# UNION OF INDIA AND ORS v. COSMO FILMS LIMITED

- **Citation:** [2023] 7 S.C.R. 185
- **Court:** Supreme Court of India
- **Decided:** 2023-04-28
- **Case number:** Civil Appeal No. 290 of 2023
- **Bench:** S. Ravindra Bhat, Dipankar Datta
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/union-of-india-and-ors-v-cosmo-films-limited-37471
- **Pages:** 45

## Headnote

Foreign Trade (Development & Regulation) Act, 1992 -
Foreign Trade Policy of 2015-2020 (FTP) - Handbook of Procedures
2015-2020 (HBP) - Notification No.18/2015-Customs exempted
payment of basic customs duty, additional duty (countervailing duty,
special additional duty), safeguard duty and anti-dumping duty on
inputs imported against a valid Advance Authorization (AA) - GST
regime was introduced w.e.f 01.07.2017 - However, no
corresponding amendment was made to the aforesaid Notification
w.r.t IGST and compensation cess - Notification No.79/2017Customs amended the aforesaid Notification by granting IGST and
compensation cess exemption, subject to the conditions that the
export obligation shall be fulfilled by physical exports only and
shall also be subject to 'pre-import condition' - Notification No.
33/2015-2020 was also issued, amending various provisions of the
FTP, whereby this 'pre-import condition' was incorporated in
paragraph 4.14 - High Court set aside the mandatory fulfilment of
the 'pre-import condition' incorporated in the FTP and HBP by the
aforesaid two Notifications - As per the High Court, such fulfilment
in order to claim exemption of IGST and GST compensation cess on
input imported into India for the production of export goods, on
the strength of an AA was arbitrary and unreasonable -
Sustainability of - Held: Not sustainable - Exporters were made
aware of the changes brought about due to the introduction of GST,
through a trade notice - However, this trade notice escaped the
attention of the High Court - Further, the concept of 'pre-import
condition' was not alien - Appendix-4J (mentioned in paragraph
4.13 (ii) of the FTP) listed several articles as articles for which the
'pre-import condition' was applicable, prior to the GST regime -
Furthermore, by paragraph 4.13 of the FTP, the DGFT could impose
'pre-import conditions' on articles other than those specified -
Retention of the power to impose 'pre-import conditions' on articles
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[2023] 7 S.C.R.
other than those specified in Appendix-4J, meant that the DGFT
could exercise it, in relation to any goods - High Court did not
discuss this aspect and proceeded on the assumption that only
specified goods were subject to the pre-import condition - Any
category of supply, other than actual exports to other country and
supply to SEZ cannot be considered as physical exports - In case
the entire exports were not physical exports, the AAs were
automatically ineligible for exemption - The introduction of the GST
regime resulted in a substantial and fundamental overhaul of the
indirect tax structure - There is no constitutional compulsion that
whilst framing new law or policies, particularly when an entirely
different set of fiscal norms are created, overhauling the taxation
structure, concessions hitherto granted should necessarily be
continued in the same fashion as they were in the past - Inevitably,
this process is bound to lead to some disruption - In this case, the
disruption is in the form of exporters needing to import inputs, pay
the two duties, and claim refunds - Yet, this inconvenience is
insufficient to trump the legislative choice of creating an altogether
new fiscal legislation, and insisting that a section of assessees order
their affairs, to be in accord with the new law - Therefore, the
exclusion of benefit of imports in anticipation of AAs, and requiring
payment of duties, u/s.3 (7) and (9) of 1975 Act, with the 'pre-import
condition', cannot be characterized as arbitrary or unreasonable
- Impugned notifications cannot be faulted for arbitrariness or
under classification - Impugned judgment of the High Court set
aside - Customs Tariff Act, 1975 - ss.3 (7), (9).
Foreign Trade (Development & Regulation) Act, 1992 - s.5 -
Foreign Trade Policy of 2015-2020 (FTP) vis-à-vis Handbook of
Procedures 2015-2020 (HBP) - Held: FTPs are statutory and are
framed by the Union, exercising its powers u/s.5 of the FTRA -
Whereas,

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 [2023] 7 S.C.R. 185
185
UNION OF INDIA AND ORS.
v.
