2023 (5) TMI 42 - SC - Customs

Constitutional Validity of pre-import condition - advance authorization - Exemption from all custom duty levies, including IGST and compensation cess - incorporation of pre-import condition as per N/N. 33 / 2015-2020 and N/N. 18/2015-Cus dated 01.04.2015 by N/N. 79/2017-Customs dated 13.10.2017 - Whether pre-import condition violated Article 14, which permitted reasonable classification to achieve specific ends? - The High Court, after considering the notifications and taking into account the exporters submissions, held that paragraph 4.27 of the FTP envisaged exports in anticipation of authorisation, in terms of the cycle of import-manufacture-export carried out, including delivery time of 3-4 months allowed normally by overseas buyers, within minimum six months time for completion of the cycle. HELD THAT - By the Notification No. 18/2015-Cus dated 01.04.2015, issued in exercise of powers under Section 25 (1) of the Customs Act, 1962, goods imported into India against valid AAs were exempted from the whole of the duty of customs leviable thereon which was specified in the First Schedule to the Customs Tariff Act, 1975 and from the whole of the additional duty, safeguard duty, transitional product specific safeguard duty and anti-dumping duty leviable thereon, respectively, under Sections 3, 8B, 8C and 9A of the Act. The GST regime came into force with effect from 01-07-2017. However, no corresponding amendment was carried out to this notification but Section 3 of the Customs Tariff Act, 1975 was amended by substituting Sections 3 (7) and (9), whereby levy of integrated tax under Section 5 of the Integrated Goods and Services Tax Act, 2017 and levy of Goods and Service Tax compensation cess leviable under Section 8 of the GST Act (Compensation to States) Cess Act, 2017 was incorporated. Since IGST and compensation cess was levied against AAs, they were apparently challenged before the Delhi High Court in several petitions, wherein interim relief was granted. Because of the initial problems relating to GST, the committed refund of IGST got delayed, resulting in blocking of working capital for many businesses. The Union then issued an amending notification dated 13-10-2017 in exercise of powers under Section 25 (1) of the Customs Act, 1962 (Notification 79/2017 - dated 13.10.2017) inter alia amending the opening paragraph of Notification 18 / 2015 (dated 1.4.2015) whereby goods imported into India were exempted from the whole of the duty of customs leviable thereon, specified in the First Schedule to the Customs Tariff Act, 1975 and from the whole of the additional duty leviable thereon under sub-sections (1), (3) and (5) of Section 3, IGST leviable thereon under sub-section (7) of section 3 and compensation cess leviable under sub-section (9) of section 3 - exemption from levy of IGST under Section 3 (7) and compensation cess leviable under Section 3 (9) of Customs Tariff Act, 1975 were subject to the conditions that the export obligation shall be fulfilled by physical exports only and shall also be subject to pre-import condition . By a notification paragraph 6.8(a) and paragraph 6.8(h) of the said FTP were amended, preventing EOUs from making DTA sales of the finished marble made from imported rough marble, with immediate effect. The change was made a few months after renewal of letter of permission to the unit, authorizing it to manufacture and export marble tiles for 5 years, subject to a specified monetary limit - the absence of pre-import conditions in respect of basic customs duty, and other levies, where in anticipation of AAs, duty free imports can be made, in contradistinction with the need to follow such pre-import conditions in respect of IGST and compensation cess, rendered the AAs worthless. Lastly, it was held that exporters, who have to import inputs, would face impossibility in fulfilling the pre-import condition , because the normal cycle of import of inputs and export of finished products would be for a period of six months, whereas the period, which the regime permits, would work out to three months. In this court s opinion, the introduction of the pre-import condition may have resulted in hardship to the exporters, because even whilst they fulfilled the physical export criteria, they could not continue with their former business practices of importing inputs, after applying for AAs, to fulfil their overseas contractual obligations. The new dispensation required them to pay the two duties, and then claim refunds, after satisfying that the inputs had been utilized fully (wastage excluded) for producing the final export goods. The re-shaping of their businesses caused inconvenience to them. Yet, that cannot be a ground to hold that the insertion of the pre-import condition , was arbitrary, as the High Court concluded. There is no constitutional compulsion that whilst framing a new law, or policies under a new legislation particularly when an entirely different set of fiscal norms are created, overhauling the taxation structure, concessions hitherto granted or given should necessarily be continued in the same fashion as they were in the past. When a new set of laws are enacted, the legislature s effort is to on the one hand, assimilate- as far as practicable, the past regime - the exclusion of benefit of imports in anticipation of AAs, and requiring payment of duties, under Sections 3 (7) and (9) of Customs Tariff Act, 1975, with the pre-import condition , cannot be characterized as arbitrary or unreasonable. The High Court was persuaded to hold that the subsequent notification of 10.01.2019 withdrew the pre-import condition meant that the Union itself recognized its unworkable and unfeasible nature, and consequently the condition should not be insisted upon for the period it existed, i.e., after 13.10.2017. This court is of the opinion that the reasoning is faulty. It is now settled that the FTPRA contains no power to frame retrospective regulations. Construing the later notification of 10.01.2019 as being effective from 13.10.2017 would be giving effect to it from a date prior to the date of its existence; in other words the court would impart retrospectivity - To give retrospective effect, to the notification of 10.01.2019 through interpretation, would be to achieve what is impermissible in law. Therefore, the impugned judgment cannot be sustained on this score as well. Appeal of Revenue allowed.

