT Delhi: Diversion of Goods After Export Does Not Automatically Defeat Drawback Entitlement

Aadrikaa Legal Services (ALS)- Law I Litigation I Arbitration

Date: 07.10.2026

CESTAT Delhi: Diversion of Goods After Export Does Not Automatically Defeat Drawback Entitlement

In a significant ruling concerning export drawback, realisation of export proceeds, destination of exported goods, confiscation under Section 113 and penalty under Section 114 of the Customs Act, 1962, the Principal Bench of CESTAT, New Delhi has allowed six connected appeals arising from exports of readymade garments to Russia under the special Rupee-Rouble repayment of State Credits arrangement.

The Tribunal set aside the Commissioner’s order that had disallowed and ordered recovery of approximately ₹3.30 crore of drawback, held export goods valued at about ₹26.98 crore liable to confiscation, and imposed substantial penalties on the exporter and other appellants.

Most importantly, CESTAT held that once goods are exported—that is, they leave the territorial waters of India and title passes to the buyer—the exporter’s entitlement to drawback does not disappear merely because the goods allegedly did not reach the originally intended destination. The Tribunal relied on the Supreme Court’s ruling in Collector of Customs v. Sun Industries.

The appeals were decided by Dr. Rachna Gupta, Officiating President, and P.V. Subba Rao, Member (Technical). The matter was heard on 4 August 2026 and decided on 28 September 2026.

Background of the Dispute

• M/s PGY Associates had exported readymade garments to Russia through ICD Tughlakabad and ICD Patparganj, New Delhi, during August 2001 to March 2003 under the Repayment of State Credit Scheme and claimed duty drawback.
• The Directorate of Revenue Intelligence (“DRI”), including through its Customs Overseas Intelligence Network officer in Moscow, investigated the transactions. According to the Department, the exported goods never reached Moscow and the containers had instead been de-stuffed at Kotka, Finland, or Bandar Abbas, Iran.
• On that basis, the Department alleged that the remittances received by PGY Associates through Punjab National Bank were not actually the sale proceeds relatable to the exports.
• A show cause notice dated 31 October 2008 consequently proposed recovery of drawback with interest and imposition of penalties.

Commissioner Orders Recovery of ₹3.30 Crore Drawback

The Commissioner of Customs confirmed the allegations through Order-in-Original No. 10/2012 dated 31 March 2012.

The Commissioner disallowed:

• ₹2,07,94,934 relating to exports through ICD Tughlakabad; and
• ₹1,22,51,916 relating to exports through ICD Patparganj.
• The total drawback ordered to be recovered was therefore ₹3,30,46,850.
• An amount of ₹1 crore already paid by PGY Associates was appropriated towards the demand.
• The Commissioner also held goods valued at approximately ₹26.98 crore liable to confiscation under Section 113 of the Customs Act. Since the goods had already been exported and were unavailable for physical confiscation, no redemption fine was imposed.
• However, a penalty equivalent to the drawback amount—₹3,30,46,850—was imposed on PGY Associates under Section 114, besides penalties on partners and officials connected with the exporter. Interest was also ordered to be recovered.

Exporter’s Case Before CESTAT

• PGY Associates challenged the Department’s entire premise.
• The exporter argued that the Commissioner himself had accepted that the goods had left India and reached either Kotka or Bandar Abbas. Once the goods were exported from India, it was contended, the statutory requirement of export stood fulfilled.
• According to the appellant, delivery at the ultimate foreign destination is not the test for completion of export under the Customs Act.
• Reliance was placed upon the Supreme Court judgment in Collector of Customs v. Sun Industries, reported at 1988 (35) ELT 241 (SC).
• The exporter further contended that the Drawback Rules did not make the destination country a condition for entitlement to drawback.
• It also argued that drawback could be recovered for non-realisation of export proceeds only in accordance with the mechanism prescribed under Rule 16A and that, in the present case, the export proceeds had in fact been received.

