JANUARY 18, 2019

By Shailesh Sheth, Advocate & Founder, M/s. SPS Legal

"There are times, too, when the law doesn't give a damn who gets caught beneath its wheels".

[Susanne Alleyn]

BY notification no. 18/2015-Customs dated 01.04.2015, exemption from payment of customs duty, additional duty, safeguard duty and anti-dumping duty is provided in respect of material imported against the valid Advance Authorizations, subject to the conditions specified therein.

Notification No. 18/2015-Customs was amended by Notification No. 79/2017-Customs dated 13.10.2017 so as to provide the exemption from payment of IGST and Compensation Cess, subject to the following conditions viz.

(i) Discharge of export obligation shall only be by physical exports (Second proviso to condition (viii) as inserted w.e.f., 13.10.2017 refers);

(ii) Exemption shall be subject to Pre-import condition (condition (xii) inserted w.e.f., 13.10.2017 refers).

While the exemption from IGST and Compensation Cess was granted on the consistent demand from the exporters, the attendant conditions were inserted in the notification so as to bring the same in tune with Para 4.14 of FTP 2015-20.

The exemption from IGST and Compensation Cess was initially granted only upto 31.03.2018, presumably on the premise that by that time, the E-Wallet System for the Exporters  would be in place. However, since the E- Wallet system couldn't be introduced, the validity period of exemption was extended, firstly, upto 01.10.2018 by notification no. 35/2018-Customs dated 28.03.2018, and later, upto 31.03.2019, by notification no. 66/2018-Customs dated 26.09.2018. 

It is also pertinent to mention here that in terms of Rule 96(10) of the CGST Rules, 2017 as last amended by notification no. 54/2018-Central Tax dated 09.10.2018, the option of exports on payment of IGST under refund claim stands withdrawn in case the benefit under the aforesaid notification no. 79/2017-Customs is availed in respect of the materials imported against the Advance Authorizations.

Needless to say, the conditions were found to be too unreasonable and onerous by the exporting community.

Voicing their concerns over the implications and aftermath of these conditions, representations were made by various quarters to both the Ministries, that is, Ministry of Commerce & Industry and Ministry of Finance for the removal or easing of these conditions. At last, the Government seems to have relented, albeit, after almost 15 months, and decided to address the woes of the exporting community arising due to above conditions.

First, it was the turn of the Ministry of Commerce & Industry. The DGFT, on 10.01.2019, issued a notification no.  53/2015-20,  inter alia , amending Para 4.14 of FTP-2015-20 so as to remove the "Pre-import condition" as well as mandate of "physical exports" in case of imports against Advance Authorizations without payment of IGST and Compensation Cess as were hitherto prescribed. The Notification explains the effect of the amendment as under:

"Effect of this Notification: Para 4.14 of FTP 2015-20 is amended to remove pre-import condition to avail exemption from Integrated tax and Compensation cess and exemption form Integrated Tax and Compensation Cess is also extended to deemed supplies."

Simultaneously, in order to effectuate the above amendments in the FTP, Ministry of Finance also issued, on 10.01.2019 itself, a notification no. 01/2019-Customs amending notification no. 18/2015-Customs whereby the conditions relating to Pre-import and physical exports in cases where the exemption from IGST and Compensation Cess is availed on the material imported against Advance Authorizations, are dispensed with. At the same time, new conditions are prescribed, involving different situations in case of imports against Advance Authorizations after the export obligations are discharged in full.

On comprehensive study and analysis of the above amendments made on January 10, 2019, the following position emerges:

(a) The importer importing any material against Advance Authorizations and claiming exemption from payment of IGST and Compensation Cess will not be subjected to the Pre-import condition henceforth i.e. from 10.01.2019.

(b) Similarly, such importer will also be entitled to take into account deemed exports for the purpose of discharge of export obligations.

(c) In case the material is imported after fulfilment of export obligation in full (in effect, by way of replenishment) and if Input Tax Credit is availed on the input used for goods manufactured and exported, the importer will have to furnish a bond at the time of clearance of imported goods that the same will be used for manufacture and supply of taxable goods (other than Nil rated or fully exempt supplies). The importer will also be required to submit a Certificate from a Chartered Accountant within 6 months from the date of clearance of the said materials that the imported materials have been so used. (Condition at Clause (vi)(a) as inserted w.e.f. 10.01.2019 refers).