COSMO FILMS LIMITED
(Civil Appeal No. 290 of 2023)
APRIL 28, 2023
[S. RAVINDRA BHAT AND DIPANKAR DATTA, JJ.]
Foreign Trade (Development & Regulation) Act, 1992 -
Foreign Trade Policy of 2015-2020 (FTP) - Handbook of Procedures
2015-2020 (HBP) - Notification No.18/2015-Customs exempted
payment of basic customs duty, additional duty (countervailing duty,
special additional duty), safeguard duty and anti-dumping duty on
inputs imported against a valid Advance Authorization (AA) - GST
regime was introduced w.e.f 01.07.2017 - However, no
corresponding amendment was made to the aforesaid Notification
w.r.t IGST and compensation cess - Notification No.79/2017Customs amended the aforesaid Notification by granting IGST and
compensation cess exemption, subject to the conditions that the
export obligation shall be fulfilled by physical exports only and
shall also be subject to 'pre-import condition' - Notification No.
33/2015-2020 was also issued, amending various provisions of the
FTP, whereby this 'pre-import condition' was incorporated in
paragraph 4.14 - High Court set aside the mandatory fulfilment of
the 'pre-import condition' incorporated in the FTP and HBP by the
aforesaid two Notifications - As per the High Court, such fulfilment
in order to claim exemption of IGST and GST compensation cess on
input imported into India for the production of export goods, on
the strength of an AA was arbitrary and unreasonable -
Sustainability of - Held: Not sustainable - Exporters were made
aware of the changes brought about due to the introduction of GST,
through a trade notice - However, this trade notice escaped the
attention of the High Court - Further, the concept of 'pre-import
condition' was not alien - Appendix-4J (mentioned in paragraph
4.13 (ii) of the FTP) listed several articles as articles for which the
'pre-import condition' was applicable, prior to the GST regime -
Furthermore, by paragraph 4.13 of the FTP, the DGFT could impose
'pre-import conditions' on articles other than those specified -
Retention of the power to impose 'pre-import conditions' on articles
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other than those specified in Appendix-4J, meant that the DGFT
could exercise it, in relation to any goods - High Court did not
discuss this aspect and proceeded on the assumption that only
specified goods were subject to the pre-import condition - Any
category of supply, other than actual exports to other country and
supply to SEZ cannot be considered as physical exports - In case
the entire exports were not physical exports, the AAs were
automatically ineligible for exemption - The introduction of the GST
regime resulted in a substantial and fundamental overhaul of the
indirect tax structure - There is no constitutional compulsion that
whilst framing new law or policies, particularly when an entirely
different set of fiscal norms are created, overhauling the taxation
structure, concessions hitherto granted should necessarily be
continued in the same fashion as they were in the past - Inevitably,
this process is bound to lead to some disruption - In this case, the
disruption is in the form of exporters needing to import inputs, pay
the two duties, and claim refunds - Yet, this inconvenience is
insufficient to trump the legislative choice of creating an altogether
new fiscal legislation, and insisting that a section of assessees order
their affairs, to be in accord with the new law - Therefore, the
exclusion of benefit of imports in anticipation of AAs, and requiring
payment of duties, u/s.3 (7) and (9) of 1975 Act, with the 'pre-import
condition', cannot be characterized as arbitrary or unreasonable
- Impugned notifications cannot be faulted for arbitrariness or
under classification - Impugned judgment of the High Court set
aside - Customs Tariff Act, 1975 - ss.3 (7), (9).
Foreign Trade (Development & Regulation) Act, 1992 - s.5 -
Foreign Trade Policy of 2015-2020 (FTP) vis-à-vis Handbook of
Procedures 2015-2020 (HBP) - Held: FTPs are statutory and are
framed by the Union, exercising its powers u/s.5 of the FTRA -
Whereas, the HBP does not have the status of rules or regulations -
It merely contains guidelines.
Tax/Taxation - Validity or constitutionality of fiscal laws/
economic measures - Hardship/inconvenience, if relevant - Held:
Court is not concerned with the wisdom or unwisdom, the justice or
injustice of the law as Parliament and State Legislatures - Hardship
is not relevant in pronouncing on the constitutional validity of a
fiscal statute or economic law - When reform by way of new
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legislation is introduced, the doctrine of classification cannot be
applied strictly, and that some allowance for experimentation, to
observe the effect of the law, is available to the executive or
legislature - Doctrine of Classification.