Revenue’s Case: Goods Never Reached Russia

• Revenue strongly defended the Commissioner’s order.
• According to the Department, investigations showed that the goods intended for Russia were offloaded en route and never reached the Russian buyers.
• The Russian importers had allegedly not received the goods, and the Roubles paid by them in advance were stated to have been returned.
• Revenue therefore argued that any remittance received by the Indian exporter could not be treated as sale proceeds of those exports.
• The Department further contended that drawback is an export incentive representing repayment of taxes embedded in exported goods and that mere receipt of money cannot, by itself, establish entitlement to drawback.

CESTAT Examines the Special Rupee-Rouble Export Mechanism

• An important feature of the judgment is CESTAT’s detailed examination of the special mechanism governing exports from India to Russia.
• Unlike conventional exports where payment ordinarily travels from the foreign buyer’s bank to the Indian exporter’s bank in freely convertible currency, the transactions in question operated through a special arrangement involving the Reserve Bank of India and Russia’s Bank for Foreign Economic Affairs (BFEA).
• Under the arrangement, an Indian exporter would export goods to Russia in Indian Rupees. The Indian bank would pay the exporter and forward the relevant documents to RBI.
• RBI would then reimburse the Indian bank and set off the export amount against the Government of India’s debt to Russia, while informing BFEA.
• The Tribunal therefore found the source and character of the remittance crucial.

“Who Made the Remittances?” — RBI Did

• CESTAT rejected the Commissioner’s finding that the remittances received by PGY Associates were unrelated to the disputed exports.
• The Tribunal observed that the remittances had come from RBI through Punjab National Bank under the special Russian export scheme.

According to CESTAT, accepting the Commissioner’s conclusion would effectively mean accepting that RBI had:

• wrongly remitted money to the exporter;
• wrongly adjusted that amount against India’s State debt to Russia; and
• informed BFEA of an incorrect adjustment.

It would further imply that BFEA had wrongly accepted or failed to dispute the corresponding reduction in India’s sovereign debt.

The Tribunal found no evidence capable of supporting such far-reaching conclusions.

DRI Should Have Referred the Remittance Issue to RBI

• One of the strongest findings in the decision concerns the jurisdictional and evidentiary role of RBI.
• CESTAT held that if DRI’s investigation led it to believe that the goods had not reached Russia and that RBI had consequently made an incorrect remittance, the matter should have been taken up with RBI.
• The Tribunal noted that there was nothing on record showing that PNB or RBI had been informed of the alleged wrongful remittance and had confirmed or reversed it.

In its final summary, CESTAT went further and observed that:

• “Neither the DRI nor the Commissioner who passed the impugned order can sit in judgment over the remittance made by RBI.”
• The Tribunal held that if DRI doubted whether the remittance actually related to the exports, the matter ought to have been referred to RBI, which could decide the issue concerning the remittance under the scheme.
• This finding has considerable significance in disputes where Customs seeks to question the realisation or character of export proceeds falling within RBI-administered mechanisms.

When Does an Export Become Complete for Drawback?

• The central legal issue before CESTAT was whether drawback could be denied merely because the goods allegedly failed to reach their declared foreign destination.
• The Tribunal answered this question in favour of the exporter.
• CESTAT explained that drawback is an export incentive based on the internationally recognised principle that countries export goods, not taxes. Sections 74, 75 and 76 of the Customs Act contain the statutory framework governing drawback.
• The Tribunal then made an important distinction between the nature of the goods exported and their ultimate destination.
• It observed that the duties and taxes embedded in exported goods depend upon the goods, inputs and applicable duty incidence—not upon the country or port to which they are exported.
• This is why drawback schedules prescribe rates according to the nature of the goods rather than different rates for individual destination countries.

