By TIOL News Service

AHMEDABAD, FEB 23, 2019: PARAGRAPH 4.03 of Chapter 4 ["Advance Authorisation"] of the Foreign Trade Policy 2015-20 says that Advance Authorisation is issued to allow duty free import of input, which is physically incorporated in export product (making normal allowance for wastage).

The Director General of Foreign Trade (DGFT) has notified the Hand Book of Procedure vide Public Notice No.1/2015-2010 for Exim Policy 2015-20. Under Chapter 4 of the Hand Book, procedure in respect of duty exemption/remission schemes is laid down. By virtue of paragraph 4.27 thereof, exports in anticipation of authorisation are permitted, with a clarification that exports made from the date of generation of file number for an Advance Authorisation may be accepted towards discharge of export obligation.

At present, Notification No.18/2015-Cus dated 1.4.2015 is in operation. As the duties levied on imported goods when this notification was issued were in the nature of additional duty, safeguard duty etc., all such duties have been referred to in paragraph 1 of the notification, and exemption from payment of all such duties was allowed when the goods were imported against a valid Advance Authorisation.

With the introduction of GST and such new levies from 1.7.2017, section 3 of the Customs Tariff Act has been amended, and Integrated Tax and GST compensation cess are levied and collected on any article imported into India by virtue of sub-sections (7) and (9) substituted in section 3 of the Customs Tariff Act with effect from 1.7.2017.

It is the case of the petitioner that for the goods imported against an Advance Authorisation, Notification No.18/2015- Cus., allowed exemption from various duties which were leviable till then; but the new levies of integrated tax and GST compensation cess were not referred to at paragraph 1 of the notification and, therefore, the custom authorities all over the country started levying and collecting these new levies even for the goods imported into India against an Advance Authorisation.

It is also the case of the petitioner that realizing the error of not amending the existing notification or in not issuing a new notification for exemption from Integrated Tax and the Cess to goods imported against an Advance Authorisation, the Central Government has issued an amending Notification No.79/2017- Customs dated 13.10.2017, whereby six existing notifications have been amended, including Notification No.18/2015- Customs for imports made against Advance Authorisation.

Consequently, exemption is also granted from levies imposed under sub-sections (7) and (9) of section 3 of the Customs Tariff Act.

The grievance of the petitioners is the insertion of "Pre-import Condition" vide condition (xii) in the above notification.

Simultaneously, the Central Government has issued a Notification No.33/2015-2020 dated 13.10.2017 thereby amending various provisions of the Foreign Trade Policy 2015-20, whereby the "pre-import condition" has also been incorporated in paragraph 4.14 thereof with effect from 13.10.2017.

It is the case of the petitioner that there is no definition or clarification about the meaning of "pre-import condition"; but the DRI officers conducting the inquiry and investigation, hold a view that "pre-import condition" would mean that goods have to be imported first and then the final products manufactured from such imported goods have to be exported, and only when it was established that goods imported against a particular Authorisation were used in relation to manufacture of finished goods exported for fulfillment of Export Obligation of that particular Authorisation that the "pre-import condition" was satisfied, and accordingly, exemption was admissible to the goods imported against such Authorisation.

Insofar as the petitioners are concerned, it transpires that if "pre-import condition" as understood by the DRI officers is to be satisfied, then taxes in the nature of integrated tax and GST Compensation Cess aggregating to Rs.1,61,63,653/- would be payable with interest thereon.

It is in the above circumstances that the petitioners have challenged the "pre-import condition".

After considering the exhaustive submissions made by both sides, the High Court inter alia observed thus -

What is given by one hand is taken away by the other

+ It has been asserted in the affidavit-in-reply of the Directorate of Revenue Intelligence (DRI) that "pre-import" condition means that the entire materials covered by the Advance Authorisation should invariably be imported first, either in entirety or in a phased manner, for use in the process of manufacture of the finished goods, which in turn would be exported, towards the said Advance Authorisation only.

