In Case of: Cosmos Films Limited
Order By: Hon Supreme Court of India
Date: 28th April 2023
Order:
Supreme Court Reverses Gujarat High Court Decision, Permits IGST and GST Compensation Cess Exemption on Import Inputs
Background:
Under the Foreign Trade (Development & Regulation) Act, 1992 (“FTDRA”), the Central Government, or Union, periodically formulated Export-Import Policies (FTPs) to regulate and oversee imports and exports. These policies included duty exemption schemes, such as Advance Authorizations (AAs). To streamline the implementation of FTP provisions and rules, the Director General of Foreign Trade (DGFT) issued the Handbook of Procedures (HBP), Chapter 4 of which outlined the process for availing duty exemption schemes. Paragraph 4.27 of the HBP allowed exports “in anticipation of authorization” to prevent delays in fulfilling export orders. Concurrently, Notification No. 18/2015-Customs, dated 1.04.2015, exempted basic customs duty (BCD), countervailing duty (CVD), special additional duty (SAD), safeguard duty, and anti-dumping duty on inputs imported under valid AAs.
With the implementation of the Goods and Services Tax (GST) regime on 01.07.2017, there were no amendments made to Notification No. 18/2015-Customs, dated 1.04.2015, concerning Integrated Goods and Services Tax (IGST) and compensation cess. Consequently, IGST and compensation cess were levied on inputs imported into India under AAs, leading to additional costs for importers.
On 13.10.2017, six existing notifications underwent amendments, including Notification No. 79/2017-Customs, which modified Notification No. 18/2015-Customs dated 1.04.2015. This amendment provided exemptions from IGST and compensation cess, subject to two conditions. Firstly, the export obligation had to be fulfilled through physical exports if exemptions were availed. Secondly, the exemption was contingent upon a pre-import condition. Simultaneously, Notification No. 33/2015-20 amended provisions of the FTP, incorporating the pre-import condition into paragraph 4.14, effective from 13.10.2017. The petitioners before the High Court claimed unawareness of this condition and continued exports anticipating AA grants, expecting exemption from all custom duty levies, including IGST and compensation cess.
Subsequently, the Directorate of Revenue Intelligence (DRI) Kolkata initiated investigations and summoned various manufacturers nationwide importing goods under AAs. Discrepancies arose over the interpretation of the pre-import condition: while respondents found it ambiguous, DRI officers construed it as necessitating the import of goods before their use in manufacturing final exported products. Once it was established that goods imported against a specific AA were used in manufacturing exported goods to fulfill export obligations, the pre-import condition was deemed satisfied. However, this interpretation rendered exemptions inadmissible for manufacturer-exporters engaged in continuous manufacturing and export cycles or exporting goods in anticipation of licenses or authorizations. Consequently, aggrieved manufacturer-exporters approached the High Court seeking redressal.
High Court Observations:
After thorough review of notifications and consideration of exporters’ submissions, the High Court determined that paragraph 4.27 of the FTP outlines export procedures allowing for anticipation of authorization. This encompasses the import-manufacture-export cycle, accounting for a customary delivery time of 3-4 months expected by overseas buyers, within a minimum six-month completion period for the entire process.
The court deemed this condition unworkable for several reasons – firstly, while the ‘pre-import condition’ was imposed on duties collected under Sections 3(7) and (9) of the Customs Tariff Act, 1975, it was not applied to levies under Sections 3(1), (3), and (5). Consequently, even though certain levies were exempt from the ‘pre-import condition,’ the requirement still applied uniformly to all inputs, resulting in undue burdens.
Secondly, the court considered the objectives of the FTDRA and the FTP, along with Notification No. 01/2019-Cus dated 10-01-2019, which omitted condition (xii). This omission indicated a shift in policy by the Union government, reflecting a recognition of public interest in discontinuing the ‘pre-import condition’ for obtaining exemptions from IGST and compensation cess on materials imported against an Advance Authorization.
Therefore, the court concluded that the government’s decision supported the exporters’ stance. Consequently, it was ruled that:
“The condition of pre-import militates against the Advance Authorisation Scheme and therefore, the impugned condition (xii) in Notification No. 18/2015-Customs dated 1.04.2015 introduced vide Notification No. 79/2017 : MANU/CUST/0095/2017 dated 13th October, 2017 as well as the amendment in paragraph 4.14 of the Foreign Trade Policy made vide Notification No. 33 /2015-20 dated 13th October, 2017, to the extent the same imposes a “pre-import condition” in case of imports under Advance Authorisation for physical export for exemption from the whole of the integrated tax and GST compensation cess leviable under sub-section (7) and sub-section (9) respectively, of section 3 of the Customs Tariff Act, do not meet with the test of reasonableness and are also not in consonance with the scheme of Advance Authorisation”.