Drawback Becomes Payable Once Export Is Completed

• CESTAT observed that drawback becomes payable when export is completed, evidenced by processing of the shipping bill, issuance of the Let Export Order (LEO) and filing of the Export General Manifest (EGM) containing the relevant export.
• The Tribunal separately recognised that realisation of sale proceeds is governed through the foreign-exchange framework administered under FERA/FEMA and monitored by RBI.
• This distinction between physical export of goods and realisation of export proceeds became central to the outcome.

Destination of Goods Does Not Determine Drawback Entitlement

• The Tribunal considered what would happen if exported goods did not ultimately reach the intended destination, were diverted elsewhere, destroyed after export or subsequently re-imported.
• It observed that the answer may depend upon the terms governing passage of property and risk.
• For instance, under an FOB transaction, once goods are placed on board and the seller’s delivery obligation is completed, subsequent risks fall upon the buyer.
• Accordingly, if the buyer later resells the goods or diverts them to another location, that circumstance does not by itself alter the exporter’s drawback entitlement or the separate obligation to realise export proceeds.

Supreme Court’s Sun Industries Judgment Becomes Decisive

• CESTAT relied heavily upon the Supreme Court’s decision in Collector of Customs, Calcutta v. Sun Industries.
• In Sun Industries, goods destined for Colombo had left Indian territorial waters, but the vessel later developed engine trouble, returned and ran aground within Indian territorial waters.
• The Supreme Court nevertheless upheld the finding that export had already been completed when the goods left Indian territorial waters and title had passed to the purchaser.

Applying that principle, CESTAT held:

• once the goods are exported—that is, they leave the territorial waters of India and title passes to the buyer—the exporter becomes entitled to drawback.
• Therefore, even assuming that PGY Associates’ goods never reached Russia and were instead landed at Bandar Abbas or Kotka, the exporter would still be entitled to drawback.
• Consequently, the denial and recovery of drawback could not be sustained.

Rule 16 and Rule 16A of Drawback Rules: Important Distinction

• The Tribunal also explained the distinction between Rule 16 and Rule 16A of the Customs and Central Excise Duties Drawback Rules, 1995.
• Rule 16 deals with drawback that has been erroneously or excessively paid.
• Rule 16A, on the other hand, provides a specific mechanism for recovery where the sale proceeds of exported goods have not been realised within the period permitted under the applicable foreign-exchange law.
• Under Rule 16A, the process contemplated receipt of relevant information from RBI, issuance of notice to the exporter and an opportunity to produce evidence of realisation.
• The ruling therefore reinforces that questions concerning export, drawback entitlement and realisation of export proceeds must be examined within their respective statutory frameworks rather than conflated.

Can Goods Already Exported Be Confiscated Under Section 113?

• CESTAT then dealt with another major issue: the Commissioner’s finding that the exported goods were liable to confiscation under Section 113 of the Customs Act.
• The Tribunal focused upon the statutory expression “export goods”.
• Under Section 2(19), “export goods” means goods which “are to be taken out of India to a place outside India.”
• CESTAT distinguished such goods from goods that have already been exported.
• It held that Section 113 provides for confiscation of specified categories of “export goods”, but not goods which have already completed export and ceased to remain within Indian Customs control.

The Tribunal identified two reasons:

• First, once goods have already been exported, they are no longer under the control of Indian Customs for confiscation.
• Second, during the period relevant to the dispute, the Customs Act extended to the whole of India and did not possess the later-expanded extraterritorial reach. The Tribunal noted that the statutory extent was expanded beyond India through an amendment in 2018.
• Accordingly, CESTAT held that the already-exported goods could not be held liable to confiscation under Section 113.

Section 114 Penalties Also Fall

• This finding had a direct consequence for the penalties imposed upon PGY Associates and the other appellants.
• Section 114 penalises acts or omissions that render goods liable to confiscation under Section 113.
• CESTAT reasoned that once the goods could not legally be held liable to confiscation under Section 113, the foundation for penalties under Section 114 also disappeared.
• The Tribunal therefore set aside all such penalties.
• This resulted in relief not merely for PGY Associates but also for the individual appellants against whom substantial personal penalties had been imposed.

