The Pre-Import Condition Saga: When Law, Logic, and Global Trade Principles Collide

[DrJoshua Ebenezer]

Bombay High Court delivers landmark relief to exporters in A.R. SULPHONATES PRIVATE LIMITED VERSUS UNION OF INDIA, COMMISSIONER OF CUSTOMS (ADJUDICATION) MUMBAI, COMMISSIONER OF CUSTOMS, (IMPORT-I), MUMBAI, COMMISSIONER OF CUSTOMS, GUJARAT, COMMISSIONER OF CUSTOMS, KANDLA, THE DEPUTY COMMISSIONER OF STATE TAX, KALYAN. - 2025 (4) TMI 578 - BOMBAY HIGH COURT

In the complex world of customs exemptions and trade facilitation, few issues have caused as much confusion and litigation as the "pre-import condition" introduced under India’s Advance Authorisation scheme in 2017. A seemingly minor procedural requirement snowballed into a major compliance headache for exporters across the country.

In a significant judgment dated 09.04.2025, the Bombay High Court in A.R. SULPHONATES PRIVATE LIMITED VERSUS UNION OF INDIA, COMMISSIONER OF CUSTOMS (ADJUDICATION) MUMBAI, COMMISSIONER OF CUSTOMS, (IMPORT-I), MUMBAI, COMMISSIONER OF CUSTOMS, GUJARAT, COMMISSIONER OF CUSTOMS, KANDLA, THE DEPUTY COMMISSIONER OF STATE TAX, KALYAN. - 2025 (4) TMI 578 - BOMBAY HIGH COURT, finally addressed this issue, holding that the imposition of interest, penalties, and fines for procedural violations prior to August 2024 had no legal backing. This article breaks down the origin of the issue, its fallout, global practices, and the legal reasoning that brought relief to exporters.

What Was the Pre-Import Condition?

The Advance Authorisation (AA) scheme allows exporters to import raw materials duty-free, provided they use them in the manufacture of goods meant for export. In 2017, this scheme was amended to include a pre-import condition through Notification No. 79/2017-Customs and DGFT Notification No. 33/2015-2020.  The condition stated that import of raw materials must take place before the export of finished goods. This seemingly procedural requirement became critical to eligibility for IGST exemption.

Eg: Imagine a baker who exports cakes and is allowed to import sugar and flour duty-free under a special permit. The government then says, "To get this benefit, you must import the sugar before baking and exporting the cakes." If the baker uses old sugar stock, exports cakes, and only later imports fresh sugar, they lose the exemption.

A Technical Rule Turned Punitive

Between October 2017 and January 2019, many exporters unintentionally violated this sequencing. They exported finished goods and imported inputs afterward, not realizing this would be considered a breach of the pre-import condition.

Years later, customs authorities initiated investigations, issuing show cause notices demanding:

1. IGST payment on duty-free imports
2. Interest on delayed tax payment
3. Penalty for procedural violation
4. Confiscation of goods and redemption fines

Let me assuage, you book a discounted airline ticket on the condition that you must check in online before arriving at the airport. You forget to check in online but reach the airport on time and board the flight. Months later, the airline charges you a fine for violating check-in rules — even though you took the flight without issue.

 Globally, procedural conditions like pre-import sequencing are treated as technical, not substantive, requirements. International bodies such as the WTO and World Customs Organization (WCO) encourage facilitation, not rigid compliance.

Under the WTO’s Agreement on Subsidies and Countervailing Measures (ASCM), duty exemption schemes are allowed as long as they are not trade-distorting. WTO discourages rules that unnecessarily complicate trade processes.

In the USA, exporters can claim duty drawbacks even after exports, with documentary evidence. In the EU, reconciliation-based methods are used to match inputs and outputs, without strict sequencing. Canada and Australia follow post-export verification models.

 India turned a technical requirement into a strict compliance yardstick, punishing exporters for import-export timing rather than intent or misuse. This contradicted global best practices, where the focus is on actual export fulfilment and usage of imported goods.

Legal Battles:  

2019 – Gujarat HC in Maxim Tubes: Held the pre-import condition ultra vires the Foreign Trade Policy and declared it invalid.

2023 – SC in Cosmos Films: Overturned Gujarat HC upheld the condition’s validity, but provided transitional relief. Exporters could claim refunds or input tax credit if they had paid IGST.

2023 – CBIC Circular 16/2023:Directed importers who violated the pre-import condition to pay IGST with interest.

2024 – Amendment to Section 3(12), CTA: Finance Act 2024 introduced power to levy interest and penalties, but made it effective only from 16.08.2024.

Bombay HC’s Verdict in A. R. Sulphonates – What It Held

The Bombay High Court took a clear and reasoned approach:

1. No Interest or Penalty Without Legal Backing
2. IGST was levied under Section 3(7) of the Customs Tariff Act.
3. But power to charge interest/penalty under Section 3(12) came only from 16.08.2024.

Ratio Decidendi: "No tax, interest, or penalty can be imposed without explicit authority of law. Article 265 of the Constitution prohibits taxation without law."

2. Circulars Cannot Override Law

1. CBIC Circular 16/2023 directed payment of interest retrospectively.
2. The Court ruled this invalid as executive instructions cannot create liabilities not provided in law.

Ratio: "Circulars are for implementation guidance, not for expanding statutory scope."

3. Procedural Lapse Is Not Fraud

1. Goods were sought to be confiscated and fines imposed for breach of pre-import.
2. The Court said such actions were disproportionate and legally unsustainable for a technical lapse.

Ratio: "Confiscation requires intent or fraud. Timing mismatch isn't sufficient ground."

4. Relied on Mahindra & Mahindra Precedent

1. Earlier held that unless law expressly provides for interest/penalty, it cannot be inferred.

Ratio: "Absence of provision = absence of liability. Courts cannot read in powers not granted by law."

Relief:

1. No interest or penalties for pre-import violations prior to 16.08.2024.
2. Exporters who acted in good faith can resist demands using this ruling.

If you received a show cause notice citing pre-import violations, refer to this judgment. Legal remedy (writ petition) is available. CBIC Circular 16/2023 must be interpreted in line with this judgment.

Summary Table

Issue	Legal Status After Judgment
Pre-import condition	Valid (as per SC in Cosmos Films)
IGST demand (on violation)	Valid
Interest/Penalty (pre-16.08.2024)	Invalid
CBIC Circular 16/2023	Partially ultra vires
Confiscation & Redemption Fine	Legally unsustainable

Let Law Be the Light

This judgment isn’t just a win for one exporter, it’s a reminder that fairness, proportionality, and legality must guide tax enforcement. The law must evolve to serve the needs of trade, not trap it in procedural quicksand. Courts continue to be the lighthouse guiding policy back to the shores of legality. As India moves towards trade facilitation and ease of doing business, harmonizing domestic practices with global standards is not optional, it’s necessary.

“Injustice anywhere is a threat to justice everywhere.” — Martin Luther King Jr.

This verdict upholds that spirit.