MAY 07, 2018

By Srinivas Chaturvedula, Superintendent, CBIC

THE Government of India, in line with the it's long standing ideal of rendering exports tax free, had inter-alia, decided to extend the exemption from IGST levy, to imports made under the Advance Authorisation scheme (hereinafter referred to as 'AA' for brevity) by issuing two notifications, one under the Customs Act, 1962 in the form of notification 79/2017-Cus dated 13.10.2017 and the other under the FT(D&R) Act, 1992 in the form of notification No.33/2015-2020, both dated 13th October 2017.

2. Notification 79/2017-Cus dated 13.10.2017, was issued amending various notifications issued in relation to the Advance Authorisation scheme. Surprisingly, the benefit of imports under the AA scheme was severely restricted by stipulating that only physical exports made by the AA holder could be counted towards export obligation. While the merits of doing so, were not comprehendible and since the said aspect is outside the scope of this article, it is felt that it is better to leave it at that, for being dealt with separately, as there is one more amendment crying for immediate attention. The amendment in itself, it's interpretation and associated ramifications, are spelt out in the following lines.

3.1. S.no 2(a) of the said notification (79/2017-Cus), inter-alia, amending notification nos.18/2015-Customs, dated 1.4.2015, 20/2015-Customs, dated 1.4.2015, 21/2015-Customs, dated 1.4.2015 enables exemption from:

"The whole of additional duty leviable under sub-section(1), (3) and (5) of Section 3,Integrated tax leviable under sub-section (7) of Section 3,Goods and Service tax, service tax compensation cess leviable thereon under sub-section(9) of Section 3,safeguard duty leviable thereon under Section 8B,countervailing duty leviable thereon under Section 9and anti-dumping duty leviable thereon under Section 9A….."

3.2. However, vide s.no 2(b) of the notification, in condition VIII, after the proviso, the following proviso was inserted

"Provided further that notwithstanding anything contained herein above for the said authorisations where the exemption from integrated tax and the goods and service tax compensation cess leviable thereon under 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"

Thus, if the importer choses to avail IGST/Compensation Cess exemption, then his export obligation will have to be fulfilled by physical exports only. In other words, such importer will not have option of making 'Deemed Exports'. The rationale of such a condition apart, there appears to be no other confusion over this condition.

4.1. It is, however, condition 2(C) of the said notification introducing condition (xii), that has indeed taken the Industry by storm.

The said condition (xii) reads as follows:

"(xii) the exemption from integrated tax and the goods and service 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 ."

4.2. It had come to the fore that, reportedly DGFT authorities and certain authorities had expressed an opinion that due to the above condition, the exemption from Integrated Tax and Compensation Cess is available only in the case of imports made before fulfillment of export obligation (result of their interpretation of the stipulation that ' exemption is subject to pre-import condition ' to mean only imports made before discharge of export obligation).

4.3. In consequence, there is a very strong widespread view, that the said exemption is NOT available in the case of imports made under AA, where the export obligation is completed before import.

5. Amidst all the hue and cry that is associated with the outcome of such an interpretation, it appears that it would be primarily incumbent to first:

- Analyze whether the usage of the phrase 'subject to pre-import condition' could be allowed to mean that the exemption would be ONLY available to imports made before fulfillment of export obligation and NOT to imports made on replenishment basis.

- Analyze whether 'pre-import condition' can be meant to indicate imports made before discharge of export obligation notwithstanding existence of specific usage of the phrase in the FTP.

6. If one comprehends that the above meaning cannot be allowed to be drawn out of the stipulation, then it would be necessary for him to cause a roving enquiry into the meaning of the phrase ' subject to pre-import condition ' and into the very meaning of ' pre-import condition' itself.

7. Normally, a pre-import condition is a condition that is associated with import of goods and such a condition cast an obligation on the importer importing the said goods.It is rather a condition that is attached to import of specified goods. Being so, it becomes imperative to get to the contemplation behind the use of the phrase 'exemption subject to pre-import condition' in the notification. For this, one has to invariably scan the provisions of the Foreign Trade Policy(FTP) to find the purport and meaning of 'pre-import condition'.

