2023 (5) TMI 42 - SC - Customs

Supreme Court Upholds 'Pre-Import Condition' for IGST Exemption

The Supreme Court upheld the legality of the 'pre-import condition' imposed by Notification No. 33/2015-2020 and Notification No. 79/2017-Customs, which ... Pre-import condition - Advance Authorisation (AA) scheme - IGST and GST compensation cess exemption subject to conditions - exports in anticipation of authorization - DGFT power to impose pre-import condition under FTP - Handbook of Procedures subordinate to and governed by FTP - reasonableness and arbitrariness under Article 14 - retrospective effect of delegated legislation - refund or input tax creditPre-import condition - Advance Authorisation (AA) scheme - DGFT power to impose pre-import condition under FTP - IGST and GST compensation cess exemption subject to conditions - Handbook of Procedures subordinate to and governed by FTP - Validity of the 'pre-import condition' introduced by Notification No.79/2017 (Customs) and Notification No.33/2015-2020 (FTP) as a condition for exemption of IGST and GST compensation cess on imports under Advance Authorisation. - HELD THAT: - The Court held that the amendments of 13.10.2017 making IGST and compensation cess exemption subject to (i) physical export and (ii) a 'pre-import condition' were within the competence of the executive and not arbitrary. Paragraph 4.13(i) of the FTP expressly preserved DGFT's power to impose pre-import conditions and Appendix-4J previously listed items subject to such conditions; thus the power to extend the condition to other inputs lay with DGFT. The Handbook of Procedures is procedural and subordinate to the FTP; paragraph 4.27(d) of the HBP (disallowing duty-free authorisations for inputs subject to pre-import condition) and the Trade Notice communicated the change to trade. The introduction of GST created new levies (IGST and compensation cess) with a distinct mechanism of input tax credit and refunds; treating these levies differently from pre-existing customs levies (BCD, CVD, SAD) was a permissible policy choice and not violative of Article 14. Hardship or commercial inconvenience resulting from the new regime does not render a plainly enacted condition arbitrary. Experimental or phased implementation in a complex economic reform is entitled to judicial deference; the change in the mechanism of levy, collection and refund justified the differentiated treatment and the imposition of the pre-import requirement for exemption from IGST and cess.The pre-import condition, as introduced by the notifications dated 13.10.2017, is valid and not arbitrary; the Gujarat High Court's declaration to the contrary is set aside.Exports in anticipation of authorization - pre-import condition - Handbook of Procedures subordinate to and governed by FTP - Whether paragraph 4.27 of the Handbook of Procedures (permitting exports in anticipation of authorization) overrides or renders inoperative the pre-import requirement imposed by the FTP and the amending notifications. - HELD THAT: - The Court held there is no conflict that invalidates the pre-import requirement. Paragraph 4.27 of the HBP permits exports in anticipation of authorisation as an exception but paragraph 4.27(d) excludes inputs subject to pre-import conditions from that exception. The FTP (paragraph 4.03 and paragraph 4.13) has primacy; HBP cannot override FTP. Thus exports-in-anticipation provisions do not negate the power to impose or the effect of the pre-import condition where the policy and notifications so provide.Paragraph 4.27 of the HBP does not nullify the pre-import condition imposed under the FTP and the notifications; the High Court erred in giving primacy to the HBP over the FTP.Retrospective effect of delegated legislation - Whether the subsequent deletion of the pre-import condition by Notification dated 10.01.2019 renders the condition unlawful for the period it was in force (i.e., whether the later notification operates retrospectively). - HELD THAT: - The Court reaffirmed that the power under Section 5 of the FTDRA and delegated rule-making does not permit retrospective framing of regulations unless expressly provided. Interpreting the 10.01.2019 notification as effective from 13.10.2017 would amount to impermissible retrospectivity. The fact that the condition was later omitted does not invalidate the lawfulness of its operation while in force.The deletion of the pre-import condition on 10.01.2019 cannot be given retrospective effect; the High Court's reliance on the subsequent omission to invalidate the earlier notification is unsustainable.Reasonableness and arbitrariness under Article 14 - IGST and GST compensation cess exemption subject to conditions - Whether the imposition of the pre-import condition specifically for exemption from IGST and compensation cess (while other customs levies remained exempt without that condition) offended Article 14 as unreasonable classification or discriminatory. - HELD THAT: - The Court held that differential treatment of the new GST-era levies from older customs levies has a