Thus, in effect, the scheme of imports by way of replenishment has been reintroduced. Similarly, the end use condition has also been effectively re-introduced. The amendment, however, does not restrict the importer from utilizing the imported material cleared on execution of bond as aforesaid, for the manufacture of taxable goods and supplying such taxable goods in DTA, if otherwise permissible.

The requirement of obtaining certificate pertaining to end-use from the jurisdictional excise authorities which was prevalent earlier shall no longer be there and a Certificate from a Chartered Accountant shall suffice. This would be a great relief to the taxpayers as the interaction with the Department will be avoided. 

(d) In case the importer opts to pay IGST on the material imported after fulfilment of export obligation in full, then the same can be cleared without furnishing a bond. (Proviso to clause (vi)(a) refers.) 

(e) If the importer imports the material after fulfilment of export obligation in full and claims that ITC facility was not availed on inputs used in the manufacture and supply of goods exported and furnishes a proof to this effect to the satisfaction of DCC / ACC, then also, bond will not be required to be furnished. (condition at Clause (vi)(b) as inserted w.e.f. 10.01.2019 refers.)

It may be stated here that the nature of proof and from whom the same should be provided are not prescribed in the notification.

(f) The importer claiming the exemption from IGST and Compensation Cess will be entitled to fulfil the export obligation by physical exports or by deemed exports mentioned at Sl.  No. 1 or 2 or 3 of notification no. 48/2017- Central Tax dated 18.10.2017 i.e., supply to EOU or against Advance Authorizations or EPCG Authorization, as the case may be.

(g) The exemption of IGST with the above relaxations provided by the amendments shall be available till 31.03.2019 (please refer Notification No. 66/2018-Customs). It is expected that by 31.03.2019, E-wallet Scheme will be put in place by the Government.

Close on the heels of the above amendments, another notification no. 1/2019-CT dtd. 15.01.2019 came to be issued by the CBIC amending notification no.48/2017-CT dtd.18.10.2017 relating to 'deemed exports'. By notification no.48/2017-CT, certain categories of supplies of goods by a registered person are notified as 'deemed exports'. Such notified supplies include supply of goods against Advance Authorization. The expression 'Advance Authorization' was defined by clause 1 of the Explanation appended to the notification and the same, as it stood prior to its amendment on 15.01.2019, read as under:

"Advance Authorization" means an authorization issued by the Director General of Foreign Trade under Chapter 4 of the Foreign Trade Policy 2015-20 for import or domestic procurement of inputs on pre-import basis for physical exports."

[Emphasis supplied]

Now, by notification no.1/2019-CT, certain amendments are carried out in notification no.48/2017-CT, the implications of which are briefly explained below:

a) Where the goods are supplied by the registered person against Advance Authorization, after exports have already been made after availing ITC on inputs used in the manufacture of such exports, the goods so supplied shall be used in the manufacture and supply of taxable goods (other than Nil rated or fully exempted goods). A certificate to this effect shall be furnished by a Chartered Accountant to a Jurisdictional Commissioner of GST or any other authorized officer within six months of such supply. [First proviso as inserted in Entry at S.no.1 of the table w.e.f 15.01.2019 refers];

b) The certificate from a Chartered Accountant contemplated as above shall not be required if ITC has not been availed on inputs used in the manufacture of export goods. [Second proviso as inserted in Entry at S.no.1 of the table w.e.f 15.01.2019 refers];

c) It is obvious that the requirement of utilization of goods supplied against Advance Authorization rests upon the recipient of the goods and that is, the exporter who is the holder of Advance Authorization. Therefore, the registered supplier of the goods to such exporter / Advance Authorization holder will have to obtain a certificate from the chartered accountant certifying such use of goods [inputs] by the latter in case the supply takes place after exports are made and the benefit of ITC has been availed on input used in the manufacture of export goods. Is this the return of the days of Chapter X of the erstwhile Central Excise Rules, 1944? It may be noted that a similar requirement is prescribed by the aforesaid notification no.01/2019-Customs in case of imports by the Advance Authorization holder in similar circumstances, as discussed above. Therefore, effectively, two different certificates from the Chartered Accountant would be required to be submitted by the Advance Authorization holder in such cases. One, in respect of direct imports by him and to be submitted by him to the proper officer and another, in respect of domestic procurement and to be submitted through the domestic supplier to the Commissioner of GST / Authorized Officer in charge of the domestic supplier.

