There have been numerous instances where litigation has arisen due to divergent and incorrect interpretations of statutory words and expressions. The tax authorities have frequently flagged such issues, given the significant revenue implications involved. The recent decision in Noble Resources and Trading India (P) Ltd. v. Union of India1, is a case in point, and it brings much-needed clarity on the matter. This article seeks to analyse the Supreme Court’s ruling and its broader implications.
Legal background
To contextualise the judgment2, it is essential to examine the relevant legal framework. The Central Government had issued the Export and Import Policy 2002-20073 (EXIM Policy) (w.e.f. 1-4-2002) read with the Handbook of Procedures (HBP) which lays down the operative rules for import into and export of goods from India.
Para 3.7.2.1(vi) of the EXIM Policy provides that duty-free credit entitlement (DFCE) certificates for status holders achieving an incremental growth of over 25% in the Free on Board (FOB) value of exports (in free foreign exchange) subject to a minimum export turnover of Rs 25 crores (also in free foreign exchange). The duty-free entitlement shall be 10% of the incremental growth in exports. Such entitlement can be used for import of capital goods, office equipment and inputs for their own factory or the factory of the associate/supporting manufacturer/job worker.
Further, Para 3.2.5 of the HBP provides that status holders who will achieve more than 25% growth in exports in the year 2003-2004 (in free foreign exchange) subject to a minimum export of Rs 25 crores (in free foreign exchange) shall be entitled for DFCE certificate at 10% of the incremental growth in exports.
To implement these benefits, Notification No. 53/2003-Cus. dated 1-4.2003 (Notification No. 53/2003)4 was issued, granting exemption from duties on goods imported into India against a DFCE certificate issued under Para 3.7.2.1(vi) of the EXIM Policy subject to the conditions prescribed therein. Para 5(ii) of the said Notification defines goods to, inter alia, mean raw materials, components, intermediates, etc. other than agricultural and dairy products.
Note 7 was inserted in Para 3.7.2.1 of the EXIM Policy vide Notification No. 38 (RE-2003)/2002-2007 dated 21-4-20045 which provided that agricultural products which fall under Chapters 1-24 of Indian Trade Classification (Harmonised System) [ITC(HS)] classification of export and import items would not be allowed for imports under DFCE certificate for status holders. A similar amendment was made in Para 3.2.5 of the HBP vide Public Notice No. 40 (RE-2003)/2002-2007 dated 28-1-20046. Para 3.2.5 of the HBP was further amended vide Public Notice No. 40 (RE-2003)/2002-2007 dated 28-1-2004 to, inter alia, allow import of all edible oils classified under Chapter 15 of ITC (HS) under the scheme only through State Trading Corporations and Metal and Minerals Trading Corporation of India.
Even though the exclusion of agricultural products which fall under Chapters 1-24 of ITC(HS) for imports under DFCE certificate for status holders was specifically inserted in the Exim Policy and HBP, however, it was not clarified as to what would constitute an agricultural product.
Thereafter, Circular No. 10/2004-Cus. dated 30-1-2004 (Circular dated 30-1-2004)7 was issued wherein it was clarified that restriction regarding agriculture and dairy products as specified under the scheme shall mean that import of all types of products derived from agriculture/dairy origin including crude edible oil shall not be permitted.
Factual background in Noble Resources case
The appellant assessee imported crude degummed soybean oil (subject goods) vide Bills of Entry dated 26-7-2006 and 27-7-2006, claiming exemption from import duty on the strength of a certificate issued under the DFCE scheme. However, the Revenue contended that the appellant was ineligible for the benefit as the imported goods were agricultural in nature or of agricultural origin and thus fell within the exclusion list under the EXIM Policy by relying upon Circular dated 30-1-2004.
On these grounds, the appellant was issued a notice demanding payment of applicable duties along with interest. Thereafter, order-in-original was passed by the customs authorities whereby the demand of duty proposed in the show-cause notice was confirmed. This came to be assailed by the appellant before the Gujarat High Court by filing a petition, who also dismissed the writ petition by upholding the levy of demand. Thereafter, the said dispute travelled to the Supreme Court.
The Supreme Court’s decision8
The Supreme Court, in this context, considered the appellant’s claim for benefit under the DFCE scheme on the export of soybean meal extract. The basic issue for the Supreme Court’s consideration was whether the appellant was entitled to claim exemption from customs duty, in terms of Notification No. 53/2023 on import of the subject product against DFCE or not. In this regard, the Supreme Court dealt with two critical aspects, as discussed below:
(a) Validity of Circular dated 30-1-2004
The Supreme Court held that the Central Board of Indirect Taxes and Customs (CBIC) could not expand the scope of the term “other than agricultural and dairy products” as used in the statutory Notification No. 53/2003 through an administrative circular. Specifically, the inclusion of all goods of agricultural or dairy origin, such as crude edible oil, within the exclusion category by way of Circular dated 30-1-2004 amounted to rewriting statutory conditions —— a course impermissible in law. Accordingly, the Supreme Court declared the Circular dated 30-1-2004 to have no legal force insofar as it sought to alter the statutory exclusions prescribed under the notification.
(b) Classification of the imported product: Agricultural or not?
The Supreme Court observed that the subject product is not the same as the agricultural product “soybean” from which it is derived. The manufacturing process results in a new and distinct product, which causes the original agricultural character of the soybean to be lost. As such, the imported subject product cannot be classified as an “agricultural product”.
Since the term “agricultural product” was not defined under the EXIM Policy, the Supreme Court relied on dictionary definitions, common parlance understanding, and the precedent laid down in P. Narayanan Nair v. Lokeshan Nair9, to interpret the term.
On this basis, the Supreme Court concluded that the appellant was entitled to claim exemption under Notification No. 53/200310, for import of the subject products against DFCE.
Broad ratio of the judgment
This judgment11 carries significant implications for India’s export-import regulatory framework. A key observation in the case is the attempt by the Revenue to deny the appellant the benefit of the DFCE scheme by relying on an administrative circular. The Supreme Court, however, reaffirmed a well-established principle of law: the condition in which goods are imported is pivotal in determining the nature of the product and consequential applicable export incentives. Further, the Supreme Court reaffirmed the position that Circular cannot determine the nature of the product as agricultural or not.
The decision also opens avenues for exploring how the jurisprudence laid down may influence interpretations under the goods and services tax (GST) laws and the foreign trade policy (FTP), especially in terms of classification and eligibility criteria.
*Executive Partner, Lakshmikumaran and Sridharan Attorneys.
**Principal Associate, Lakshmikumaran and Sridharan Attorneys.
3. Export and Import Policy 2002-2007, w.e.f. 1-4-2002.
4. Ministry of Finance, Notification No. 53/2003-Customs (Notified on 1-4-2003).
5. Ministry of Commerce & Industry, Notification No. 38 (RE-2003)/2002-2007 (Notified on 21-4-2004).
6. Ministry of Commerce & Industry, Public Notice No. 40 (RE-2003)/2002-2007 (Notified on 28-1-2004).
7. Ministry of Finance, Circular No. 10/2004-Customs (Issued on 30-1-2004).
10. Ministry of Finance, Notification No. 53/2003-Customs (Notified on 1-4-2003).