Levy of Interest on the Imports Against Advance Authorisations is in Violation of Pre-Import Condition and The Imposition of Fines and Penalties are Without The Authority of Law

 The ‘pre-import condition’ was introduced into the Foreign Trade Policy (‘FTP’ for short) 2015-2020 through a notification, specifically Notification No. 33/2015-2020, issued on October 13, 2017. This amendment incorporated the ‘pre-import condition’ within paragraph 4.14 of the FTP, which dealt with duty exemption schemes. This condition stipulated that duty exemptions, including those for Integrated Goods and Services Tax (IGST) and Compensation Cess, would only be applicable if the goods were imported before being used to manufacture products for export against an Advance Authorization (AA). Pre-import condition requires that the importer should first import exempt material and use them in the manufacture of finished goods in discharge of export obligation under Advance Authorization.  The purpose of this condition is to ensure that the imported goods are actually used in the manufacturing process for exports, and not diverted for domestic use. Essentially, it mandates a direct link between the imported goods and the subsequent exports. This condition was previously a requirement for claiming exemptions from Integrated Goods and Services Tax (IGST) and Compensation Cess on imports made under the AA scheme. On January 10, 2019, the government removed the pre-import condition for Advance Authorizations.

In the meantime, the Gujarat High Court, by its Judgement dated 04.02. 2019, in the case of MESSRS MAXIM TUBES COMPANY PVT LTD. Versus UNION OF INDIA - 2019 (2) TMI 1445 - GUJARAT HIGH COURT struck down the ‘pre import’ condition in paragraph 4.14 of the FTP as being ultra vires the Advance Authorization Scheme as contained in the FTP as well as the provisions of the Handbook of Procedure.  The Revenue filed an appeal before the Supreme Court which is pending.

The Supreme Court, by its Judgement dated 28.04.2023, in the case of UNION OF INDIA & ORS. Versus COSMO FILMS LIMITED - 2023 (5) TMI 42 - Supreme Court, allowed the Appeal of the Revenue and upheld the validity of the pre-import condition. The Supreme Court directed the Revenue to permit to claim refund or input credit (whichever appliable and/or wherever customs duty was paid.  The importers should approach the jurisdictional commissioner, and apply with documentary evidence within six weeks from the date of the judgment.

Consequent to the judgment of Supreme Court, the Department issued a circular No. 16/2023-Customs, dated 07.06.2023 providing the procedures for payment of IGST and compensation cess by the importers who had violated the pre-import condition and had taken input tax credit of the same.  According to the said circular the importers may approach the concerned assessment group at the Port of Import with relevant details for purposes of payment of the tax and cess along with applicable interest. The assessment group at the Port of Import shall cancel the Out of Charge and indicate the reason in remarks.  On this Bill of Entries should be assessed again and decide the tax to be payable by the importer.  The payment of tax and cess, along with interest, should be made against the electronic challan generated in the Customs EDI System. On completion of above payment, the Port of Import shall make a notional Out of Charge for the Bill of Entry on the Customs EDI System.

The Joint Director of Foreign Trade, by Trade Notice No. 7 of 2023-24, dated 08.06.2023, recorded that all the imports made under the Advance Authorization Scheme on or after 13.10.2017 and up to and including 09.01.2019, which could not meet the pre-import condition, may be regularized by making payments as prescribed in the Customs Circular No. 16/2023-Customs dated 07.06.2023.

In A.R. Sulphonates Private Limited Versus Union of India, Commissioner of Customs (Adjudication) Mumbai, Commissioner of Customs, (Import-I), Mumbai, Commissioner of Customs, Gujarat, Commissioner of Customs, Kandla, The Deputy Commissioner of State Tax, Kalyan. - 2025 (4) TMI 578 - BOMBAY HIGH COURT, A.R. Sulphonates Private Limited (‘petitioner’ for reference), is engaged in the manufacture, export and supply of Linear Alkyl Benzene Sulphonic Acid.  The petitioner procures input materials from domestic markets and from foreign vendors. Section 12 of the Act is the charging Section which stipulates that duties of customs shall be levied on all goods imported into India or exported out of India at such rates as may be specified under the Tariff Act. Along with Basic Customs Duty, Additional Customs duties, Anti-dumping duty and Safeguard duty were also levied by the Act, read with the Tariff Act.  With the introduction of GST with effect from 01.07.2017, Additional Customs duties were subsumed into the newly introduced Integrated Goods and Services Tax (‘IGST’ for short) and hence IGST was made payable instead of the Additional Customs duties.

