2016 (4) TMI 185 - HC - Customs

EOUs entitled to CST reimbursement on inter-state purchases despite procedural restrictions

The court held that Export Oriented Units (EOUs) are eligible for reimbursement of Central Sales Tax (CST) on inter-state purchases from another EOU, ... Reimbursement of Central Sales Tax (CST) to Export Oriented Units - Scope and effect of procedural norms vis-a -vis substantive rights under Foreign Trade Policy - Construction and application of paragraph 6.11 of Foreign Trade Policy - Appendix 14.I-I as a procedural instrument to operationalise FTP entitlementsReimbursement of Central Sales Tax (CST) to Export Oriented Units - Construction and application of paragraph 6.11 of Foreign Trade Policy - Entitlement of an EOU to reimbursement of CST paid on inter state purchases from another EOU under paragraph 6.11 of the Foreign Trade Policy. - HELD THAT: - Paragraph 6.11(c)(i) grants reimbursement of CST on goods manufactured in India and does not by its terms restrict reimbursement to purchases from units located in the Domestic Tariff Area. The Court observed that while exemption from Central Excise under paragraph 6.11(c)(ii) expressly requires procurement from DTA, the reimbursement limb requires only that goods be manufactured in India. The substantive provision therefore covers CST paid on inter state purchases irrespective of the constitutional character of the seller (DTA or EOU), and past administrative practice of allowing such claims supports that construction. [Paras 21, 22, 26, 31]An EOU is entitled to reimbursement of CST for inter state purchases from another EOU where the goods are manufactured in India, under paragraph 6.11 of the Foreign Trade Policy.Appendix 14.I-I as a procedural instrument to operationalise FTP entitlements - Scope and effect of procedural norms vis-a -vis substantive rights under Foreign Trade Policy - Whether Appendix 14.I-I (procedure) can limit or defeat the substantive entitlement conferred by paragraph 6.11 of the Foreign Trade Policy. - HELD THAT: - The Handbook and Appendix are procedural instruments notified under paragraph 2.4 of the Policy to operationalise substantive rights. A procedure cannot be used to narrow or frustrate the substantive right granted by the Policy. If a procedural provision conflicts with the substantive terms of the Policy, the Policy prevails and the conflicting procedural norm is liable to be set aside. A bare reading of Appendix 14.I-I may suggest restriction to purchases from DTA, but that procedural restriction cannot override paragraph 6.11's substantive grant of reimbursement where goods are manufactured in India. [Paras 20, 25, 26, 28, 33]Appendix 14.I-I cannot restrict or defeat the substantive entitlement under paragraph 6.11; procedural norms must conform to and not frustrate the Policy.Invalidation of administrative communications inconsistent with Policy - Remedy of quashing and direction to grant refund - Validity of the communications dated 11.04.2014 and 28.04.2014 declining reimbursement and the appropriate remedy. - HELD THAT: - The impugned communications refused reimbursement on the ground that purchases from another EOU were ineligible. Since that position is inconsistent with the substantive entitlement in paragraph 6.11 and Appendix 14.I-I cannot lawfully narrow that entitlement, the communications are contrary to Policy and liable to be set aside. In consequence, the administrative authority is directed to grant the refund claims relating to purchases from the specified EOU in accordance with the Policy. [Paras 34, 35]Communications dated 11.04.2014 and 28.04.2014 are set aside; the Development Commissioner is directed to grant the reimbursement claims for purchases from the other EOU.Final Conclusion: The writ petitions are allowed: paragraph 6.11 of the Foreign Trade Policy entitles EOUs to reimbursement of CST on goods manufactured in India even when procured from another EOU; procedural appendix provisions cannot curtail that substantive right; the impugned communications are quashed and the Development Commissioner is directed to sanction the refund claims for the relevant period. Issues Involved:1. Eligibility of an Export Oriented Unit (EOU) for reimbursement of Central Sales Tax (CST) on inter-state purchases from another EOU.2. Interpretation of Foreign Trade Policy (FTP) provisions and Handbook of Procedures (HBP) regarding CST reimbursement.3. Validity of procedural norms conflicting with substantive rights under the FTP.Issue-wise Detailed Analysis:1. Eligibility of an EOU for Reimbursement of CST on Inter-State Purchases from Another EOU:The core issue in both writ petitions was whether inter-state purchases made by an EOU from another EOU qualify for CST reimbursement under the extant provisions of the law. The petitioner, a 100% EOU, argued that they were entitled to CST reimbursement for purchases made from another EOU, citing past instances where such claims were sanctioned. However, the respondents contended that the Handbook of Procedures Vol-I allowed CST reimbursement only for supplies from Domestic Tariff Area (DTA) units, not from EOUs.2. Interpretation of FTP Provisions and HBP Regarding CST Reimbursement:The petitioner relied on paragraph 6.11 of the FTP, which provides for certain entitlements for EOUs, including CST reimbursement on goods manufactured in India. The petitioner argued that the substantive right under the policy allows for CST reimbursement irrespective of the seller's category (DTA or EOU). The respondents, however, maintained that the Handbook of Procedures and Appendix 14.I-I only provided for CST reimbursement on purchases from DTA units, not from EOUs.3. Validity of Procedural Norms Conflicting with Substantive Rights Under the FTP:The court held that procedural norms (Appendix 14.I-I) should not restrict the substantive rights provided in the policy. It emphasized that the Handbook and Appendix are procedural instruments meant to operationalize the substantive rights in the FTP, not to prevent them. The court noted that the substantive provision in paragraph 6.11 of the FTP remained unchanged in the new FTP (2015-2020), which continued to allow CST reimbursement for goods manufactured in India without specifying the seller's category. Therefore, the procedural norms conflicting with this substantive right were held to be invalid.Judgment:The court set aside the impugned communications dated 28.04.2014 and 11.04.2014, issued by the Development Commissioner, Madras Export Processing Zone, Chennai, and the Secretary, Ministry of Commerce and Industry, respectively. It directed the Development Commissioner to grant the refund claims for CST on purchases made by the petitioner from another EOU, M/s Orchid Chemicals & Pharmaceuticals Limited. The writ petitions were allowed, and the connected miscellaneous petition was closed.