The Supreme Court Upholds The 'pre-import Condition' Requirement For Claiming Igst And Gst Compensation Cess On Imports Made Under 'advance Authorization.'

CAUSE TITLE:

UNION OF INDIA & ORS VERSUS COSMO FILMS LIMITED 

DATE OF ORDER:  

28-04-2023

JUDGE(S):

S.RavindraBhat, Dipankar Datta

PARTIES:

Petitioner:UNION OF INDIA & ORS

Respondent: COSMO FILMS LIMITED 

SUBJECT 

The Foreign Trade Policy of 2015-2020 (FTP) and Handbook of Procedures of 2015-2020 (HBP) both contain requirements for "pre-import conditions" that must be met to claim exemption from the Integrated Goods and Services Tax (IGST) and GST Compensation Cess on inputs imported into India to manufacture export goods based on "Advance Authorization."

ARGUMENTS ADVANCED BY THE RESPONDENT 

Cosmo Films Ltd., the respondent, argued before the court that there was no justification or discernible distinction between subjecting IGST and Compensation Cess to the "pre-import condition" and excluding license holders under the scheme from the said condition's application to other types of import duties, such as the Basic Customs Duty (BCD).

Court analysis

• Although the court concluded that the term "pre-import condition" was not foreign, it did point out that paragraph 4.13 (i) of the FTP gave the DGFT authority to impose "pre-import conditions" on items other than those listed in Appendix-4J of the HBP. The court noted that the Gujarat High Court had overlooked this and had mistakenly assumed that only the items listed in the aforementioned Appendix were subject to the "pre-import condition."
• The bench noted that the introduction of the "pre-import condition" may have put the exporters through hardship because they were unable to carry on with their previous business practices of importing inputs after requesting Advance Authorization to fulfill their contractual obligations for overseas export. By the new arrangement, exporters were required to pay the IGST and Compensation Cess before claiming refunds after demonstrating that all inputs (waste excluded) were used in the production of the final export article. The top court, however, ruled that the High Court's conclusion that the insertion of the "pre-import condition" was arbitrary cannot be supported by this argument.
• The Directorate of Revenue Intelligence (DRI) stated in the investigations carried out based on the aforementioned Notifications that the "pre-import condition" indicated that things were to be imported first, and then the finished products made using those imported commodities were to be exported. In other words, the items were not required to be employed for the production of export goods until after the importation of the goods had started.
• The "pre-import condition" was deemed satisfied by DRI officers after it was proven that the goods imported under a specific "Advance Authorization" were employed in connection with the production of completed goods exported to fulfill the export obligation of that specific authorization.
• The Gujarat High Court overturned the 2017 Notifications imposing the "pre-import" restriction because they were against the FTP's intended framework after the manufacturer-exporters challenged the amended Notifications there.
• The Apex Court determined that Chapter IV of the FTP contains "Duty Exemption/Remission Schemes," and that "Advance Authorization" (AA) is one of the duty exemption schemes, in the appeal brought by the tax department against the ruling of the High Court.
• The court noted that under the "Advance Authorization" arrangement, import duties are waived for raw materials and inputs used in the production of export items that are thereafter physically incorporated into those export goods. To produce goods for export, one can import raw materials or inputs for no customs charge.
• The payment of Basic Customs Duty (BCD), Additional Customs Duty, Education Cess, Anti-dumping Duty, Countervailing Duty (CVD), Safeguard Duty, and Transition Product Specific Safeguard Duty, as applicable, was waived for imports made under an "Advance Authorization."
• It further estimated that "Exports in Anticipation of Authorization" are covered under HBP Paragraph 4.27(a), as informed by the DGFT. The aforementioned rule allowed exports before receiving authorization and allows exports to fulfill export obligations based on the file number even before receiving "Advance Authorization" for imports.
• Goods imported into India with a valid advance authorization are now exempt from all customs duties, including the extra duty, safeguard duty, transitional product-specific safeguard duty, and anti-dumping duty, under Notification No. 18/2015-Customs, dated 01.04.2015.
• Exporters were required to pay IGST and compensating cess and apply for input tax credits as appropriate under the GST Rules after the implementation of the GST regime because there was no matching announcement exempting the additional taxes imposed under the Customs Tariff Act. However, as stated in the 2015 Notification, imports made with an "Advance Authorization" were still exempt from paying the standard customs duty, the education cess, and any other applicable taxes.
• The bench noted that many businesses had their operating capital blocked as a result of the IGST return being delayed as a result of the original GST-related issues.
