Supreme Court: In a bunch of appeals, against the judgment of High Court of Gujarat, wherein, mandatory fulfilment of a ‘pre-import condition’ incorporated in the Foreign Trade Policy of 2015-2020 (‘FTP’) and Handbook of Procedures 2015-2020 (‘HBP’) was set aside, the Division Bench of S. Ravindra Bhat* and Dipankar Datta, JJ., allowed the appeals, set aside the impugned judgment of the High Court and upheld the requirement of ‘pre-import condition’ to avail tax exemption benefits.
In the Foreign Trade (Development & Regulation) Act, 1992 (‘FTDRA’) the Central Government announced duty exemption scheme, one such scheme was advance authorization (‘AA’) to claim exemption of Integrated Goods and Services Tax (‘IGST’) and Goods and Services Tax (‘GST’) compensation cess on input imported into India to produce goods to be exported from India. It was implemented to regulate and guide the procedure to be followed for implementing the provisions of the FTP and the rules framed thereunder.
A ‘pre-import condition’ was notified, amending the various provisions of the FTP, with effect from 13-10-2017. 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 manufacturers and exporters (‘respondents’) were of the view that the scope of ‘pre-import condition’ was unclear, whereas the DRI officers conducting the 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 authorization, the ‘pre-import condition’ stood satisfied. Thus, the respondents, aggrieved by the approach of DRI officers challenged the ‘pre-import condition’ before the High Court.
The High Court held that the impugned ‘pre-import condition’, notified in the FTP did not suffice the test of reasonableness and were ultra vires to the scheme of FTP. Thus, the Union Government and revenue, aggrieved by the decision of the High Court, approached the Court.
Analysis, Law and Decision
The Court said that the object behind the introduction of the ‘pre-import condition’, was to smoothen and facilitate the export trade, to ensure that the finished goods, meant for export, did not suffer a competitive price disadvantage. The Court noted that the concept of ‘pre-import condition’ was not alien, as the Appendix-4J of the FTP listed several articles, such as spices, penicillin and its salts, tea, coconut oil, silk, drugs from unregistered sources, precious metals, etc. as articles for which the ‘pre-import condition’ was applicable, prior to the GST regime. Moreover, the Court noted that by paragraph 4.13 of the FTP, the Directorate General of Foreign Trade (‘DGFT’) could impose ‘pre-import condition’ on certain articles.
The Court said 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. Further, the Court said that the High Court had 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 HBP are serious infirmities in the impugned judgment.
The Court perused the notification dated 13.10.2017, issued under the Customs Act, 1962 and said that the exemption from payment of IGST at the time of import of input materials under AA was granted, however, the exemption was not absolute. The Court said that the conditions incorporated in the said notification 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’.
Thus, the Court said that the impugned notifications cannot be faulted for arbitrariness and the reasoning of the High Court was faulty.
The Court said that AAs can be issued either to a manufacturer, exporter or merchant exporter tied to supporting manufacturer, as per paragraph 4.05 of the FTP. However, paragraph 4.05 defines categories for which AAs can be issued, somewhat expansively. The Court said that one of the objects behind the impugned notifications was to ensure that the entire exports made under AAs towards discharge of export orders were physical exports. In case the entire exports were not physical exports, the AAs were automatically ineligible for exemption.
The Court said that the contention that only a few articles were enumerated when the FTP was published, cannot be a no ground for the exporters to complain that other articles could not be included for the purpose of ‘pre-import condition’. The Court said that the numerous schemes in the FTP were to maintain an equilibrium between exporters’ claims, on the one hand and on the other hand, to preserve the Revenue’s interests. The Court noted that in the present case, 2 aspects were involved i.e., exemption and postponement of exemption of IGST; a new levy altogether, whose mechanism was being worked out and evolved, for the first time.
Further, the Court said that the introduction of the ‘pre-import condition’ may have resulted in hardship to the exporters, because even after fulfilling 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. Further, the Court said that the re-shaping of their businesses caused inconvenience to them, however, this cannot be a ground to hold that the insertion of the ‘pre-import condition’, was arbitrary, as concluded by the High Court.
Thus, the impugned judgment and orders of the Gujarat High Court were set aside. The Court directed the Revenue to permit the respondents to claim a refund or input credit, whichever was appliable and wherever customs duty was paid. The respondents were directed to approach the jurisdictional Commissioner and apply with documentary evidence within six weeks from the date of this judgment to claim the refund.
[Union of India v. Cosmo Films Ltd., 2023 SCC Online SC 518, Decided on 28-05-2023]
Judgment Authored by: Justice S. Ravindra Bhat