"Paragraph 4.13 of the FTP reads thus

(i) DGFT may, by notification, impose pre-import condition for inputs under this chapter.

(ii) Import items subject to pre-import condition are listed in Appendix 4-Jor will be as indicated in SION.

(iii) Import of drugs from unregistered sources shall have pre-import conditions."

8. Thus, from the foregoing, it is easily discernible that the phrase 'subject to pre-import condition' cannot be taken to mean that the exemption is subject to the condition that the imports must be made prior to exports under AA. It is pertinent to note that the phrase pre-import condition has a very specific meaning in the FTP and hence cannot be loosely interpreted to mean imports made prior to fulfillment of export obligation.

9. For any one looking for succor in this regard, towards DGFT, would have been disappointed in great measure, as the amendment to Para 4.14 of FTP carried out by way of issue of notification no.33/2015-2020 dated 13.10.2017 by DGFT, only specifies that, exemption granted by notification of department of Revenue shall be subject to pre-import condition . Thus, the attempt to rope in conditionality attached to import of certain goods into the issue of eligibility to the benefits conferred by notifications issued by Department of Revenue,appears to be the intention behind paragraph 1 of the said notification. A plain reading of the notification, on the other hand, does in no way give a meaning that the exemption benefits are available ONLY TO IMPORTS MADE BEFORE FULFILLMENT OF EXPORT OBLIGATION

10. In such a scenario, it only appears that, the exemption under the various notifications amended by notification 79/2017-Cus, is among other things, ALSO subject to fulfillment of the pre-import condition attached to it, if any, by the provisions of notification issued by DGFT. A mere cursory glance at the said Appendix 4-J of the FTP, is sufficient to comprehend that commodities/goods like Spices, Drugs(with specific order and pre-import condition),Precious Metal/Gold/Silver/Platinum, Penicillin have pre-import conditions attached to their import.

11. Thus, the usage of the phrase 'subject to pre-import condition ' in the amending notification 79/2017-Cus, was used, apparently to link the exemption under the said notification to fulfillment of pre-import condition, if any, notified by DGFT. Legal possibility and contemplation appearing to be such, it is not clear on what basis the interpretation that the Integrated Tax exemption is available ONLY for imports made before discharge of export obligation, had gained so much ground and, surprisingly, so rapidly. Further, had the intention been so then the conditions(v) and (vi) of Notfn 18/2015-Cus; conditions (iv) and (v) of Notfn 20/2015-Cus; and conditions (v) and (vi) of Notfn 20/2015-Cus would have been omitted being redundant.

12. It is important in this regard, to correctly understand the contextual importance of the phrase ' pre-import condition'. Thus, an attempt made in the notification 79/2017-Cus, to rope in fulfillment of pre-import condition laid down by DGFT, as one of the conditions for grant of exemption, cannot be given altogether a different meaning, so as to render imports made after fulfillment of export obligation ineligible for the benefits of IGST and Compensation Cess exemption.

13. Thus, the very crux of the issue is in defining, what was really meant by 'subject to pre-import condition' in the notifications 79/2017-Cus issued by CBIC and notification 33/2015-2020 issued by DGFT both dated 13.10.2017. For reasons aforementioned, it prima facie appears that, 'pre-import condition' as used in the said notification 79/2017-Cus does not mean, a condition that first imports have to be made before the exports concerned to be eligible for exemption.

Contextual interpretations apart, it appears that irrespective of the merit in the argument or explanation espoused above, it surely is high time, the issue of interpretation of the conditions imposed by notification 79/2017-Cus, more particularly the above one, be authoritatively clarified by way of issue of a clarificatory notification (section 25(2A) of the Customs Act, 1962 refers) to obviate the need for any unwarranted litigation.

(The views expressed are strictly personal)