Supreme Court Upholds Pre-Import Condition for IGST Exemption in Advance Authorisation Scheme: Union of India vs. Cosmo Films Limited (28 April 2023)

Date of the Judgment: 28 April 2023

Citation: 2023 INSC 387

Judges: S. Ravindra Bhat, J., Dipankar Datta, J.

Can the government impose a ‘pre-import condition’ for exporters to avail exemptions on Integrated Goods and Services Tax (IGST) and GST compensation cess? The Supreme Court of India recently addressed this question, examining the validity of such a condition imposed on exporters under the Advance Authorisation (AA) scheme. This case revolves around the interpretation of the Foreign Trade Policy and related customs notifications, specifically concerning exemptions for goods imported for export production. The bench comprised Justices S. Ravindra Bhat and Dipankar Datta, with the majority opinion authored by Justice S. Ravindra Bhat.

Case Background

The case originated from a dispute regarding the ‘pre-import condition’ introduced in the Foreign Trade Policy (FTP) 2015-2020 and the Handbook of Procedures (HBP). The Union of India, through its various departments, had been framing policies to regulate imports and exports. One such policy was the Advance Authorisation (AA) scheme, which provided duty exemptions on inputs imported for manufacturing goods to be exported. Initially, exporters could import inputs without paying basic customs duty, additional duty, and other levies. However, with the introduction of the Goods and Services Tax (GST) regime on 1 July 2017, Integrated Goods and Services Tax (IGST) and GST compensation cess were also levied on imported inputs. Subsequently, on 13 October 2017, the government introduced a ‘pre-import condition’ for availing exemptions on IGST and compensation cess. This meant that exporters had to first import the inputs and then use them to manufacture goods for export. This condition was challenged by various exporters who had already exported goods in anticipation of receiving the AA, thus not fulfilling the ‘pre-import condition’.

Timeline

Course of Proceedings

Aggrieved by the interpretation of the ‘pre-import condition’ by the Directorate of Revenue Intelligence (DRI), several manufacturer-exporters approached the High Court of Gujarat. The exporters argued that the condition was unclear and made it impossible to avail the exemption. The High Court ruled in favor of the exporters, setting aside the ‘pre-import condition’ as arbitrary and unreasonable. The court noted that the condition was against the Advance Authorisation Scheme and made the benefit of exemption illusory. The Union of India then appealed this decision to the Supreme Court.

Legal Framework

The legal framework for this case is primarily based on the following:

• The Foreign Trade (Development & Regulation) Act, 1992 (FTDRA): This Act empowers the Central Government to frame policies for the development, regulation, and control of imports and exports.
• The Foreign Trade Policy (FTP) 2015-2020: This policy outlines the guidelines for import and export activities, including the Advance Authorisation scheme. Paragraph 4.03 of the FTP discusses the Advance Authorisation scheme. Paragraph 4.13 of the FTP allows the DGFT to impose a “pre-import condition.” Paragraph 4.14 of the FTP details the duties exempted under the Advance Authorisation scheme.
  
  “4.03 Advance Authorisation
  (a) Advance Authorisation is issued to allow duty free import of input, which is physically incorporated in export product (making normal allowance for wastage). In addition, fuel, oil, catalyst which is consumed/utilized in the process of production of export product, may also be allowed.”
  
  “4.13 “pre -import condition” in certain cases
  (i) DGFT may, by Notification, impose “pre -import condition” for inputs under this Chapter.”
• Handbook of Procedures (HBP) 2015-2020: This document provides the procedures for implementing the FTP. Paragraph 4.27 of the HBP allows exports in anticipation of authorisation.
  
  “4.27 Exports in Anticipation of Authorisation
  Exports/supplies made from the date of EDI generated file number for an Advance Authorisation, may be accepted towards discharge of EO. Shipping/Supply document(s) should be endorsed with File Number or Authorisation Number to establish co -relation of exports/supplies with Authorisation issued.”
• Notification No. 18/2015-Customs: This notification exempted goods imported against a valid AA from basic customs duty, additional duty, safeguard duty, and anti-dumping duty.
• Notification No. 79/2017-Customs: This notification amended Notification No. 18/2015-Customs, introducing the ‘pre-import condition’ for availing IGST and compensation cess exemptions. It also stated that the export obligation shall be fulfilled by physical exports only.
  
  “Provided further that notwithstanding anything contained hereinabove for the said authorisations where the exemption from integrated tax and the goods and services tax compensation cess leviable thereon under sub -section (7) and sub -section (9) of section 3 of the said Customs Tariff Act, has been availed, the export obligation shall be fulfilled by physical exports only.”
  
  “That the exemption from integrated tax and the goods and services tax compensation cess leviable thereon under sub -section (7) and sub -section (9) of section 3 of the said Customs Tariff Act shall be subject to pre -import condition”
• Notification No. 33/2015-2020: This notification amended the FTP, incorporating the ‘pre-import condition’ in paragraph 4.14.
• The Customs Tariff Act, 1975: Section 3(7) and 3(9) of the Act levy IGST and GST compensation cess respectively on imported goods.
  
