TaxTMI 
TaxTMI 
2023 (5) TMI 42
X X X X Extracts X X X X
X X X X Extracts X X X X
....of the Gujarat High Court, M/s Shri Jagdamba Polymers Ltd. & Ors. v Union of India & Ors., Special Civil Application No. 19324 of 2018 wherein mandatory fulfilment of a 'pre-import condition' Paragraph 4.13 of FTP, read with the HBP incorporated in the Foreign Trade Policy of 2015-2020 ("FTP") and Handbook of Procedures 2015-2020 ("HBP") by Notification No. 33 / 2015-20 and Notification No. 79 / 2015-Customs, both dated 13.10.2017, was set aside. According to the High Court, such fulfilment in order to claim exemption of Integrated Goods and Services Tax ("IGST") Leviable under Section 3(7) of The Customs Tariff Act, 1975 and GST compensation cess Leviable under Section 3(9) of The Customs Tariff Act, 1975 on input imported into India for the production of goods to be exported from India, on the strength of an advance authorization Paragraph 4.03 of FTP ("AA") was arbitrary and unreasonable. I. Background 2. In terms of the Foreign Trade (Development & Regulation) Act, 1992 ("FTDRA") the Central Government ("Union") had been framing, from time to time, Export-Import Policies (or FTPs) for the development, regulation and control of imports and exports in the country. The Union....
X X X X Extracts X X X X
X X X X Extracts X X X X
....his condition, and continued exports in anticipation of grant of AA, and consequently expected exemption from all custom duty levies, including IGST and compensation cess. 5. The Directorate of Revenue Intelligence ("DRI") Kolkata noticed the above amendments and thereupon, initiated investigation and issued summons to various manufacturers located across the country importing goods against AAs. The respondents were of the view that the scope of 'pre-import condition' was unclear, whereas the DRI officers conducting the inquiry and investigation, however, were of the view that 'pre-import condition' meant that goods had to be imported first, and then the final products manufactured with such imported goods were to be exported. When it was established that goods imported against a particular AA were used in relation to manufacture of finished goods exported for fulfilment of export obligation of that particular authorisation, the 'pre-import condition' stood satisfied. 6. In view of this development, the exemption granted by Notification No. 18 / 2015-Customs was inadmissible where manufacturer-exporters, who undertook manufacturing and export of goods in a continuous cycle, c....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... at the time of imports under AA within a specified time. The importers, therefore, started paying IGST on goods imported under AA with effect from 1.7.2017, and were getting outright exemption from BCD, ADD, safeguard duty, etc., and IGST paid was refunded. The legislative intent was clear in imposing IGST on all imports made under AAs, on or after 1.7.2017, without differentiating between the status of such authorisations, whether or not it was issued prior to or after introduction of GST. It was a policy decision, which could have been reversed or altered only by the GST Council. The Revenue also pointed out that due to problems in Goods and Service Tax Network (GSTN) Which provides shared IT infrastructure and service to both central and state governments including taxpayers and other stakeholders. The registration front end services, returns, and payments to all taxpayers were provided by GSTN, the committed refund of IGST was getting delayed. This resulted in blocking of working capital for many business houses. To obviate this problem, the GST Council allowed exemption from IGST when imported under AAs. The Directorate General of Foreign Trade ("DGFT") accordingly, issued No....