d) The words 'on pre-import - basis' are omitted from clause 1 of the Explanation to notification no.48/2017-CT reproduced above. Thus, for a supply against Advance Authorization to be considered as 'deemed exports', the 'pre-import' condition will not be operative henceforth.

e) However, it must be noted that for some strange reason, the condition relating to 'physical exports' continues to remain in case of supply against Advance Authorization. This is despite the fact that by the above amendments made in Customs notification no. 18/2015-Customs and para 4.14 of the FTP 2015-20 , both the conditions relating to 'pre-import' and 'physical exports' have been omitted as explained above. The Advance Authorization holder is, thus, allowed now to consider 'deemed exports' made by him for the purpose of discharge of export obligation. But the retention of the condition relating to 'physical exports' in notification no. 48/2017-CT would mean that a domestic supplier supplying the goods against Advance Authorization to an exporter will be able to claim such supply as 'deemed exports' only if the Advance Authorization holder undertakes physical exports. It is difficult to comprehend how will it be possible for a registered supplier to ensure that his buyer i.e. the Advance Authorization holder makes physical exports? As for the Advance Authorization holder who is otherwise entitled to procure his requirements through imports or from the domestic supplier, he will be in an unenviable position since while he may breathe easy as far as imports are concerned with the removal of 'physical exports' condition, he will be required to undertake 'physical exports' if he procures any goods from the domestic supplier against Advance Authorization and where such supplier claims the supply as 'deemed exports'! This may present a nightmarish situation for the exporter and one can't even begin to think how would he be able to comply with these dual requirements?

It is not known whether this is a case of 'accidental omission' or 'deliberate retention' so far as the condition relating to 'physical exports' still retained in notification no.48/2017-CT is concerned? If it is 'accidental omission', then the same needs to be urgently rectified. However, if it is a 'deliberate act', then, it is 'diabolical' in design and in its consequences!

"Laws are generally not understood by three sorts of persons, namely,
by those who make them, by those who execute them,
and by those who suffer if they break them."

[George Savile]

As if the confusion created by the above conflicting amendments is not enough, the condition relating to the exports under LUT / Bond in cases where the benefit of exemptions under notification no. 18/2015-Customs as amended by 79/2017-Customs, will continue to prevail in terms of the amended Rule 96(10) of the CGST Rules, 2017, in force as on date. This is despite the fact that the other conditions relating to 'pre-import' and 'physical exports' are dispensed with so far as the relevant Customs notifications and the FTP Para are concerned. Therefore, such importer will not be entitled to export the goods on payment of IGST under refund claim if he avails the exemption under notification no. 18/2015-Customs as last amended by above notification no. 1/2019-Customs.

In the first place, it shall be noted that a domestic supplier supplying goods to the Advance Authorization holder and claiming such supply as 'deemed exports' in terms of notification no.48/2017-CT as amended, is not at liberty to make such supply under LUT / Bond. He will have to necessarily make such supply on payment of GST and then claim the benefit of 'deemed exports' later. If such domestic supplier himself also happens to be an exporter and Advance Authorization holder, he will be subject to the same condition of 'exports under LUT / Bond' if he imports the material against Advance Authorization and claims the exemptions under notification no. 18/2015-Customs as amended by notification no. 01/2019-Customs. The poor fellow will then have two streams of simultaneous supplies, one, supply to the Advance Authorization holder on payment of GST and qualified as 'deemed exports' and another, supply by way of exports under LUT / Bond! And let us not forget that with the latest Customs / FTP amendments, it will be permissible for him to consider the 'deemed exports' for the purpose of the discharge of his export obligations!

On the other hand, the exporter holding the Advance Authorization and procuring the goods through imports and from the domestic supplier against such Advance Authorization (deemed exports) will also face a serious dilemma in as much as -

- his procurement from the domestic supplier will be on payment of GST though his imports against Advance Authorization will be fully exempted;

- he will be required to export the goods under LUT / Bond as prescribed under Rule 96(10) of the CGST Rules, 2017 as he avails the benefit of exemption under notification no. 18/2015-Customs as amended by notification no.79/2017-Customs;

- he will be required to undertake 'physical exports' in view of his procurement of material from the domestic supplier against Advance Authorization and claimed as 'deemed exports' by such supplier.