Allowing the appeals, the Court
HELD: 1.1 Exporters were made aware of the changes
brought about due to the introduction of GST, through a trade
notice, (Trade Notice 11/2017, dated 30-06-2017). The public
notice clearly forewarned that AAs and their utilisation would
not continue in the same manner as the AA scheme was operating
hitherto. This trade notice has escaped the attention of the High
Court, since there is no advertence to it in the impugned order,
or a discussion about it. Likewise, the HBP was amended, and
paragraph 4.27 (d) was inserted, which stated that duty free
authorisation for inputs subject to 'pre-import condition' could
not be issued. By virtue of the trade notice, exporters were made
aware of the fact that under the GST regime, no exemption from
payment of IGST and compensation cess would be available for
imports under AA. Importers had to pay IGST and take input tax
credit as applicable under GST rules. [Paras 49, 50, 51][215-A;
216-B,C,D,E]
1.2 The FTP, inter alia, facilitated AAs for duty-free import
of input, which is physically incorporated in export product,
making normal allowance for wastage (paragraph 4.03 of the FTP).
No doubt, the rationale or object behind this was to smoothen
and facilitate export trade, ensuring that finished goods, meant
for export, did not suffer a competitive price disadvantage.
However, the concept of 'pre-import condition' was not alien -
Appendix-4J (mentioned in paragraph 4.13 (ii) of the FTP) listed
several articles, such as spices, penicillin and its salts, tea,
coconut oil, silk, drugs from unregistered sources, precious
metals, etc. as articles for which the 'pre-import condition' was
applicable, prior to the GST regime. Furthermore, by paragraph
4.13 of the FTP, the DGFT could impose 'pre-import conditions'
on articles other than those specified. The retention of the power
to impose 'pre-import conditions' on articles other than those
specified in Appendix-4J, meant that the DGFT could exercise
it, in relation to any goods. The High Court has not discussed
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this aspect, and proceeded on the assumption that only specified
goods were subject to the 'pre-import condition'. The existence
of paragraph 4.13 (i) reserving the power to insist upon the 'preimport condition', meant that the policy was capable of change,
depending on the exigencies of the time. This omission, together
with the High Court's failure to notice paragraph 4.27 (d) of the
HBP are serious infirmities in the impugned judgment. [Paras
56, 57][217-G-H; 218-A-D]
1.3 'Physical export' is defined in paragraph 4.05(c) and
paragraph 9.20 of the FTP read with Section 2(e) of the FTDRA.
Essentially, therefore, export involves taking goods out of India.
AAs can be issued either to a manufacturer exporter or merchant
exporter tied to supporting manufacturer (as per paragraph 4.05).
However, paragraph 4.05 of the FTP defines categories for which
AAs can be issued, somewhat expansively. The definition extends
in specific terms (under Chapter 4 of FTP) - supplies made to
SEZ are considered as 'physical exports' despite not being an
event in which goods are being taken out of India. The other
three categories defined under (c) (ii), (iii) & (iv) are ineligible
as 'physical exports'. Supplies of intermediate goods are covered
by letter of invalidation, whereas supplies covered under Chapter
7 of the FTP are considered as 'deemed exports'. These supplies
are ineligible for being considered 'physical exports'. Therefore,
any category of supply, be it under letter of invalidation and/or to
EOU and/or under International Competitive Bidding (ICB) and/
or to Mega Power Projects, other than actual exports to other
country and supply to SEZ, cannot be considered as 'physical
exports'. One of the objects behind the impugned notifications
was to ensure that the entire exports made under AAs towards
discharge of export orders were physical exports. In case the
entire exports were not physical exports, the AAs were
automatically ineligible for exemption. [Para 59][218-F-H; 219A-E]
1.4 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
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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 reshaping of their businesses caused inconvenience to them. Yet,
that cannot be a ground to hold that the insertion of the 'preimport condition', was arbitrary, as the High Court concluded.