Note:- Supreme Court Verdict on Pre-Import Condition and IGST Exemptions: A Legal Analysis

Issues Involved:
1. Legality of the 'pre-import condition' imposed by Notification No. 33/2015-2020 and Notification No. 79/2017-Customs.
2. Reasonableness and arbitrariness of the 'pre-import condition' in the context of the Advance Authorization (AA) scheme.
3. Differential treatment of Integrated Goods and Services Tax (IGST) and Basic Customs Duty (BCD) under the AA scheme.
4. Retrospective application of the notification dated 10.01.2019, which withdrew the 'pre-import condition'.

Summary:

I. Legality of the 'pre-import condition'
The Supreme Court examined the legality of the 'pre-import condition' imposed by Notification No. 33/2015-2020 and Notification No. 79/2017-Customs. The 'pre-import condition' required that goods be imported first and then used for manufacturing export products to avail IGST exemption. The High Court had set aside this condition, considering it arbitrary and unreasonable. However, the Supreme Court noted that the DGFT had the power to impose such conditions under paragraph 4.13(i) of the FTP, which allowed flexibility in policy changes depending on the exigencies of the time.

II. Reasonableness and Arbitrariness of the 'pre-import condition'
The High Court found the 'pre-import condition' to be unfeasible and contrary to the objectives of the AA scheme, which aims to facilitate duty-free import of inputs for manufacturing export products. The Supreme Court acknowledged that the introduction of GST led to significant changes in the tax regime, necessitating new conditions like the 'pre-import condition' to ensure proper tax administration. The Court emphasized that inconvenience or hardship to exporters does not render a statutory provision arbitrary or unreasonable.

III. Differential Treatment of IGST and BCD
The respondents argued that the 'pre-import condition' was applied only to IGST and compensation cess, while BCD and other levies were exempt without such a condition. The Supreme Court held that IGST and BCD serve different purposes within the tax framework. BCD is a customs levy at the point of import, whereas IGST is part of a broader GST regime involving input credit and refunds. The Court found this differentiation justified and not discriminatory.

IV. Retrospective Application of the Notification dated 10.01.2019
The High Court had inferred that the withdrawal of the 'pre-import condition' by the notification dated 10.01.2019 indicated its unworkability and should apply retrospectively. The Supreme Court disagreed, stating that the FTPRA does not allow for retrospective regulations. The Court emphasized that giving retrospective effect to the notification would be legally impermissible.

Conclusion
The Supreme Court set aside the High Court's judgment, upholding the validity of the 'pre-import condition' imposed by the notifications. The Court directed that respondents who had enjoyed interim relief could claim refunds or input credit by applying to the jurisdictional commissioner with documentary evidence within six weeks. The Revenue was instructed to facilitate this process through a circular.

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