X X X X Extracts X X X X
X X X X Extracts X X X X
....and GST legislation provided for complete zero-rating, extending IGST exemption on replenishment imports would imply double benefit to the authorisation holder. Therefore, the AA holders were not adversely affected and not prejudiced by the impugned notifications. The IGST paid on replenishment material could be availed as input tax credit for payment of GST. III. Findings of the High Court 12. The High Court, after considering the notifications and taking into account the exporters' submissions, held that paragraph 4.27 of the FTP envisaged exports in anticipation of authorisation, in terms of the cycle of import-manufacture-export carried out, including delivery time of 3-4 months allowed normally by overseas buyers, within minimum six months' time for completion of the cycle. The court considered this to be an unfeasible condition: "Considering the above interpretation of the condition of physical export and pre-import put forth by the DRI, it is more or less impossible to make any exports under an Advance Authorisation without violating the condition of pre-import. In effect and substance, what is given by one hand is taken away by the other. In other words, in t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rmissible imports made in anticipation of authorisation as replenishment. This was despite the fact that for the purpose of exemption from the other levies imposed under Sections 3(1), 3(3) and 3(5) of the Customs Tariff Act, 1975 for decades the procedure was permitted, and continued to be permitted, (for the purpose of exemption from levy of IGST and compensation cess), yet, such imports were "suddenly" treated as "replenishment imports" which was held to be "incomprehensible". Supra note 1 The court held that that the impugned exemption notification and paragraph 4.14 of the FTP, to the extent they were impugned did not meet with the test of reasonableness and were held to be ultra vires the scheme of the FTP. IV. The Union's Contentions before this Court 15. Mr. N. Venkatraman, learned Additional Solicitor General ("ASG") appearing for the Union, urged that the essence of the AA was that the exporters were expected to import duty-free materials first, and use them for the purpose of manufacture of products to be exported out of India or be supplied under deemed export, if allowed by the FTP or the customs notifications. This aspect of physical incorporation of input mater....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed 'pre-import' and 'physical export' conditions, and held that the contention of physical incorporation of the duty-free materials under paragraph 4.03 of the FTP was contrary to paragraph 4.27 of the HBP which specifically allowed imports in anticipation of authorization. The observation of the court was without merit. The court erroneously granted primacy to paragraph 4.27 of the HBP over paragraph 4.03 of the FTP, when infact the FTP had pre-eminence over the HBP for laying down the procedures to be followed by an exporter or importer in terms of paragraph 1.03 of the FTP. Therefore, provision of the HBP could not override the FTP in case of a conflict. It was argued that paragraph 4.27(d) limited and confined the scope of paragraph 4.27(a). The moment paragraph 4.27(d) came into picture, paragraph 4.27(a) became inoperative. 19. It was also urged that there was no conflict between paragraph 4.03 of the FTP and that of 4.27(a) of the HBP. The scope and field of operation of individual paragraphs were completely different. Paragraph 4.03(a) of the FTP provided that: "(a) Advance Authorisation is issued to allow duty free import of input, which is physically incorpora....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... be specifically mentioned under paragraph 4.13 of the FTP, it was submitted, was misplaced. The Revenue pointed out that paragraph 4.13 (1) itself left the issue of which inputs was to be subjected to 'pre import condition' open to the DGFT to notify: Paragraph 4.13(1) of FTP "DGFT may, by Notification, impose pre-import condition for inputs under this Chapter." The provision clearly left open, the scope of imposing 'pre-import condition' on any goods which could have been covered by the said Chapter 4 of the Policy. Therefore, imposing, such condition across the board for all goods imported under AA was well within the competence and authority of the policy makers. It was argued that the High Court failed to notice that DGFT was duly empowered to issue Notification No.33/2015-20 dated 13.10.2017. This notification was general in nature and did not exclude any goods from its purview. The only condition was that wherever the importer wanted to avail the benefit of IGST and compensation cess exemption, the 'pre-import condition' had to be satisfied. In absence of any negative list containing specific mention of a set of goods, which were not to be covered by the said provision....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ted under paragraph 4.14, was attracted. The notification acted as a bridge between paragraph 4.13 and 4.14 of the FTP. They were in harmony with the spirit of the FTP. 24. The learned ASG urged that the notifications interpreted by the High Court amended the conditions for granting exemption from the levy of certain taxes. The respondent exporters had not challenged the power to impose the levies; their only argument was that the 'pre-import' condition, which was introduced for the first time in the notification, was burdensome. They also contend that these conditions were contradictory and made business cumbersome. The ASG submitted that once the power to levy was undisputed, the conditions under which such levies were imposed, and the manner in which they were collected, were within the domain of the legislature or Parliament. Unless it was shown that the statute imposed a method of collection that was capricious, or arbitrary, the courts ought not to interfere with the levy. Similarly, a levy could fail if there was no mechanism for assessment and collection. Reliance was placed on the decisions reported as Khandige Sham Bhat v Agricultural Income Tax Officer 1963 (3) SCR 80....