+ Thus, in case there is any shortage of raw material imported against an Advance Authorisation, to meet with such exigency, if the importer uses raw material imported against another Advance Authorisation, it will be considered as breach of pre-import condition.

+ In case the exports are made in anticipation of authorisation in terms of paragraph 4.27 of the Handbook, since the raw material used in the goods so imported would not have been imported under that particular advance licence, the "pre-import condition" would be held to be violated and consequently, the importer would be denied exemption from levy of integrated tax and GST compensation cess.

+ Thus, an importer who manufactures goods in a cycle would no longer be in a position to do so and all exports made in anticipation of authorisation as permitted by paragraph 4.27 of the Handbook of Procedure would be held to be in breach of the "pre-import condition" insofar as levy of integrated tax and GST compensation cess are concerned.

+ Therefore, in respect of all Advance Authorisations which were subsisting on the date when the exemption notification in respect of integrated tax and GST compensation cess was issued, the condition of pre- import would be likely to have been violated and the importer would not be entitled to the benefit of exemption.

+ Considering the above interpretation of the condition of physical export and pre-import put forth by the DRI, it is more or less impossible to make any exports under an Advance Authorisation without violating the condition of pre-import.

+ In other words, in the light of the condition of pre-import, the benefit of exemption from levy of integrated tax and GST compensation cess becomes more or less illusory.

+ Consequently, even paragraph 4.27 of the Handbook, which is specifically applicable to Advance Authorisation, just remains in the Handbook and has no relevance whatsoever.

+ Firstly, for the reason that if the importer wants the benefit of exemption from integrated tax and GST compensation cess in respect of such imports, he has to comply with the "pre-import condition"; and secondly, because in terms of the interpretation put forth by the Directorate of Revenue Intelligence violation of condition of pre-import would vitiate the entire authorisation, which may mean that in case of breach of condition of pre-import, the importer may be denied all the benefits available under such Advance Authorisation, including exemption in respect of levies other than integrated tax and GST compensation cess, in respect of which there is no "pre-import condition".

+ Therefore, export in anticipation of Advance Authorisation as contemplated in paragraph 4.27 of the Handbook and the "pre-import condition" contained in paragraph 4.14 of the Foreign Trade Policy and condition (xii) of the exemption notification, cannot stand together.

+ Moreover, a piquant situation has been created whereby the very same inputs which are not subject to "pre-import condition" insofar as payment of basic customs duty, additional customs duty, education cess, anti-dumping duty, safeguard duty and transition product specific safeguard duty are concerned, are subject to condition of pre-import insofar as integrated tax and GST compensation cess are concerned, thereby setting at naught the first part of paragraph 4.14, inasmuch as if the very same inputs are subject to the condition of pre-import qua some levies, it would amount to importing the inputs subject to the condition of pre-import even qua the other levies. Thus, an anomalous situation has arisen, whereby the second part of paragraph 4.14 is inconsistent with the first part thereof and renders the first part redundant.

Does pre-import condition furthers the objective of the FTP?

Scheme has to be workable as a whole.

+ From the facts as emerging from the record as discussed hereinabove, in view of the "pre-import condition", it is not possible for the manufacturers-exporters to import duty free imports against an Advance Authorisation.

+ The consequence is that with the advent of the Goods and Services Tax regime, on account of the condition of pre-import stipulated to get the benefit of exemption from the levy of integrated tax and GST compensation cess, imports under the Advance Authorisation scheme (which has been operating successfully since many years without the condition of pre-import), have become next to impossible, which certainly does not sub-serve the objective of the Act and the Foreign Trade Policy.

+ Moreover, in absence of compliance with the condition of pre-import, the exporters would be liable to make upfront payment of IGST/Compensation Cess on import of inputs, thereby defeating the objective of preventing cash blockage of exporters.

