AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2023 (5) TMI 42
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....damba 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 announced duty exemption schemes as well. ....
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....equently 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, could not prove the above. Exemption was also not admissible when goods manufactur....
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....rted 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 Notification No. 33/2015-20 dated 13.10.2017 which was backed by Customs Notification No.....
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....ent 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 the light of the condition of pre-import, the benefit of exemption from levy of integrated tax and GST co....
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....rpose 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 materials in the export goods was covered under paragraph 4.03 of the FTP, which specifically demanded physical incorporatio....
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....erials 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 incorporated in export product (making normal allowance for wastage). In addition, fuel, oil, catalyst which is consumed / utilized in the proc....
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....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, all goods were covered by the said notification and subject to a uniform condition. It was also urged that it was neither practicable nor po....
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....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 809; Assistant Commissioner of Urban Land Tax v Buckingham & Carnatic Co Ltd. 1970 (1) SCR 268; R.K. Garg v Union of India 1981 (1) SCR 947; Union of ....
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....ly 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, if the 'pre-import condition' was to be satisfied. Consequently, the delivery schedule of about 4 to 8 weeks from receiving purchase orders could not have been fu....
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.... 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 to the IGST benefit when compared to the BCD exemption under the original Notification No. 18 / 2015-Customs was not justified and failed the test of reasonable classifi....
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....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 / unmanufactured or manufactured state. Advance Licenses are issued to allow duty-free import of inputs, which are then physically incorporated in export goods (after making norm....
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....cific 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 shall be utilized only in the manufacture of dutiable goods whether within the same factory or outside (by a supporting manufacturer). For this, the Authorisation holder shall produce a certificate from either the jurisdictional Customs Authority or Chartered Accountant, at the option of the....
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....e 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 article which is imported into India shall, in addition, be liable to the Goods and Services Tax compensation cess at such rate, as is leviable under section 8 of the Goods and Services Tax (Compensation to States) Cess Act, 2017 on a like article on its supply in India, on the value of the imported article as determined under sub-section (10)." 45. Sec....
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....rst 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 inserted condition (xii) which reads thus: "(xii) that 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 shall be subject to pre-import condition." 48. Thus, exemption from levy of IGST under Section 3 (7) and compensation cess leviable under Section 3 (9) of Customs Tariff Ac....
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....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 directed not to issue ARO except for Schedulc-4 items as stated above. Imports/exports under the replenishment schemes for the Gems and Jewellery sector covered under chapter 4 of FTP and HBP shall be subject to Customs Notification issued/ to be issued in this regard." 50. The public notice clearly forewarned that AAs and their utilisation would not continue in the same manner as the AA scheme was operating hitherto. This trade notice has escaped the attention of the High Court, since there is no advertence to it in....
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.....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 the need to follow such 'pre-import conditions' in respect of IGST and compensation cess, rendered the AAs worthless. Lastly, it was held that exporters, who have to import inputs, would face impossibility in fulfilling the 'pre-import condition', because the normal cycle of import of inputs and export of finished products would be for a period of six months, whereas the period, which the regime permits, would work out to three months. 56. It would be necessary to first analyse the introduction of the 'pre-import condition'. The FTP, inter alia, facil....
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....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), (f) (g) and (h) of this FTP. (iv) Supply of 'stores' on board of foreign going vessel / aircraft, subject to condition that there is specific Standard Input Output Norms in respect of item supplied." The definition extends in specific terms (under Chapter 4 of FTP) - supplies made to SEZ are considered as 'physical exports' despite not being an event in which goods are being taken out of India. The other three categories defined under (c) (ii), (iii) & (iv) are ineligible as 'physical exports'. Supplies of intermediate goods are covered by letter of invalidation, whereas supplies covere....
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....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 criteria, they could not continue with their former business practices of importing inputs, after applying for AAs, to fulfil their overseas contractual obligations. The new dispensation required them to pay the two duties, and then claim refunds, after satisfying that the inputs had been utilized fully (wastage excluded) for producing the final export goods. The re-shaping of their businesses caused inconvenience to them. Yet, that cannot be a ground to hold that the insertion of the 'pre-import condition', was arbitrary, as the High Court concluded. It was held, in Rohitash Kumar & Ors. v Om Prakash Sharma & ....
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....on 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 retrospectively." In the circumstances, this decision has no application to the facts of this case, because the facility of AA without 'pre import condition' was introduced prospectively. 65. The respondents had alleged discrimination on two counts: one, that for purposes of classification, all exporters who were granted AAs were to be treated alike; and two, that insisting on the 'pre-import condition' in respect to exemption from two levies only, while granting that benefit in respect of other AAs, was discriminatory. As far as the first aspect is concerned, the impugned judgment, in this court's opinion, is on a misreading of the FTP. As noted earlier, pa....
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....urpose 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 less than 50 persons makes the classification under-inclusive, when it is seen that all factories employing 10 or 20 persons, as the case may be, have been included and that the purpose of the law is to get in unpaid accumulations for the welfare of the labour. Since the classification does not include all who are similarly situated with respect to the purpose of the law, the classification might appear, at first blush, to be unreasonable. But the Court has recognised the very real difficulties under which legislatures operate - difficulties arising out of both the nature of the legislative process and of the society which legislation attempts perennially to reshape - and....
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....nstitutions 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 is not open to the charge of denial of equal protection on the ground that it had no application to other persons." Likewise, Javed v. State of Haryana (2003) 8 SCC 369 observed that there is no constitutional compulsion that a law or policy should be implemented all at once: "16. A uniform policy may be devised by the Centre or by a State. However, there is no constitutional requirement that any such policy must be implemented at one go. Policies are capable of being implemented in a phased manner. More so, when the policies have far-reaching implications and are dynamic in nature, their implementation in a phased manner is welcome for it receives gradual willing acceptance and invites lesser resistance.....
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..... 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 investigate...." 69. The object behind imposing the 'pre-import condition' is discernible from paragraph 4.03 of FTP and Annexure-4J of the HBP; that only few articles were enumerated when the FTP was published, is no ground for the exporters to complain that other articles could not be included for the purpose of 'pre-import condition'; as held earlier, that is the import of paragraph 4.03 (i). The numerous schemes in the FTP are to maintain an equilibrium between exporters' claims, on the one hand and on the other hand, to preserve the Revenue's interests. Here, what is involved is exemption and postponement of exemption of IGST, a new levy altogether, whose mechanism was being worked out and evolved, for the first time. The plea of impos....
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....sses 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 payment of tax. Under Clause (ii) of the first proviso, Parliament has envisaged a refund of unutilized ITC, where the credit has accumulated on account of the rate of tax on inputs being higher than the rate of tax on output supplies. When there is neither a constitutional guarantee nor a statutory entitlement to refund, the submission that goods and services must necessarily be treated at par on a matter of a refund of unutilized ITC cannot be accepted. Such an interpretation, if carried to its logical conclusion would involve unforeseen consequences, circumscribing the legislative discretion of Parliament to fashion the rate of tax, concessions and exemptions. If the judiciary were to do so, it would run the risk of encroaching upon legislative choices, a....