Supreme Court Rules: Pre-import Condition in FTP for Availing Benefit of Exemption is not Arbitrary

Supreme Court Rules: Pre-import Condition in FTP for Availing Benefit of Exemption is not Arbitrary

The Supreme Court in a significant ruling has upheld the requirement of ‘pre-import condition’ incorporated in the Foreign Trade Policy of 2015-2020 (FTP) and Handbook of Procedures 2015-2020 (HBP) to claim exemption of Integrated Goods and Services Tax (IGST) and GST Compensation Cess on inputs imported into India for manufacture of export goods, on the basis of ‘Advance Authorization.’

The division judges bench comprising of Justices S. Ravindra Bhat and Dipankar Datta set aside the judgment of the Gujarat High Court where it had quashed the amending Notifications, i.e., Notification No. 33 / 2015-20 and 79 / 2017-Custom, dated 13 October, 2017, by which the Director General of Foreign Trade (DGFT) had imposed the ‘pre-import’ and ‘physical export’ conditions for availing IGST and Compensation Cess exemption on imports made under ‘Advance Authorization.’

The Directorate of Revenue Intelligence initiated investigation and issued summons to the manufacturers on the ground that exemption claimed from all custom duty levies, including IGST and compensation cess was not admissible. It was argued that exemption was not allowed when goods manufactured were exported first in anticipation of license/authorization, with duty-free import against the authorization having been undertaken later. The assessee approached the High Court against it and challenged the pre-import condition.

According to the High Court, such fulfillment in order to claim exemption of Integrated Goods and Services Tax and GST compensation cess on input imported into India for the production of goods to be exported from India on the strength of an advance authorization was arbitrary and unreasonable.

The Apex Court remarked that the Gujarat High Court had failed to consider the same and had erroneously proceeded on the assumption that only the goods specified in the said Appendix were subject to the ‘pre-import condition.’

The Apex Court observed that the concept of ‘pre-import condition’ was not alien, and that the FTP empowered the Director General of Foreign Trade (DGFT) to impose articles other than those specified in the HBP.

In that context, it was observed that “The retention of the power to impose ‘pre-import conditions’ on articles other than those specified in Appendix-4J, meant that the DGFT could exercise it, in relation to any goods. The High Court has not discussed this aspect, and proceeded on the assumption that only specified goods were subject to the ‘pre import condition’. The existence of paragraph 4.13 (i) reserving the power to insist upon the ‘pre-import condition’, meant that the policy was capable of change, depending on the exigencies of the time. This omission, together with the High Court’s failure to notice paragraph 4.27 (d) of the HBP are serious infirmities in the impugned judgment.”

The Apex Court while noting that Chapter IV of the FTP provides for ‘Duty Exemption/Remission Schemes,’ and that ‘Advance Authorization’ (AA) is one of the duty exemption schemes. Hence, the Court observed that under the ‘Advance Authorization’ scheme, exemption from the payment of import duties is given to raw materials/ input required for the manufacture of export products, which are then physically incorporated in such export goods. Thus, one can import raw materials or inputs at zero customs duty for production of export products, opined the bench.

On perusal of the trade notice (Trade Notice 11/2017, dated 30-06-2017), the Court appositely stated that the exporters were made aware of the changes.

The Court asserted, “the public notice clearly forewarned that AAs and their utilization 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 the impugned order, or a discussion about it. Likewise, the HBP was amended, and paragraph 4.27 (d) was inserted, which stated that duty free authorization for inputs subject to ‘pre-import condition’ could not be issued.”

The bench was of the opinion that 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.

However, the Court further observed that it cannot be a ground to hold that the insertion of the ‘pre-import condition’ was arbitrary.

The Apex Court further emphasized that one of the onuses behind the 2017 Notifications was to ensure that the entire exports made under ‘Advance Authorization’ towards discharge of export orders were physical exports. In case the entire exports were not physical exports, the ‘Advance Authorization’ were automatically ineligible for exemption.

Therefore, the Court concluded that there is no constitutional compulsion that whilst framing a new law, or policies under a new legislation – particularly when an entirely different set of fiscal norms are created, overhauling the taxation structure, concessions hitherto granted or given should necessarily be continued in the same fashion as they were in the past. When a new set of laws are enacted, the legislature’s effort is to on the one hand, assimilate- as far as practicable, the past regime.

In furtherance, it was held that “this inconvenience is insufficient to trump the legislative choice of creating an altogether new fiscal legislation, and insisting that a section of assessees order their affairs, to be in accord with the new law. Therefore, the exclusion of benefit of imports in anticipation of AAs, and requiring payment of duties, under Sections 3 (7) and (9) of Customs Tariff Act, 1975, with the ‘pre-import condition’, cannot be characterized as arbitrary or unreasonable.”

The Apex Court clarified that IGST is levied at multiple points (including at the stage of import) and input credit gets into the stream, till the point of end user. As a result, there is justification for a separate treatment of the two levies.

IGST is levied under the IGST Act, 2017 and is collected, for convenience, at the customs point through the machinery under the Customs Act, 1962. The impugned notifications, therefore, cannot be faulted for arbitrariness or under classification, the bench added.

In light of the same, the appeal of the Revenue succeeded and the orders of the High Court were set aside.

Mr. B. Krishna Prasad, AOR Mr. Nikhil Jain, AOR Mr. Mukesh Kumar Maroria, AOR Mr. Mukesh Kumar Maroria, AOR appeared for the Appellant.

The Respondent was represented by Mr. Mukesh Kumar Maroria, AOR M/s. Khaitan & Co., AOR Mr. Ajay Bhargava, Adv. Mr. Ayush Malhotra, Adv. Ms. Trishala Trivedi, Adv. Mr. Upkar Agrawal, Adv. Mr. Shamik Shirishbhai Sanjanwala, AOR Mr. Siddharth Srivastav, Adv. Mr. Abhishek A. Rastogi, Adv. Mr. Nikhil Jain, AOR Ms. Divya Jain, Adv. Mr. P. S. Sudheer, AOR Mr. Sudhanshu S. Choudhari, AOR