+ The scheme of Advance Authorisation has been working smoothly without any hitch for all these years, therefore, in the absence of anything adverse, there was no necessity to change the scheme by subjecting the two levies referred to in sub-section (7) and sub-section (9) of section 3 of the Customs Tariff Act to the condition of pre-import.

+ More so, when the Foreign Trade Policy has a separate paragraph 4.13 which provides for "pre-import condition" in respect of specific inputs, there is no rationale for placing a condition of pre-import qua any inputs than those specified under paragraph 4.13.

Test of reasonableness:

+ Vide Notification No. 01/2019-Cus dated 10th January, 2019, the Central Government, on being satisfied that it is necessary in the public interest so to do, has amended Notification No.18/2015 dated 1 st April, 2015, whereby, inter alia, condition (xii) has been omitted. Therefore, the Government has found it to be in public interest not to have a condition of pre-import for availing the benefit of exemption from integrated tax and GST Compensation Cessleviable on material imported against an Advance Authorisation, which vindicates the stand of the petitioners.

+ Clearly, therefore, the condition of pre-import militates against the Advance Authorisation Scheme and therefore, the impugned condition (xii) in Notification No.18/2015-Cus dated 1st April, 2015 introduced vide Notification No.9/2017 dated 13th October, 2017 as well as the amendment in paragraph 4.14 of the Foreign Trade Policy made vide Notification No. 33/2015-2020 dated 13th October, 2017, to the extent the same imposes a "pre-import condition" in case of imports under Advance Authorisation for physical export for exemption from the whole of the integrated tax and GST compensation cessleviable under sub-section (7) and sub-section (9) respectively, of section 3 of the Customs Tariff Act, do not meet with the test of reasonableness and are also not in consonance with the scheme of Advance Authorisation.

+ Clearly, therefore, the impugned condition which renders the very scheme of Advance Authorisation nugatory does not have any nexus to the objective of the Advance Authorisation Scheme, viz., to boost exports, rendering it unsustainable in law.

Condition (xii) inserted by Notfn. 79/2017-Cus is ultra vires the FTP scheme:

+ In the light of the above discussion, this court is of the view that paragraph 4.14 of the Foreign Trade Policy whereby a condition of pre-import has been put for availing the benefit of exemption from levy of integrated tax and GST compensation cess vide Notification No. 33/2015-2020 dated 13th October, 2017 as well as the condition (xii) inserted in Notification No.18/2015 dated 1st April, 2015 vide Notification No.79/2017 dated 13.10.2017, are ultra vires the scheme of the Foreign Trade Policy, 2015-2020 and the Handbook of Procedure and are, therefore, required to be quashed and set aside.

Notification 01/2019-Cus - Retrospective?

+ While the respondents have now amended the exemption notification being Notification No.18/2015 dated 1st April, 2015, by deleting condition (xii), such notification has not been given retrospective effect.

+ Even if the respondents do consider the grievances of the petitioners, they would not be in a position to grant any relief as the notification cannot be given retrospective effect, and hence, it would not be possible for the respondents to grant the benefit of deletion of condition of pre-import retrospectively. It, therefore, appears that the Government, even if so deems fit, may not be in a position to grant the benefit given under the notification dated 10th January, 2019 retrospectively. The grievance of the petitioners for the period under consideration would, therefore, have to be addressed by this court.

+ For the foregoing reasons, the petitions succeed and are, accordingly, allowed. The "pre-import condition" contained in paragraph 4.14 of the Foreign Trade Policy, 2015-2020 inserted vide Notification No.33/2015-2020 dated 13.10.2017 and inserted vide clause (xii) in Notification No.18/2015-Cus vide Notification No.79/2017-Cus dated 13.10.2017, are hereby struck down as being ultra vires the Advance Authorisation Scheme as contained in the Foreign Trade Policy, 2015-2020 as well as the provisions of the Handbook of Procedures.

Conclusion:

++ All proceedings initiated for violation of "pre-import condition" would no longer survive.

(See 2019-TIOL-459-HC-AHM-CUS)