The court further concluded that although paragraph 4.27 of the Handbook of Procedures (HBP) expressly allowed exports in anticipation of authorization, by linking the file number or authorization number to establish correlation, the Revenue department sought to categorize such imports made in anticipation as replenishment. This stance was taken despite the longstanding practice of permitting such procedures for exemption from other levies imposed under Sections 3(1), 3(3), and 3(5) of the Customs Tariff Act, 1975. Even for the purpose of exemption from the levy of IGST and compensation cess, this procedure had been permitted for decades without interruption. Hence, the sudden classification of these imports as “replenishment imports” was deemed incomprehensible by the court.
Hon Supreme Court Observations:
The primary challenge before the High Court centered on the ‘pre-import condition’ introduced by Notification No. 33/2015-20 and Notification No. 79/2017-Customs. Chapter IV of the FTP outlines Duty Exemption/Remission Schemes, with the AA being one such scheme. Paragraphs 4.13, 4.14, and 4.16 of the FTP were pertinent to the case. The Directorate General of Foreign Trade (DGFT) notified the Handbook of Procedures (HBP) on 01.04.2015, permitting exports in anticipation of authorization.
Notification No. 18/2015-Customs, issued on 01.04.2015, exempted goods imported against valid AAs from certain customs duties. However, with the introduction of the GST regime, no corresponding amendment was made to exempt additional duties, leading to exporters facing IGST and compensation cess payments. Consequently, several challenges were filed before the Delhi High Court, resulting in interim relief due to delayed IGST refunds and blocked working capital.
Subsequently, an amending notification dated 13-10-2017 exempted certain duties for imports under AA, subject to conditions including fulfilling export obligations through physical exports and adherence to the ‘pre-import condition.’ Exporters were informed of these changes through Trade Notice 11/2017, issued on 30-06-2017, indicating alterations in the operation of the AA scheme under the GST regime. The said clause is as follows:
“(iv) No Duty Free Import Authorisation shall be issued for an input which is subjected to pre-import condition.”
It’s crucial to note that while FTPs hold statutory status, the HBP does not constitute rules or regulations.
The court acknowledged that the introduction of the ‘pre-import condition’ might have posed challenges for exporters. Under this condition, exporters were required to pay duties upfront on imported inputs, then claim refunds after demonstrating their utilization in final export products. While this change caused inconvenience, it didn’t render the condition arbitrary, as concluded by the High Court.
There is no constitutional obligation to maintain past concessions when enacting new laws or policies, especially when undergoing significant fiscal reforms like the introduction of GST. Legislative efforts aim to assimilate past practices while establishing new rights and obligations. While this process inevitably leads to disruption, it does not invalidate the legislative choice to implement new fiscal legislation.
The purpose behind the ‘pre-import condition’ is evident from the FTP and HBP, aiming to balance exporters’ claims with revenue interests, particularly regarding the exemption or deferral of IGST, a new levy. The court dismissed arguments of differential treatment between BCD and IGST under the AA scheme, emphasizing the rationale for separate treatment due to the nature of these levies.
Regarding the subsequent withdrawal of the ‘pre-import condition’ via a notification on 10.01.2019, the court clarified that retrospective regulations are impermissible. Granting retrospective effect to the notification would violate legal principles. Similarly, what applies to refunds, including legitimate curtailment of rights, also applies to exemptions.
The court contextualized the introduction of GST as a significant tax reform, emphasizing its role in creating a unified market and smoothing interstate trade. While acknowledging initial disruptions, it rejected the notion that inconvenience to a section of businesses and imposition of new taxes and conditions render the change unreasonable or arbitrary.
Judgement:
The court ruled in favor of the Revenue for the reasons outlined above. The judgments and orders of the Gujarat High Court under challenge were overturned. However, considering that the respondents were granted interim relief pending the delivery of the impugned judgments, the Revenue was instructed to allow them to claim refunds or input credits (whichever is applicable and wherever customs duty was paid).
To initiate this process, the respondents must approach the jurisdictional commissioner and submit their applications along with supporting documentation within six weeks from the date of the judgment. Each claim for refund or credit will be assessed on its individual merits following a case-by-case examination. For ease of process, the Revenue was directed to issue a circular outlining the appropriate procedure to be followed.