The continuation of the restriction on the exports on payment of IGST under refund claim is rather unreasonable and unwarranted. It is difficult to fathom the purpose and logic behind this restriction. All said and done, the process of preparation and filing of refund claim of accumulated ITC in case of the exports under LUT / Bond remains highly cumbersome and time-consuming. It also invariably involves the interaction with the department unlike in case of the exports on payment of IGST under refund claim where such interaction has considerably reduced. The mandatory condition of exports under LUT / Bond in the given cases also entail financial consequences with the blockage of the funds of the exporters due to delays in the grant of refunds. Last, but not the least, the subject restriction prescribed by amended Rule 96(10) of the CGST Rules is, prima facie, ultra-vires Section 16(3) of the IGST Act, 2017 read with Section 54 of the CGST Act, 2017 and is a case of ' excessive delegation'. The maintainability of such restriction is, therefore, susceptible to Constitutional challenge as well.

It is hoped that the Government will turn it's 'benevolent eye' to this unjustified restriction and the same will be omitted!

"There is no worse torture than the torture of laws."

[Francis Bacon]

The amendments made in the notification no. 18/2015-Customs prima facie , appear to be prospective i.e., effective from 10.01.2019. However, considering the nature of the amendments and the circumstances in which the same have been made and also taking into account the overall facts surrounding the entire issue, it is possible to contend that the amendments are retrospective in nature. It may be pertinent note here that the conditions relating to 'physical exports' and 'pre-import' have been removed by substituting second proviso in condition (viii) and omission of condition (xii) respectively of the notification no. 18/2015-Customs as were earlier inserted by notification no. 79/2017-Customs. Whether such amendments by way of 'substitution' and 'omission' shall be considered as prospective or retrospective is a moot issue and has to be considered in light of the principles of law as laid down by various judicial pronouncements. No doubt, the issue is highly debatable, litigation-prone but worth considering.

The prospective or retrospective nature of the amendments will also have a bearing on the maintainability of the on-going investigation by the DRI and the demand of IGST being raised on the ground of non-fulfilment of Pre- import and/or physical exports conditions.

An issue may also arise with regard to the material already imported up to 10.01.2019 by availing exemption from IGST under the subject notification no. 18/2015 Customs with the acceptance of the condition relating to physical exports. Whether such material can now be used for the manufacture and supply of taxable goods against the "Deemed exports" supplies. This would again depend upon whether the present amendments can be considered as prospective or retrospective in nature. It is, however, advisable that such existing stock be used for the purpose of manufacture of goods to be cleared by way of physical exports only to avoid litigation. 

There is yet another issue that may arise consequent upon the above amendments. In case of a single Advance Authorization which is partly used, say, between 13.10.2017 and 09.01.2019, with availment of exemption from IGST on imports made thereunder, a piquant situation may arise when the balance imports are to be made post-10.01.2019. Can such single Advance Authorization be subjected to the condition of pre-import and physical export partly and if so, how can such condition in this manner be implemented or complied with by the importer? Again, the answer to this issue would depend upon whether the amendments should be considered as prospective or retrospective in nature.

Finally, the erstwhile conditions were inserted in the parent notification no. 18/2015-Customs by notification no.79/2017-Customs which, as is always a case, was issued in 'public interest'. The Revenue had even strongly defended the insertion of these conditions before the Madurai Bench (Single Judge) of Hon'ble Madras High Court in the case of M/s. Vedanta Limited vs. Union of India and the Hon'ble Bench has, by its judgement dated 29.10.2018 - 2018-TIOL-2308-HC-MAD-CUS, upheld the validity of the said conditions. It is understood that an appeal against this judgement is filed and pending before the Division Bench of the Hon'ble High Court as on date.

Be that as it may, the Government, even after stoutly defending these conditions and winning the first round of the battle, suddenly, has a change of heart and removed these conditions by the above amending notification no. 01/2019-Customs which is also issued in 'public interest'!

"The good of the people is the chief law".

[Cicero]

(The views expressed are strictly personal)