CESTAT’s Key Findings

• In its concluding summary, the Tribunal recorded several important propositions.
• The remittances received by PGY Associates were related to the disputed Russian exports because they were received from RBI through PNB under the special Rupee export mechanism.
• The Commissioner could not presume that RBI had wrongly made the remittance and wrongly adjusted the amount against India’s sovereign debt to Russia without evidence supporting such a conclusion.
• If DRI doubted the delivery of the goods and consequently questioned the remittance, the matter should have been referred to RBI.
• Further, neither DRI nor the Commissioner could substitute their own determination for RBI’s position regarding the remittance.
• Most importantly, drawback was admissible once export stood completed by the goods leaving Indian territorial waters and title passing to the buyer.
• Finally, goods already exported were no longer “export goods” for the purpose of Section 113, and therefore the confiscation and consequential Section 114 penalties could not survive.

Final Order: All Six Appeals Allowed

• CESTAT ultimately allowed all six appeals and set aside the Commissioner’s impugned order.
• The appellants were held entitled to consequential relief.

Thus, the Tribunal effectively set aside:

• the drawback recovery of ₹3,30,46,850;
  the confiscation liability attached to the exported goods;
  the Section 114 penalties imposed on the appellants; and
  the impugned order insofar as challenged in the six appeals.
• The Final Order was pronounced in open court on 28 September 2026.

Why This Judgment Matters for Exporters

• The PGY Associates ruling has substantial implications for exporters and trade-compliance professionals because it draws clear legal boundaries between export completion, ultimate destination, drawback entitlement and realisation of export proceeds.
• An allegation that goods did not ultimately reach the declared buyer or destination does not, without more, establish that no export took place for purposes of drawback.
• Similarly, where export proceeds are received through a mechanism administered by RBI, Customs authorities must be cautious before independently treating those remittances as unrelated to the exports—particularly when RBI itself has neither repudiated nor reversed them.
• The decision also underscores the importance of identifying the correct statutory route for recovery. Non-realisation of export proceeds, erroneous drawback and alleged export misdeclaration are distinct issues governed by different statutory provisions and cannot automatically be treated as interchangeable.

Important Principle on Customs Jurisdiction Over Already Exported Goods

• Another potentially far-reaching aspect of the ruling is CESTAT’s interpretation of Sections 2(19), 113 and 114 of the Customs Act.
• The Tribunal distinguished “export goods”—goods that are to be taken out of India—from goods that have already completed export.
• On the facts and statutory framework applicable to the period involved, CESTAT held that goods already exported could not subsequently be held liable to confiscation under Section 113. Once that confiscation foundation failed, the consequential penalties under Section 114 also became unsustainable.
• This reasoning may be particularly relevant in legacy export cases involving allegations raised only after goods have physically left India.

Conclusion

The CESTAT Principal Bench’s decision in M/s PGY Associates & Others v. Commissioner of Customs is an important ruling on the legal meaning of export for drawback purposes.

The Tribunal rejected the proposition that drawback could be recovered merely because exported goods allegedly failed to reach Russia and were said to have been offloaded at intermediary destinations.

Relying on the Supreme Court’s decision in Sun Industries, CESTAT reaffirmed that where goods have left Indian territorial waters and title has passed to the purchaser, the export stands completed. The subsequent destination of those goods does not, by itself, undo the completed export or extinguish drawback entitlement.

Equally significant is the Tribunal’s refusal to permit Customs authorities to disregard an RBI-administered remittance mechanism without evidence from RBI itself. The decision therefore provides an important reminder that Customs enforcement, foreign-exchange regulation and export-incentive recovery each operate within defined statutory boundaries. The result was complete relief to the appellants: all six appeals were allowed, the impugned order was set aside and consequential relief was directed.

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Source: CESTAT Delhi

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Ravi Shekhar Jha – Advocate, Bar Council of Delhi