Supreme Court Upholds Requirement Of ‘Pre-Import Condition’ To Claim IGST And GST Compensation Cess On Imports Made Under ‘Advance Authorization’

The Supreme Court has upheld the requirement of ‘pre-import condition’ incorporated in the Foreign Trade Policy of 2015-2020 (FTP) and Handbook of Procedures 2015-2020 (HBP) to claim exemption of Integrated Goods and Services Tax (IGST) and GST Compensation Cess on inputs imported into India for manufacture of export goods, on the basis of ‘Advance Authorization’.The bench comprising Justices S. Ravindra Bhat and Dipankar Datta set aside the judgment of the Gujarat High Court where it had quashed the amending Notifications, i.e., Notification No. 33 / 2015-20 and 79 / 2017-Customs, dated 13.10.2017, by which the Director General of Foreign Trade (DGFT) had imposed the ‘pre-import’ and ‘physical export’ conditions for availing IGST and Compensation Cess exemption on imports made under ‘Advance Authorisation’.While holding that the concept of ‘pre-import condition’ was not alien, the court observed that paragraph 4.13 (i) of the FTP itself empowered the DGFT to impose ‘pre-import conditions’ on articles other than those specified in Appendix-4J of the HBP. The bench remarked that the Gujarat High Court had failed to consider the same and had erroneously proceeded on the assumption that only the goods specified in the said Appendix were subject to the ‘pre-import condition’. The bench remarked that the introduction of the ‘pre-import condition’ may have resulted in hardship to the exporters, since they could no longer continue with their former business practices of importing inputs, after applying for Advance Authorization, to fulfil their overseas export contractual obligations. Under the new scheme, the exporters were required to pay the IGST and Compensation Cess, and then claim refunds, after satisfying that the inputs had been utilized fully (wastage excluded) for producing the final export good. However, the top court held that the same cannot be a ground to hold that the insertion of the ‘pre-import condition’ was arbitrary, as held by the High Court.In the investigations initiated on the basis of the said Notifications, the Directorate of Revenue Intelligence (DRI) opined that the ‘pre-import condition’ meant that goods had to be imported first, and then the final products manufactured with such imported goods were to be exported. That is, only after the import of the goods commenced, were they required to be used for manufacture of export goods, which were ultimately exported.As per the DRI officers, the ‘pre-import condition’ stood satisfied when it was established that the goods imported against a particular ‘Advance Authorisation’ were used in relation to manufacture of finished goods exported for fulfilment of export obligation of that particular authorisation.The manufacturer-exporters challenged the amending Notifications before the Gujarat High Court, who set aside the 2017 Notifications imposing the ‘pre-import’ condition on the ground that they were ultra vires the scheme of the FTP.In the appeal filed by the revenue department against the decision of the High Court, the Apex Court reckoned that Chapter IV of the FTP provides for “Duty Exemption/Remission Schemes”, and that ‘Advance Authorization’ (AA) is one of the duty exemption schemes.The court took note that under the ‘Advance Authorization’ scheme, exemption from the payment of import duties is given to raw materials / inputs required for the manufacture of export products, which are then physically incorporated in such export goods. Thus, one can import raw materials or inputs at zero customs duty for production of export products. Imports under an ‘Advance Authorization’ were exempted from the payment of Basic Customs Duty (BCD), Additional Customs Duty, Education Cess, Anti-dumping Duty, Countervailing Duty (CVD), Safeguard Duty, and Transition Product Specific Safeguard Duty, wherever applicable.It further reckoned that Paragraph 4.27 (a) of the HBP, as notified by the DGFT, provides for “Exports in Anticipation of Authorisation”. The said provision permitted exports in anticipation of authorisation, and permits exports towards discharge of export obligation on the basis of the file number even prior to the grant of ‘Advance Authorisation’ for imports. By the Notification No. 18/2015-Customs, dated 01.04.2015, goods imported into India against valid Advance Authorisation were exempted from the customs duty, including the additional duty, safeguard duty, transitional product specific safeguard duty, and anti-dumping duty.After the introduction of the GST regime, as there was no corresponding notification exempting the additional duties leviable under the Customs Tariff Act, exporters had to pay IGST and compensation cess and seek input tax credit as applicable under the GST Rules. Imports under ‘Advance Authorisation’, however, continued to be exempt from payment of basic customs duty, education cess, and other duties, wherever applicable, as per the 2015 Notification.The bench observed that because of the initial problems...

Supreme Court Upholds Requirement Of ‘Pre-Import Condition’ To Claim IGST And GST Compensation Cess On Imports Made Under ‘Advance Authorization’

Parina Katyal

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