Prior to the GST regime, and in terms of the Notification No.18 of 2015, dated 01.04.2015, import of input materials under a valid Advance Authorization Licenses were exempted from payment of BCD, CVD, SAD, Anti-dumping duty and Safeguard Duty.  The petitioner had applied for 11 Advanced Authorization Licenses, which were duly granted by the DGFT.  After introduction of GST, the Notification No.18 of 2015 was amended in which BCD was given exemption but IGST was not given exemption against the imports.  The said Notification was again amended on 13.10.2017 to provide exemption to IGST subject to the following conditions-

• discharge of export obligation shall only be by physical exports; and
• the exemption shall be subject to pre-import condition.

The Petitioner had imported input materials amounting to Rs. 39,93,06,014/- under the cover of 11 Advanced Authorization Licenses during the period from 27.10.2017 to 27.03.2018.  The input materials worth Rs. 33,05,86,230/- were imported at Mumbai Port, input materials worth Rs. 3,85,58,608/- were imported at Mundra Port and input materials worth Rs. 3,01,61,176/- were imported at Kandla Port.

An investigation was initiated by the Directorate of Revenue Intelligence for alleged wrong availment of exemption from payment of IGST in respect of imports undertaken against Advanced Authorization Licenses. The Petitioner submitted the details of the said imports to the Investigating Authority.  The statement of the GM of the petitioner company was also recorded.  On 23.07.2018 the petitioner requested the Deputy Commissioner of Customs to permit re-assessment of the bills of entry to enable it to make payment of IGST.  Again on 29.08.2018 the petitioner requested for re-assessment of the bills of entry. On 12.09.2018 the Deputy Commissioner informed the petitioner that the request of the petitioner could not be considered due to technical issues.  Again on 31.12.2018 the petitioner reminded the department but no use.

On 10.10.2019 the Department issued a show cause notice to the petitioner calling upon it to show cause as to why-

• Cumulative Duty of Customs amounting to Rs. 7,18,75,084/- in the form of IGST, saved in course of imports of the goods through ports of Mumbai, Mundra and Kandla under Advance Authorization licenses should not be demanded and recovered under Section 28 (1) of the Customs Act for the period 27.10.2017 to 27.03.2018.
• The goods having assessable value of Rs. 33,05,86,230/- should not be held liable for confiscation under Section 111 (m) of Customs Act.
• Interest should not be held liable to be demanded and recovered under Section 28AA of the Customs Act.
• Penalty should not be imposed under Section 112 (a) of the Customs Act.
• Bonds executed at the time of import should not be enforced in terms of Section 143 (3) of the Customs Act for the recovery of Customs duty of Rs. 7,18,75,084/- and interest thereon.

The petitioner filed a reply to the said notice denying all the allegations contained in the show cause notice. A personal hearing was granted to the petitioner on 07.01.2020.  The petitioner prayed that the show cause notice be kept in abeyance till the final decision of the Hon’ble Supreme Court.

The petitioner contended that that no interest could be levied as there is no machinery provision under the Tariff Act to levy interest on IGST which is payable under Section 3 (7) of the Tariff Act.  The same has been confirmed by the Supreme Court in UNION OF INDIA & ORS. Versus MAHINDRA AND MAHINDRA LTD. - 2023 (8) TMI 135 - SC Order.  Against the said order the Revenue filed a revision petition.  Therefore, the show cause notice issued to the petitioner was kept in abeyance and transferred to Call Book.  The said revision petition was dismissed by the Supreme Court on 09.01.2024.

The Department took the case from the Call book and gave a personal hearing to the petitioner on 22.07.2024.  The petitioner, through his letters of various dates requested the Department to reassess the Bill of entry without charging interest on the tax payable in virtue of the order of Supreme Court in Union of India (supra). The petitioner attended the personal hearing on 22.07.2024 and filed his written submissions.  The Commissioner of Customs passed the following order-

• confirming the demand of duty amounting to Rs. 7,18,75,084/- towards IGST under section 28 (8) of the Act;
• to recover the interest at appropriate rate in respect of demand confirmed at para (i) under section 28AA of the Act;
• to confiscate the impugned goods having assessable value of Rs. 39.93 Crores.  Since the goods are not available for confiscation, Redemption Fine of Rs.2 Crore is imposed on the noticee under Section 125 of the Act;
• to impose penalty of Rs. 70 lakhs on the noticee under Section 112 (a) of the Act.
•  to enforce the bonds executed by the noticee at the time of import in terms of Section 143 (3) of the Act, for recovery of aforesaid dues.