• "The Union subsequently issued an amending notification dated 13- 10-2017 in the exercise of powers under Section 25 (1) of the Customs Act, 1962 (Notification 79/2017 - dated 13.10.2017), inter alia amending the opening paragraph of Notification 18 / 2015 (dated 1.4.2015) whereby goods imported into India received an exemption from the entire customs duty leviable thereon, specified in the First Schedule to the Customs Tariff Act, 1975, and from the entire additional duty leviable
• The bench noted that the above-mentioned amended notification also included the "physical export" and "pre-import" conditions for IGST and Compensation Cess exemption.
• "Thus, exemption from IGST levy under Section 3 (7) and compensation cess leviable under Section 3 (9) of Customs Tariff Act, 1975 were based on the conditions that the export obligation shall be accomplished by physical exports only and shall also be subject to 'pre-import condition,'" the court stated.
• The bench also stated that the modifications were communicated to exporters via a trade notice (Trade Notice 11/2017, dated 30-06-2017).
• "The public notice clearly stated that AAs and their use would not continue in the same manner as the AA scheme had previously operated." "The High Court has missed this trade notice because there is no mention of it in the impugned order or discussion of it," the court stated.
• It further stated that by the trade notice, exporters were made aware of the fact that under the GST regime, no exemptions from payment of IGST and Compensation Cess would be available for imports under ‘Advance Authorisation’. Importers were required to pay IGST and claim input tax credits by GST guidelines.
• "Similarly, 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 court added.
• While noting that the concept of 'pre-import condition' was not foreign, the court stated that "Appendix-4J (mentioned in paragraph 4.13 (ii) 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' as applicable, before the GST regime." Furthermore, under FTP paragraph 4.13, the DGFT may impose 'pre-import conditions' on articles other than those specified.
• "By retaining the authority to impose 'pre-import conditions' on articles other than those listed in Appendix-4J, the DGFT could use it on any goods." The High Court did not address this issue, instead assuming that the 'pre-import condition' applied solely to certain items. The existence of paragraph 4.13 (i) reserving the right to insist on the 'pre-import condition' meant that the policy could alter depending on the necessities of the time. This omission, along with the High Court's failure to note paragraph 4.27 (d) of the HBP, are fundamental flaws in the assailed judgment, according to the court.
• The court went on to say that one of the goals of the 2017 Notifications was to ensure that all exports made under 'Advance Authorisation' for discharge of export orders were physical exports. If the entire exports were not physical, the 'Advance Authorisation' were ineligible for the exemption.
• The bench stated that, while the imposition of the 'pre-import requirement' may have caused difficulty to the exporters, this cannot be used to argue that the imposition of the 'pre-import condition' was arbitrary.
• "In this court's opinion, the introduction of the 'pre-import condition' may have caused hardship to the exporters because, even if they met the physical export criteria, they could not continue with their previous business practices of importing inputs after applying for AAs ('Advance Authorisation') to meet their overseas contractual obligations." The new regime required them to pay the two duties and then claim refunds after demonstrating that the inputs were completely used (wastage excluded) in the production of the final export goods. They were inconvenienced by the restructuring of their firms. However, this cannot be used to argue that the insertion of the 'pre-import condition' was arbitrary, as the High Court concluded. Rohitash Kumar & Ors. v Om Prakash Sharma & Ors. 31, the court stated that "inconvenience or hardship is not a ground for the court to interpret the plain language of the statute differently to grant relief."
• The bench recognenactst enacting a new set of legislation is sure to cause some disturbance. "In this case, the disruption is that exporters must import inputs, pay the two duties, and then claim refunds." However, this inconvenience is insufficient to overcome the legislative choice of enacting entirely new fiscal legislation and requiring a subset of assessees to order their affairs by the new law. "As a result, the exclusion of the benefit of imports in anticipation of AAs, and the requirement of payment of duties, under Sections 3 (7) and (9) of the Customs Tariff Act, 1975, with the 'pre-import condition,' cannot be described as arbitrary or unreasonable," the court said.
• The court dismissed the respondent's objections, stating, "The exporter respondents' argument that there is no rationale for differential treatment of BCD and IGST under the AA scheme is without merit." BCD is a customs charge levied at the point of importation. There is no question of credit at that point. IGST, on the other hand, is levied at various locations (including at the point of import) and input credit is credited till the final user. As a result, there is a reason for treating the two levies separately.
• The IGST is imposed under the IGST Act, 2017, and is collected at the customs point using the equipment set up under the Customs Act, 1962. As a result, the contested notifications cannot be criticized for arbitrariness or under classification."
• As a result, the court granted the appeal and reversed the Gujarat High Court's decision.

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