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... no rationale or justification in imposing the 'pre-import condition' only for a limited period from 13.10.2017 to 09.01.2019 to a scheme operating successfully without any such condition. 29. It was urged that the 'pre-import condition' was made applicable for such limited period only for exemption from IGST and compensation cess, whereas other import duties, namely, BCD, ADD, Safeguard Duty etc. were exempt even during this period of about 13 months without the 'pre-import condition'. 30. It was submitted that no reason or justification was provided for subjecting IGST and compensation cess to this 'pre-import condition', and not applying this condition for other types of import duties. If 'pre-import condition' was applicable for AA, then the whole scheme would be nullified because it was impossible for any manufacturer-importer to satisfy the 'pre-import condition' when the export orders were to be executed by supplying the final products within a short period of 4 weeks to 8 weeks after receiving the purchase orders from overseas customers. In a typical case, the manufacturer-exporter could export goods only after more than six months from receiving the purchase orders, ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ense holders to avail the IGST benefit. This was because those who fulfilled the export obligation before importing the goods were denied the opportunity to avail the benefit of IGST exemption. 33. The imposition of 'pre-import condition' on AAs issued prior to 13.10.2017 placed the exporter-respondents in the shoes of any importer who did not hold any license. The respondents had imported the goods after fulfilling the corresponding export obligation. It was impossible to fulfil the 'pre-import condition' mandated for old AAs through a retrospective application of an amendment in the impugned notifications, even though the respondents could demonstrate that all imported goods were subsequently used for manufacturing export products. 34. Learned counsel for the respondents highlighted that there was no reason for differential treatment of BCD and IGST under the AA scheme. When the levy of IGST on imported goods was treated like the levy of BCD, there was no reason why the unconditional exemption of BCD granted to license holders under the scheme could not be extended to the IGST exemption available for goods imported under the same scheme. This differential treatment meted out t....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... is not a case of first-time exemption. As the Union sought to place restrictions, it had to show that the conditions were remedial and necessary. It was hence contended that as there was no rationale behind introducing the 'pre-import condition' (which had no nexus with the object sought to be achieved by the AA scheme), it violated Article 19(1) (g) of the Constitution, and was accordingly set aside. VI. Analysis and Findings 38. The AA scheme is a duty exemption scheme introduced by the Union, under the FTP. Under the scheme, exemption from the payment of import duties is given to raw materials / inputs required for the manufacture of export products i.e., one can import raw materials or inputs at zero customs duty for production of export products. The purpose of this scheme is to ensure competitiveness of India's products in the global market. When duties paid on raw materials are saved, it reduces the cost of the final export product. In terms of the scheme, the exporter can import raw materials duty-free. As per Chapter 9 of FTP paragraph 9.44, "Raw material" is input(s) required for manufacturing of goods. These inputs either can be in a raw / natural / unrefined / un....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ndition." 4.14 Details of Duties exempted Imports under Advance Authorisation are exempted from payment of Basic Customs Duty, Additional Customs Duty, Education Cess, Anti-dumping Duty, Countervailing Duty, Safeguard Duty, Transition Product Specific Safeguard Duty, wherever applicable. Import against supplies covered under paragraph 7.02 (c), (d) and (g) of FTP will not be exempted from payment of applicable Anti-dumping Duty, Countervailing Duty, Safeguard Duty and Transition Product Specific Safeguard Duty, if any. ************** 4.16 Actual User Condition for Advance Authorisation (i) Advance Authorisation and/or material imported under Advance Authorisation shall be subject to 'Actual User' condition. The same shall not be transferable even after completion of export obligation. However, Authorisation holder will have option to dispose of product manufactured out of duty free input once export obligation is completed. (ii) In case where CENVAT/input tax credit facility on input has been availed for the exported goods, even after completion of export obligation, the goods imported against such Advance Authorisation ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....from the whole of the duty of customs leviable thereon which was specified in the First Schedule to the Customs Tariff Act, 1975 and from the whole of the additional duty, safeguard duty, transitional product specific safeguard duty and anti-dumping duty leviable thereon, respectively, under Sections 3, 8B, 8C and 9A of the Act. The GST regime came into force with effect from 01-07-2017. However, no corresponding amendment was carried out to this notification but Section 3 of the Customs Tariff Act, 1975 was amended by substituting Sections 3 (7) and (9), whereby levy of integrated tax [under Section 5 of the Integrated Goods and Services Tax Act, 2017 and levy of Goods and Service Tax compensation cess leviable under Section 8 of the GST Act (Compensation to States) Cess Act, 2017] was incorporated: "(7) Any article which is imported into India shall, in addition, be liable to integrated tax at such rate, not exceeding 40% as is leviable under section 5 of the Integrated Goods and Services Tax Act, 2017 on a like article on its supply in India, on the value of the imported article as determined under sub-section (8). ********* **************** (9) Any ar....