By Finance Act (No. 2) of 2024, Section 3 (12) of the Tariff Act was amended prospectively with effect from 16.08.2024, to inter alia include the applicability of interest and penalty provisions of the Customs Act to the Tariff Act. Against this the petitioner filed the writ petition before the High Court.

The petitioner submitted the following before the High Court-

• The Respondent No. 2 violated the principle of judicial discipline by not following the decision of the jurisdictional High Court in the case of Mahindra & Mahindra Limited  (supra).
• The Respondent No. 2 erred in holding in the impugned Order that the decision in Mahindra & Mahindra Limited (supra) was not applicable to the present case on the ground that this Court had decided the same in respect of challenge to an Order of the Settlement Commission.
• The Respondent No. 2 erred in relying upon the decision of the CESTAT, Kolkata, in the case of M/s. Texmaco Rail Engineering Limited Versus Commissioner of Customs (Port), Kolkata - 2024 (1) TMI 902 - CESTAT KOLKATAto confirm the levy of interest.
• The Joint Director General of Foreign Trade, by Notice No. 7 of 2023-24, dated 08.07.2023 had clarified that all imports made under Advance Authorization Scheme on or after 13.10.2017 and up to and including 09.01.2019, which could not meet the pre-import condition, may be regularized by making payments as prescribed in Circular No. 16 of 2023-Customs, dated 07.06.2023. Considering the same, no confiscation or redemption fine is imposable. The said Circular does not mention about demanding any redemption fine.
• Once the petitioner pays the IGST, it would amount to the petitioner not having availed the benefit of exemption and the issue would be regularized. Therefore, the provisions of Section 111 (o) of the Act will not be attracted. Consequently, no fine and penalty would be recoverable from the Petitioner.
• The impugned order, in so far as it seeks recovery of interest, fine and penalty, is without jurisdiction, without the authority of law and is liable to be quashed and set aside.

The Revenue submitted the following before the High Court-

• The decision in the case of Mahindra & Mahindra Limited(supra) was not applicable to the facts of the present case since it did not interpret Section 3 (12) of the Tariff Act.
• Respondent No. 2 was correct in distinguishing the judgement of this Court in Mahindra & Mahindra Limited (supra) and relying upon the decision of the CESTAT-Kolkata in the case of Texmaco Rail Engineering Limited (supra).
• The provisions of unamended Section 3 (12) use the term ‘including’ thereby implying that all provisions of the Act would be made applicable to the Tariff Act.
• It was justified in ordering payment of interest, penalty and redemption fine in the impugned order.

The Revenue prayed for the dismissal of the writ petition.

        The High Court considered the arguments of both the parties.  The High Court considered the provisions of Section 3(7) and 3(12) of the Tariff Act. The High Court also considered the decision in Mahindra & Mahindra Limited  (supra).  In this case it was held that imposing interest and penalty on the portion of demand pertaining to surcharge or additional duty of customs or special additional duty of customs is incorrect and without jurisdiction. The Court went through the provisions of Section 3 (6) of the Tariff Act and Section 3A (4) of the Tariff Act as applicable at the relevant time, held that no specific reference was made to interest and penalties in Sections 3 (6) and 3A (4) of the Tariff Act, which are substantive provisions and, therefore, imposing interest and penalty would be without the authority of law. In the present case, the levy of IGST is under Section 3 (7) of the Tariff Act, and Section 3 (12) of the Tariff Act which is applicable to the said levy is pari materia to Sections 3 (6) and 3A (4) of the Tariff Act as referred to in the case of Mahindra & Mahindra Limited (supra). In these circumstances, the High Court was of the view that the said decision is squarely applicable to the facts of the present case.  The High Court held that when no specific reference was made to interest and penalties in the said provisions, imposing interest and penalty would be without the authority of law. In these circumstances in the view of the High Court the ratio of the decision in the case of Mahindra & Mahindra Limited (supra), would be squarely applicable to the facts of the present case.

The High Court held that-

• Circular No. 16 of 2023-Customs dated 07.06.2023, to the extent that it purports to levy interest upon the IGST payment, is beyond the provisions of the Customs Tariff Act, 1975 and is bad in law.
• The impugned Order dated 01.08.2024, to the extent that it seeks to recover interest, confiscate goods, impose redemption fine and impose penalty, is quashed and set aside.
• The amendment to the provisions of Section 3 (12) of the Customs Tariff Act, 1975 by Finance (No. 2) Act, 2024 dated 16.08.2024 is prospective in nature and is applicable only from 16.08.2024 onwards.