rational basis: IGST and compensation cess form part of a unified GST regime dependent on input tax credit and refund mechanisms, unlike legacy customs levies. Classification in fiscal matters admits latitude for experimentation and phased application; absent palpable arbitrariness or mala fide discrimination, the Court will defer to policy judgments. The requirement to pay and then claim refund or claim input credit was a legitimate administrative choice and did not amount to unconstitutional classification.The differentiation between IGST/cess and other customs levies for purposes of imposing the pre-import condition does not violate Article 14.Refund or input tax credit - Relief available to exporters who paid IGST/compensation cess during the period the pre-import condition operated and enjoyed interim orders. - HELD THAT: - Although the notifications and conditions are upheld, the Court recognised that many exporters had interim orders and that IGST/cess had been paid or blocked as working capital. In equity and consistent with statutory refund/input-credit regimes, the Court directed administrative facilitation of claims: affected exporters may apply for refund or input tax credit to the jurisdictional commissioner with documentary evidence within six weeks; claims shall be examined on merits and the Revenue should issue a circular prescribing a convenient procedure.Revenue must permit affected exporters to apply for refund or input tax credit within six weeks; claims to be examined on merits and appropriate administrative directions issued.Final Conclusion: The appeals are allowed; the Gujarat High Court's judgment setting aside the pre-import condition and related amendments of 13.10.2017 is set aside. The pre-import requirement and the conditions for IGST/compensation cess exemption introduced on 13.10.2017 are upheld as lawful and not arbitrary; affected exporters may apply for refund or input tax credit within the period directed and their claims shall be examined on merits. Issues Involved:1. Legality of the 'pre-import condition' imposed by Notification No. 33/2015-2020 and Notification No. 79/2017-Customs.2. Reasonableness and arbitrariness of the 'pre-import condition' in the context of the Advance Authorization (AA) scheme.3. Differential treatment of Integrated Goods and Services Tax (IGST) and Basic Customs Duty (BCD) under the AA scheme.4. Retrospective application of the notification dated 10.01.2019, which withdrew the 'pre-import condition'.Summary:I. Legality of the 'pre-import condition' The Supreme Court examined the legality of the 'pre-import condition' imposed by Notification No. 33/2015-2020 and Notification No. 79/2017-Customs. The 'pre-import condition' required that goods be imported first and then used for manufacturing export products to avail IGST exemption. The High Court had set aside this condition, considering it arbitrary and unreasonable. However, the Supreme Court noted that the DGFT had the power to impose such conditions under paragraph 4.13(i) of the FTP, which allowed flexibility in policy changes depending on the exigencies of the time.II. Reasonableness and Arbitrariness of the 'pre-import condition'The High Court found the 'pre-import condition' to be unfeasible and contrary to the objectives of the AA scheme, which aims to facilitate duty-free import of inputs for manufacturing export products. The Supreme Court acknowledged that the introduction of GST led to significant changes in the tax regime, necessitating new conditions like the 'pre-import condition' to ensure proper tax administration. The Court emphasized that inconvenience or hardship to exporters does not render a statutory provision arbitrary or unreasonable.III. Differential Treatment of IGST and BCDThe respondents argued that the 'pre-import condition' was applied only to IGST and compensation cess, while BCD and other levies were exempt without such a condition. The Supreme Court held that IGST and BCD serve different purposes within the tax framework. BCD is a customs levy at the point of import, whereas IGST is part of a broader GST regime involving input credit and refunds. The Court found this differentiation justified and not discriminatory.IV. Retrospective Application of the Notification dated 10.01.2019The High Court had inferred that the withdrawal of the 'pre-import condition' by the notification dated 10.01.2019 indicated its unworkability and should apply retrospectively. The Supreme Court disagreed, stating that the FTPRA does not allow for retrospective regulations. The Court emphasized that giving retrospective effect to the notification would be legally impermissible.ConclusionThe Supreme Court set aside the High Court's judgment, upholding the validity of the 'pre-import condition' imposed by the notifications. The Court directed that respondents who had enjoyed interim relief could claim refunds or input credit by applying to the jurisdictional commissioner with documentary evidence within six weeks. The Revenue was instructed to facilitate this process through a circular.