The Central Board of Indirect Taxes and Customs, by Instruction No. 17/2026-Customs dated 21 September 2026, clarified how field formations should sequence Section 28AAA of the Customs Act, 1962 adjudication against the Directorate General of Foreign Trade's parallel process for cancelling an allegedly fraudulently obtained instrument or scrip, setting out three distinct fact patterns rather than a single fraud-confirmed/fraud-alleged test, and confirming that adjudication may proceed without waiting for cancellation only where DGFT is itself technically or legally unable to cancel the instrument.
Background
Section 28AAA of the Customs Act, 1962 provides for recovery of customs duty from the person to whom a duty credit instrument or scrip — such as those issued under DGFT's export-incentive schemes — was originally issued, where that instrument was obtained fraudulently through collusion, wilful misstatement or suppression of facts. Because such instruments are issued by DGFT but the resulting duty liability is recovered by Customs, adjudication under Section 28AAA sits at the intersection of two separate authorities' processes: DGFT's power to cancel the instrument, and Customs' power to recover duty once fraud is established.
Existing guidance on sequencing these two processes dated back to Para II.2 of a Tax Research Unit D.O. letter dated 1 June 2012, which had advised field formations to issue demands once DGFT or the concerned Regional Authority initiated action for cancellation of an instrument, but to decide the matter only after the instrument had actually been cancelled by DGFT. Over time, this created practical difficulty for field formations in cases where DGFT's cancellation process was delayed, or complicated by a court order or judgment affecting DGFT's ability to formally cancel the instrument, leaving Section 28AAA show cause notices pending indefinitely even where the underlying fraud finding was otherwise confirmed.
Key clarifications
CBIC's Instruction No. 17/2026-Customs sets out three distinct fact patterns for adjudicating authorities, rather than a single test, followed by a residual rule:
Fraud alleged on shipping-bill misdeclaration grounds (misclassification, overvaluation or similar incorrect declarations): DGFT has taken the position that where Customs or the Directorate of Revenue Intelligence (DRI) merely suspects or alleges misclassification, Customs must first investigate and adjudicate the alleged misdeclaration itself under the Customs Act, 1962, and, where warranted, conclusively amend the shipping bill or classification. Only after that determination is made does the matter go to DGFT's Regional Authority for cancellation of the scrip. CBIC agrees with this position: field formations are instructed to adjudicate the underlying misdeclaration first, then refer the matter to DGFT for cancellation action.
Fraud alleged on policy-interpretation, eligibility or entitlement grounds within DGFT's domain: here the matter is to be referred to DGFT as the competent authority for issuance, administration and interpretation of the instrument. DGFT's view on the validity of, and entitlement under, the instrument prevails, and Customs proceedings are decided in accordance with DGFT's determination on the policy question.
DGFT technically or legally unable to cancel the instrument — including where a court order or judgment precludes cancellation, as in Supreme Castings Ltd. v. Joint DGFT, Ludhiana (cited in the Instruction for the proposition that "there being no provision in Section 9(4) to cancel the license with retrospective effect... the DEPB could not have been cancelled ab initio from the date of issue"): in this category alone, CBIC finds no reason to keep the Section 28AAA show cause notice pending for want of cancellation, and directs adjudicating authorities to proceed with adjudication and decide the case on its merits in accordance with law.
Residual rule (all other fraud-allegation cases): where an instrument is alleged to have been fraudulently obtained, DGFT has initiated cancellation proceedings, and none of the three specific scenarios above applies, CBIC reiterates the original 2012 position — adjudication under Section 28AAA should take place only after the instrument has actually been cancelled by DGFT.
Implications for practitioners
The Instruction is narrower than a general "adjudicate first, let DGFT catch up" rule, and practitioners should not read it that way. Only the third scenario — DGFT technically or legally unable to cancel, including where litigation has blocked cancellation — permits Customs to adjudicate a Section 28AAA show cause notice without waiting for DGFT action at all. Counsel representing importers or exporters under Section 28AAA scrutiny should first establish which of the three scenarios the client's facts fall into, since each carries a different procedural sequence and a different point at which the client can meaningfully engage: contest the underlying misclassification in scenario (a), make representations to DGFT on the policy question in scenario (b), or prepare to defend the Section 28AAA case on its substantive merits without an interim wait in scenario (c).
For practitioners advising exporters or duty credit scrip holders more broadly, scenario (a) is the one most likely to affect ordinary Section 28AAA respondents in practice, because it means Customs' own misdeclaration finding — not DGFT's cancellation — is the first battleground. A client whose scrip is challenged on shipping-bill misclassification grounds should expect Customs to adjudicate that underlying question directly, with DGFT's cancellation action following rather than preceding it; the strategic response is therefore to contest the misclassification finding on its own terms at the Customs stage, not to wait for or rely on the DGFT cancellation process.
The Instruction's reliance on Supreme Castings Ltd. v. Joint DGFT, Ludhiana is significant specifically for scenario (c) matters, where a court order or judgment has itself precluded DGFT from cancelling an instrument (for example, on the ground that a licence or scrip cannot be cancelled with retrospective effect). Counsel handling such matters should treat the Instruction as confirming that a stalled or legally barred DGFT cancellation process — including one stalled by litigation — will not indefinitely shield a duty-recovery adjudication that can otherwise proceed on the merits of the underlying fraud allegation.
More broadly, this Instruction is a useful example of CBIC using its instruction-issuing power to resolve inter-agency sequencing ambiguity that field formations had struggled to apply consistently across three materially different fact patterns, and practitioners handling cross-agency customs and foreign-trade matters should treat CBIC Instructions of this kind as a regular source of procedural clarification worth monitoring, since they frequently determine litigation timing and strategy even where they do not alter the underlying substantive law.
Frequently Asked Questions
What does Section 28AAA of the Customs Act, 1962 provide for?
Section 28AAA of the Customs Act, 1962 provides for recovery of customs duty from the person to whom a duty credit instrument or scrip, such as those issued by the Directorate General of Foreign Trade, was originally issued, where the instrument was obtained fraudulently by collusion, wilful misstatement or suppression of facts. CBIC's Instruction No. 17/2026-Customs, dated 21 September 2026, clarifies the sequencing between Customs adjudication under this section and DGFT's parallel cancellation process for the underlying instrument.
Can Customs adjudicate a Section 28AAA case before DGFT cancels the scrip?
Only where DGFT is technically or legally unable to cancel the instrument, including where a court order or judgment precludes cancellation - in that scenario alone, adjudicating authorities are directed to proceed and decide the case on its merits without waiting. Where fraud is alleged on shipping-bill misdeclaration grounds, Customs must first adjudicate the misdeclaration itself; where fraud is alleged on policy-interpretation grounds within DGFT's domain, DGFT's view prevails; and in all other fraud-allegation cases, adjudication still awaits DGFT's actual cancellation of the instrument.
Why did CBIC need to clarify this sequencing in 2026?
The original guidance, in Para II.2 of a Tax Research Unit D.O. letter dated 1 June 2012, had advised field formations to issue demands once DGFT initiated cancellation action but to decide the matter only after actual cancellation by DGFT. CBIC's Instruction No. 17/2026-Customs responds to confusion among field formations over when this waiting requirement could be departed from, particularly in cases where DGFT's cancellation process was delayed or complicated by legal or technical impediments.