In the decision rendered on 28 April 2023, the Supreme Court has reversed the decision of Gujarat High Court and held that the ‘pre-import condition’ stipulated in grant of exemption from payment of IGST & Compensation Cess is not ultra vires. The Gujarat High Court had held that grant of IGST exemption with ‘pre-import condition’ was arbitrary and that such condition was ultra vires the scheme of the Foreign Trade Policy.
Background
Notification No. 18/2015-Cus., dated 1 April 2015 governs import of inputs against Advance Authorization for physical exports. This notification granted complete exemption from payment of BCD (Basic Customs Duty), CVD (Additional Duty of Customs) and SAD (Special Additional Duty of Customs), apart from granting exemption to other customs duties such as ADD, etc.
On introduction of GST, the said Notification was amended to limit the exemption to payment of BCD alone. Vide Notification No. 79/2017-Cus dated 13 October 2017, exemption from payment IGST as well as Compensation Cess was extended, however subject to fulfilment of ‘pre-import condition’ and ‘physical exports’.
Vide Notification No. 33 (RE-2015-2020), dated 13 October 2017, Para 4.14 of the Foreign Trade Policy 2015-20 was also amended similarly.
Investigation was initiated against various manufacturer-exporters who had availed exemption of IGST and Compensation cess, on the ground that pre-import condition was not satisfied. As per the revenue, pre-import condition means that goods had to be imported first and then the final product manufactured using such imported goods should be exported.
The Exporters/ Assessees challenged the said pre-import condition before the Hon’ble Gujarat High Court [Shri Jagdamba Polymers Limited & Ors. v. Union of India & Ors. – 2019-VIL-80-GUJ], which held that ‘pre-import condition’, as contemplated in Notification No. 79/2017-Cus. for availing IGST exemption under Advance Authorisation Scheme, is ultra vires on the ground that the same does not meet the test of reasonableness and is also not in consonance with the scheme of Advance Authorization Scheme.
However, the said view of the Hon’ble Gujarat High Court has now been overturned by the Apex Court [UOI v. Cosmo films Limited - 2023- VIL-47-SC] holding that ‘pre-import condition’ is not ultra vires.
Issue before the Apex Court
The Civil Appeals were filed by the Revenue before the Apex Court against the order of Gujarat High Court.
The precise question before the Apex Court was that whether pre-import condition is a valid requirement to claim exemption from IGST and Compensation Cess for imports made under Advance Authorisation Scheme.
Findings and decision of the Apex Court
The Hon’ble Supreme Court has set aside Gujarat High Court Judgement with respect to fulfilment of pre-import condition as contemplated in Notification No. 79/2017-Cus., dated 13 October 2017. The key findings given by the Apex Court in this regard are summarized below:
- The Apex Court observed that the concept of ‘pre-import condition’ was not alien to the Foreign Trade Policy 2015-20 (FTP).
- Inconvenience caused to exporters by paying IGST and claiming refund thereafter could not be a ground to hold the ‘pre-import’ condition as arbitrary.
- The exclusion of benefit for imports made in anticipation of Advance Authorisation, and requiring payment of duties, under Sections 3(7) and (9) of the Customs Tariff Act, 1975, with the ‘pre-import condition’, cannot be characterized as arbitrary or unreasonable.
- Respondent-Assessee’s argument that there is no rationale for different treatment of BCD and IGST under Advance Authorisation is without merits. While dismissing the Respondent-Assessee’s argument, the Apex Court held that BCD is a customs levy at the point of import. On the other hand, IGST is levied at multiple points (including at the stage of import) and input tax credit gets into the stream, till the point of end user. As a result, there is a justification for a separate treatment of two levies. Therefore, the notification cannot be faulted with for arbitrariness or under classification.
- With respect to retrospective effect of Notification No. 01/2019-Cus., dated 10 January 2019 vide which pre-import condition was removed on 10 January 2019 as a condition for granting IGST exemption on import of goods, the Apex Court, relying upon Kanak Exports [Director General of Foreign Trade & Ors. v Kanak Exports & Ors - 2015 (326) E.L.T. 26 (S.C.)] held that Central government has no power to issue retrospective notification / regulations.
- The Apex Court has directed the Revenue to permit the manufacturer-exporters who were enjoying interim orders, till the impugned judgments were delivered, to claim refund or input tax credit. The Apex Court has also directed the Revenue to issue suitable circular in this regard.