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... businesses. The Union then issued an amending notification dated 13-10-2017 in exercise of powers under Section 25 (1) of the Customs Act, 1962 (Notification 79/2017 - dated 13.10.2017) inter alia amending the opening paragraph of Notification 18 / 2015 (dated 1.4.2015) whereby goods imported into India were exempted from the whole of the duty of customs leviable thereon, specified in the First Schedule to the Customs Tariff Act, 1975 and from the whole of the additional duty leviable thereon under sub-sections (1), (3) and (5) of Section 3, IGST leviable thereon under sub-section (7) of section 3 and compensation cess leviable under sub-section (9) of section 3. The amending notification also introduced a proviso in condition (viii), after the proviso which reads thus: "Provided further that notwithstanding anything contained hereinabove for the said authorisations where the exemption from integrated tax and the goods and services tax compensation cess leviable thereon under sub-section (7) and sub-section (9) of section 3 of the Customs Tariff Act, has been availed, the export obligation shall be fulfilled by physical exports only." The said notification also inserte....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Chapter 4 Under the GST regime, no exemption from payment of integrated GST and Compensation Cess would be available for imports under Advance Authorisation. Importers would need to pay IGST and take input tax credit as applicable under GST rules. However, imports under Advance Authorisation would continue to be exempted from payment of Basic Customs Duty, Additional Customs Duty specified under Section 3( l), 3(3) and 3(5) of the Customs Tariff Act, Education Cess, Anti-dumping Duty, Safeguard Duty and Transition Product Specific Safeguard Duty, wherever applicable. Applicable GST would need to be paid white making local procurement, using an invalidation letter of Advance Authorisation IDFIA. Recipient of goods can take Input Tax Credit CITC) of the GST paid on such local procurement. This Input Tax Credit can be utilized as per GST rules. Advance Release Order facility shall not be available for procurement of inputs 11nder Advance Authorization scheme except for inputs listed in Schedule 4 of Central Excise Act, 1944 read with The Taxation Laws (Amendment) Act 2017 No 18 of 2017, with effect from July l, 2017. RAs are direc....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... said FTP were amended, preventing EOUs from making DTA sales of the finished marble made from imported rough marble, with immediate effect. The change was made a few months after renewal of letter of permission to the unit, authorizing it to manufacture and export marble tiles for 5 years, subject to a specified monetary limit. The contention that the FTP could not have been amended, was negatived, by this court. 55. The impugned judgment, in the present case, is premised broadly on the reasoning that the amendment by Notification 79/2017 dated 13.10.2017 to the extent it required payment of duty, and, in the case of advance authorizations, the fulfilment of 'pre-import conditions' was unreasonable and arbitrary. It was concluded that the amendment is contrary to the objective of the FTP. Further, it has been held that 'pre-import conditions' are in respect of specific goods and, the notifications impugned, inasmuch as they apply 'pre-import condition' to all goods, is contrary to the provision. Further, the absence of 'pre-import conditions' in respect of basic customs duty, and other levies, where in anticipation of AAs, duty free imports can be made, in contradistinction with t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....import of input materials under AA was granted. The exemption was, however, not absolute. The conditions incorporated in the Notification (No. 79/2017), were one, that the exemption could only be extended so long as exports made under the AAs were physical exports in nature and the other that to avail such benefit, one was to follow the 'pre-import condition'. 59. 'Physical export' is defined in paragraph 4.05(c) and paragraph 9.20 of the FTP read with Section 2(e) of the FTDRA as follows: (e) "import" and 'export" means respectively bringing into, or taking out of, India ang goods by land, sea or air" Essentially, therefore, export involves taking goods out of India. AAs can be issued either to a manufacturer exporter or merchant exporter tied to supporting manufacturer (as per paragraph 4.05). However, paragraph 4.05 of the FTP defines categories for which AAs can be issued, somewhat expansively and prescribes that - "(c) Advance Authorization shall be issued for: (i) Physical export (including export to SEZ); (ii) Intermediate supply; and/ or (iii) Supply of goods to the categories mentioned in paragraph 7.02 (b), (c), (e), ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nsiderable legislative exercise in the form of repeal of several enactments (in the wake of the 101st Amendment to the Constitution, introducing Articles 246A, 269A, 279A, amendment to Articles 286 and 366, besides amending List I, II and III of the Seventh Schedule) and enactment of an entirely new set of laws. In this scheme, the new levies were IGST and compensation cess. These were not part of the original Notification No. 18/2015, and necessitated its amendment. Since the entire GST universe, so to say, is dependent on a comprehensive input credit and refund system, the policy makers (which in this case, were tax administrators and the DGFT) were of the opinion that since countervailing duty (CVD) and special additional duty (SAD), which were subsumed under the GST regime and the other levy (compensation cess), the previous regime of permitting AAs to govern import of duty free articles, as inputs, should continue, but that for the new levies, the system of input credit, and refunds should prevail. 62. In this court's opinion, the introduction of the 'pre-import condition' may have resulted in hardship to the exporters, because even whilst they fulfilled the physical export....