2019 (2) TMI 1445 - HC - Customs

Validity of Pre-import conditions - Exemption from integrated tax and GST compensation cess - benefit of N/N. 18/2015- Cus - Import against Advance Authorisation - Duty Exemption/Remission Schemes - pre-import conditions - principal challenge in these petitions is to the preimport condition in paragraph 4.14 of the Foreign Trade Policy 2015-2020 inserted vide Notification No.33/2015-2020 dated 13.10.2017 and such pre-import condition introduced by clause (xii) in Notification No.18/2015-Customs by virtue of Notification No.79/2017-Customs dated 13.10.2017. Held that - Considering the 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 effect and substance, what is given by one hand is taken away by the other. 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. Paragraph 4.13 is a provision which is specifically made for pre-import condition and provides for the categories of cases to which such condition has to be applied - even according to the respondents, there is a specific provision in the Foreign Trade Policy specifying inputs which are to be imported under pre-import condition, viz. paragraph 4.13. Therefore, if a condition of preimport has to be put in respect of any input, ideally such input should find place in paragraph 4.13 of the Foreign Trade Policy, which is not so in the present case. Due to the condition of pre-import contained in paragraph 4.14 and condition (xii) of the notification, though the inputs imported by the petitioners may not fall within the categories enumerated in paragraph 4.13 of the Foreign Trade Policy and are as such not subject to the pre-import condition, the same become subject to the condition of pre-import qua specific levies viz. integrated tax and GST compensation cess, which creates an anomalous situation, inasmuch as the import of the inputs against an Advance Authorisation is subject to several levies under section 3 of the Customs Tariff Act and in respect of the levies under sub-sections (1), (3) and (5) thereof, there is no pre-import condition; however, insofar as integrated tax and GST compensation cess leviable under sub-section (7) and sub-section (9) of section 3 of the Customs Tariff Act, 1975 are concerned, for the purpose of exemption from such levies, such imports would be subject to pre-import condition , as a result of which if the importer wants the benefit of exemption from the levy of integrated tax and GST compensation cess, the fact that the other levies are not subject to pre-import condition becomes immaterial inasmuch as the same input would be subject to the pre-import condition qua integrated tax and GST compensation cess which would, therefore, result in the input being subject to pre-import condition in respect of all the levies. Thus, in terms of the interpretation put forth by the DRI as referred to hereinabove, compliance is required of the authorisation as a whole and in case the condition of preimport is violated, the entire Advance Authorisation gets vitiated - by virtue of the amended paragraph 4.14 of the Foreign Trade Policy, even in case of inputs not falling within the ambit of paragraph 4.13, if such inputs have been imported against an Advance Authorisation, the same are subject to pre-import condition insofar as claim for exemption from the levy of integrated tax and GST compensation cess under sub-section (7) and sub-section (9) of section 3 of the Customs Tariff Act is concerned. By virtue of the amended paragraph 4.14 of the Foreign Trade Policy, even in case of inputs not falling within the ambit of paragraph 4.13, if such inputs have been imported against an Advance Authorisation, the same are subject to pre-import condition insofar as claim for exemption from the levy of integrated tax and GST compensation cess under sub-section (7) and sub-section (9) of section 3 of the Customs Tariff Act is concerned. Whether the impugned pre-import condition in any manner furthers the objective of the Foreign Trade Development Act and the Foreign Trade Policy? - Held that - The scheme of Advance Authorisation has been working smoothly without any hitch for all these years (nothing has been pointed out on behalf of the respondents that there were any difficulties or irregularities on account of non-imposition of the pre-import condition ), 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. As discussed hereinabove, though in paragraph 4.14 the condition of pre-import is not qua specific inputs, but for availing benefit of exemption from levy of integrated tax and GST compensation cess, in effect and substance, it operates as a condition for pre-import qua all the raw material imported under an Advance Authorisation. 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 cess leviable on material imported against an Advance Authorisation, which vindicates the stand of the petitioners. 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.79/2017 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 cess leviable 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. Benefit of zero-rating resulting in double benefit - Held that - Rule 3(1)(vii) of the Cenvat Credit Rules allows credit. Prior to July, 2017, if duties were paid under subsections (3) and (5) of section 3 of the Customs Tariff Act, credit was admissible. However, now the levies under subsections (3) and (5) of section 3 of the Customs Tariff Act are replaced by sub-sections (7) and (9) of section 3 of the Customs Tariff Act and there is no change in the basic scheme warranting a different procedure. The Government did not find any nexus between the condition of pre-import and the objective of this Scheme, this court is of the considered view that the impugned exemption notification and paragraph 4.14 of the Foreign Trade Policy, to the extent the same are subject matter of challenge in these petitions, cannot be said to meet with the test of reasonableness - 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. Petition allowed.