  “(7) Any article which is imported into India shall, in addition, be liable to integrated tax at such rate, not exceeding 40% as is leviable under section 5 of the Integrated Goods and Services Tax Act, 2017 on a like article on its supply in India, on the value of the imported article as determined under sub -section (8).
  
  (9) Any article which is imported into India shall, in addition, be liable to the Goods and Services Tax compensation cess at such rate, as is leviable under section 8 of the Goods and Services Tax (Compensation to States) Cess Act, 2017 on a like article on its supply in India, on the value of the imported article as determined under sub -section (10).”

These provisions are framed under the powers conferred by the Constitution of India, specifically concerning trade and taxation. The Advance Authorisation scheme is intended to promote exports by reducing the cost of production through duty exemptions. The ‘pre-import condition’ was introduced to ensure that the exemptions are used for their intended purpose, i.e., manufacturing goods for physical export.

Arguments

Arguments of the Union of India:

• The Union argued that the essence of the AA scheme is to import duty-free materials first and then use them to manufacture export products. This is supported by paragraph 4.03 of the FTP, which demands physical incorporation of imported materials in export goods.
• The Union contended that paragraph 4.27 of the HBP, which allows exports in anticipation of authorization, is an exception to meet exigencies, not a general rule. Exporters were misusing this provision, using domestic or other materials for export and diverting duty-free imports.
• The Revenue argued that paragraph 4.27(d) of the HBP bars the benefit of export in anticipation of authorization for inputs with a ‘pre-import condition’. Therefore, the ‘pre-import condition’ and export in anticipation of authorization are mutually exclusive.
  
  “(iv) No Duty Free Import Authorisation shall be issued for an input which is subjected to pre -import condition .”
• The Union stated that the ‘pre-import condition’ was not new; it existed for certain goods like drugs and precious metals. Paragraph 4.13 of the FTP allows the DGFT to impose this condition on any inputs.
  
  “DGFT may, by Notification, impose pre -import condition for inputs under this Chapter.”
• The Revenue submitted that the High Court erred in prioritizing paragraph 4.27 of the HBP over paragraph 4.03 of the FTP. The FTP has pre-eminence over the HBP.
• The Union argued that the ‘pre-import condition’ was introduced to prevent cash blockage for exporters due to upfront payment of IGST and compensation cess.
• The Revenue emphasized that the power to levy taxes includes the power to impose conditions for exemptions. Courts should be circumspect while interpreting fiscal legislation.
• The Union argued that the omission of the ‘pre-import condition’ in 2019 cannot be a ground to disregard the condition for the period it existed.

Arguments of the Respondent-Exporters:

• The exporters argued that the AA scheme had been operating successfully without a ‘pre-import condition’ since 1986. There was no justification for imposing this condition for a limited period.
• The exporters contended that the ‘pre-import condition’ was applicable only for IGST and compensation cess, while other import duties were exempt without this condition. This differential treatment was discriminatory.
• The exporters argued that the ‘pre-import condition’ made it impossible to fulfill export orders within the required time frame. The normal cycle of import, manufacture, and export takes more than six months, while delivery schedules are usually 4 to 8 weeks.
• The exporters submitted that all imports under an authorization are subject to “actual user condition,” meaning they cannot sell or dispose of the imported raw materials. There is no ‘one-to-one’ correlation between import and export of goods.
• The exporters argued that the ‘pre-import condition’ violated Article 14 of the Constitution, as it created an unreasonable classification by denying IGST exemption to exporters who fulfill their export obligations before importing goods.
• The exporters contended that the ‘pre-import condition’ effaced the entire AA scheme and should be struck down.
• The exporters argued that the differential treatment of BCD and IGST was discriminatory and failed the test of reasonable classification under Article 14 of the Constitution.

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section. However, the core issue that the court addressed was:

1. Whether the ‘pre-import condition’ imposed by Notification No. 79/2017-Customs and Notification No. 33/2015-2020 is valid and in consonance with the Advance Authorisation scheme under the Foreign Trade Policy.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Judgment

Conclusion

The Supreme Court’s judgment in Union of India vs. Cosmo Films Limited upheld the validity of the ‘pre-import condition’ for availing IGST exemption under the Advance Authorisation scheme. The court emphasized the legislative authority to impose conditions for exemptions and the need for policy flexibility in economic matters. The court rejected arguments of discrimination and hardship, stating that these are not valid grounds to strike down a law. The judgment has significant implications for exporters who had relied on the pre-existing practice of exporting before importing. This decision clarifies that the ‘pre-import condition’ was a valid requirement during its period of operation and that the subsequent withdrawal of the condition cannot be applied retrospectively.