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ns the State must adopt an objective standard amounting to a social control. In Ranjit P. Gohil (supra) the court in fact held that: "It is difficult to expect the Legislature carving out a classification which may be scientifically perfect or logically complete or which may satisfy the expectations of all concerned, still the court would respect the classification dictated by the wisdom of Legislature and shall interfere only on being convinced that the classification would result in pronounced inequality or palpable arbitrariness on the touchstone of Article 14." 64. The decision reported in MRF Ltd., Kottayam (supra) was relied upon to say that withdrawal of exemptions or tax benefits cannot be resorted to. Facially, this court's observations with respect to withdrawal of tax exemption appear to be favourable to the respondents. Yet, what weighed with this court was that the power of withdrawal of exemption was not retrospective: "Thus while Sub-section (1) authorizes the grant of an exemption or reduction in rate with retrospective effect in respect of any tax payable under the Act, Sub-section (3) does not provide for any cancellation or variation retrospe....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ble to the executive or legislature. This was emphasized in State of Gujarat v Shri Ambica Mills 1974 (3) SCR 760. "55. A classification is under-inclusive when all who are included in the class are tainted with the mischief but there are others also tainted whom the classification does not include. In other words, a classification is bad as under-inclusive when a State benefits or burdens persons in a manner that furthers a legitimate purpose but does not confer the same benefit or place the same burden on others who are similarly situated. A classification is over-inclusive when it includes not only those who are similarly situated with respect to the purpose but others who are not so situated as well. In other words, this type of classification imposes a burden upon a wider range of individuals than are included in the class of those attended with mischief at which the law aims. Herod ordering the death of all male children born on a particular day because one of them would some day bring about his downfall employed such a classification. 56. The first question, therefore, is, whether the exclusion of establishments carrying on business or trade and employing l....
X X X X Extracts X X X X
X X X X Extracts X X X X
....and complex, that many problems are singular and contingent that laws are not abstract propositions and do not relate to abstract units and are not to be measured by abstract symmetry, that exact wisdom and nice adaption of remedies cannot be required, that judgment is largely a prophecy based on meagre and uninterpreted experience, should stand as reminder that in this area the Court does not take the equal protection requirement in a pedagogic manner [See "General theory of law and state" The same idea was echoed in Ajoy Kumar Banerjee & Ors. v. Union of India & Ors 1984 (3) SCR 252 "...Article 14 does not prevent legislature from introducing a reform i.e. by applying the legislation to some institutions or objects or areas only according to the exigency of the situation and further classification of selection can be sustained on historical reasons or reasons of administrative exigency or piecemeal method of introducing reforms. The law need not apply to all the persons in the sense of having a universal application to all persons. A law can be sustained if it deals equally with the people of well-defined class-employees of insurance companies as such and such a law i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....asized that: "The Court cannot strike down a policy decision taken by the State Government merely because it feels that another policy decision would have been fairer or wiser or more scientific or logical. The Court can interfere only if the policy decision is patently arbitrary, discriminatory or mala fide." In R.K. Garg (supra) this court similarly spelt out the circumscribed role that the court has, in considering the validity or constitutionality of fiscal laws, or economic measures, stating that "the court should feel more inclined to give judicial deference to legislative judgment in the field of economic Regulation than in other areas where fundamental human rights are involved." Likewise, in Ashirwad Films v. Union of India (2007) 6 SCC 624 this court observed: "The power of the Legislature to classify is of wide range and flexibility so that it can adjust its system of taxation in all proper and reasonable ways. Even so, large latitude is allowed to the State for classification upon a reasonable basis and what is reasonable is a question of practical details and a variety of factors which the Court will be reluctant and perhaps ill- equipped to invest....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n 5 of the Act does not give any such power specifically to the Central Government to make rules retrospective. No doubt, this Section confer powers upon the Central Government to 'amend' the policy which has been framed under the aforesaid provisions. However, that by itself would not mean that such a provision empowers the Government to do so retrospective." 38. 71. To give retrospective effect, to the notification of 10.01.2019 through interpretation, would be to achieve what is impermissible in law. Therefore, the impugned judgment cannot be sustained on this score as well. 72. This court recollects its recent decision, on the question of entitlement to refund, under the old tax regime, which was subsumed and resulted in some businesses being affected. Negativing the challenge to constitutionality of the provisions of GST, it was held, in Union of India (UOI) & Ors. v VKC Footsteps India Pvt. Ltd 2021 (15) SCR 169. that: "A claim to refund is governed by statute. There is no constitutional entitlement to seek a refund. Parliament has in Clause (i) of the first proviso allowed a refund of the unutilized ITC in the case of zero-rated supplies made without p....