Summary

Issues Involved:
1. Validity of the "pre-import condition" in paragraph 4.14 of the Foreign Trade Policy 2015-2020 and clause (xii) in Notification No.18/2015-Cus.
2. Impact of the "pre-import condition" on the Advance Authorisation Scheme.
3. Whether the "pre-import condition" is reasonable and in consonance with the scheme of Advance Authorisation.
4. Whether the "pre-import condition" serves the objective of the Foreign Trade Policy and the Foreign Trade (Development and Regulation) Act, 1992.
5. The retrospective effect of the deletion of the "pre-import condition" by Notification No.01/2019-Cus dated 10th January 2019.

Detailed Analysis:

1. Validity of the "pre-import condition" in paragraph 4.14 of the Foreign Trade Policy 2015-2020 and clause (xii) in Notification No.18/2015-Cus:
The court examined the insertion of the "pre-import condition" vide Notification No.33/2015-2020 dated 13.10.2017 and clause (xii) in Notification No.18/2015-Cus introduced by Notification No.79/2017-Cus dated 13.10.2017. The court found that these conditions were ultra vires the scheme of the Foreign Trade Policy, 2015-2020, and the Handbook of Procedures. The court noted that the "pre-import condition" was not in line with the provisions of paragraph 4.13 of the Foreign Trade Policy, which specifically listed inputs subject to "pre-import condition." The imposition of the "pre-import condition" on all raw materials imported under Advance Authorisation for the purpose of availing exemption from integrated tax and GST compensation cess was found to be inconsistent with the scheme and objectives of the Advance Authorisation Scheme.

2. Impact of the "pre-import condition" on the Advance Authorisation Scheme:
The court noted that the "pre-import condition" made it nearly impossible for manufacturers-exporters to comply with the Advance Authorisation Scheme. The "pre-import condition" required that the entire materials covered by the Advance Authorisation should be imported first and used in the manufacture of finished goods, which would then be exported. This stringent requirement disrupted the continuous cycle of import-manufacture-export followed by exporters and rendered the benefit of exemption from integrated tax and GST compensation cess illusory.

3. Whether the "pre-import condition" is reasonable and in consonance with the scheme of Advance Authorisation:
The court held that the "pre-import condition" did not meet the test of reasonableness and was not in consonance with the scheme of Advance Authorisation. The court observed that the "pre-import condition" had no nexus with the objective of the Advance Authorisation Scheme, which is to boost exports. The condition was found to be arbitrary and illogical, as it disrupted the established and successful operation of the Advance Authorisation Scheme, which had been functioning without such a condition for many years.

4. Whether the "pre-import condition" serves the objective of the Foreign Trade Policy and the Foreign Trade (Development and Regulation) Act, 1992:
The court found that the "pre-import condition" did not serve the objective of the Foreign Trade Policy and the Foreign Trade (Development and Regulation) Act, 1992. The objective of the policy is to facilitate trade, boost exports, and prevent cash blockage of exporters due to upfront payment of IGST/Compensation Cess on import of inputs. The "pre-import condition" was found to be counterproductive to these objectives, as it created practical difficulties for exporters and led to cash blockage, thereby defeating the purpose of the policy.

5. The retrospective effect of the deletion of the "pre-import condition" by Notification No.01/2019-Cus dated 10th January 2019:
The court noted that the deletion of the "pre-import condition" by Notification No.01/2019-Cus dated 10th January 2019 was a curative amendment in public interest. However, the notification was not given retrospective effect. The court held that the grievances of the petitioners for the period between 13.10.2017 and 9.1.2019 had to be addressed by the court, as the Government could not grant retrospective effect to the notification.

Conclusion:
The court struck down the "pre-import condition" contained in paragraph 4.14 of the Foreign Trade Policy, 2015-2020, and clause (xii) in Notification No.18/2015-Cus, as they were ultra vires the Advance Authorisation Scheme and the Handbook of Procedures. All proceedings initiated for violation of the "pre-import condition" were rendered unsustainable. The petitions were allowed, and the "pre-import condition" was held to be unreasonable, arbitrary, and not in consonance with the objectives of the Foreign Trade Policy and the Foreign Trade (Development and Regulation) Act, 1992.