[Para 62][220-D-F]
1.5 The respondents had alleged discrimination on two
counts: one, that for purposes of classification, all exporters who
were granted AAs were to be treated alike; and two, that insisting
on the 'pre-import condition' in respect to exemption from two
levies only, while granting that benefit in respect of other AAs,
was discriminatory. As far as the first aspect is concerned, the
impugned judgment is on a misreading of the FTP. As noted
earlier, paragraph 4.13 (i) itself empowered the DGFT to include
articles, which are not specified in Appendix-4J. The existence
of this discretion means that there is flexibility in regard to the
nature of policies to be adopted, having regard to the state of
export trade, and concessions to be extended in the trade and
tax regime. Thus, the indication of a few items by virtue of
paragraph 4.13 (ii) per se never meant that other articles could
not be subjected to 'pre import conditions'. Clearly, therefore,
all AA holders were never treated alike. On the second aspect,
what hurt the respondents was not classification of AAs per se,
but their differentiation in the newly introduced tax regimes, so
far as two new levies are concerned. If one keeps in mind that
there cannot be a blanket right to claim exemption, and that such
a relief is dependent on the assessment of the State and tax
administrators, as well as the state of the economy and above all,
the mechanism for its administration, clearly the argument of
discriminatory treatment of the two levies on the one hand, and
the other taxes on the other, has to fail. The exemption from the
requirement of pre import conditions continues in respect of the
old levies, which are, even as on date, not part of the GST regime.
That clearly sets them apart from the new levies, the payment of
which is insisted (after which refund can be sought) as a part of a
unified system of levy, assessment, collection, payment, and refund.
[Para 65][222-C-H]
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1.6 The introduction of the GST regime resulted in a
substantial and fundamental overhaul of the indirect tax structure,
at the State and Central levels. 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. On
the other hand, the object of the new law is creation of new rights
and obligations, with new attendant conditions. Inevitably, this
process is bound to lead to some disruption. In this case, the
disruption is in the form of exporters needing to import inputs,
pay the two duties, and claim refunds. Yet, this inconvenience is
insufficient to trump the legislative choice of creating an
altogether new fiscal legislation, and insisting that a section of
assessees order their affairs, to be in accord with the new law.
Therefore, 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. [Paras 60,
67][219-F; 225-F-H; 226-A-B]
Rohitash Kumar & Ors. v Om Prakash Sharma & Ors
(2013) 11 SCC 451 : [2012] 13 SCR 47; State of
Madhya Pradesh v Rakesh Kohli [2012] 6 SCR 661;
State of Gujarat v Shri Ambica Mills 1974 (3) SCR 760;
Ajoy Kumar Banerjee & Ors. v. Union of India & Ors
[1984] 3 SCR 252; Javed v. State of Haryana (2003) 8
SCC 369 : [2003] 1 Suppl. SCR 947; State of Madhya
Pradesh v Nandlal Jaiswal [1987] 1 SCR 01; Ashirwad
Films v. Union of India (2007) 6 SCC 624 : [2007] 7
SCR 310 - relied on.
1.7 The object behind imposing the 'pre-import condition'
is discernible from paragraph 4.03 of FTP and Annexure-4J of
the HBP; that only few articles were enumerated when the FTP
was published, is no ground for the exporters to complain that
other articles could not be included for the purpose of 'pre-import
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condition'; as held earlier, that is the import of paragraph 4.03
(i). The numerous schemes in the FTP are to maintain an
equilibrium between exporters' claims, on the one hand and on
the other hand, to preserve the Revenue's interests. Here, what
is involved is exemption and postponement of exemption of IGST,
a new levy altogether, whose mechanism was being worked out
and evolved, for the first time. The plea of impossibility to fulfil
'pre-import conditions' under old AAs was made, suggesting that
the notifications retrospectively mandated new conditions. The
exporter respondents' argument that there is no rationale for
differential treatment of BCD and IGST under AA scheme is
without merit. BCD is a customs levy at the point of import. At
that stage, there is no question of credit. On the other hand,
IGST is levied at multiple points (including at the stage of import)
and input credit gets into the stream, till the point of end user. As
a result, there is justification for a separate treatment of the two
levies. IGST is levied under the IGST Act, 2017 and is collected,
for convenience, at the customs point through the machinery
under the Customs Act, 1962. The impugned notifications,
therefore, cannot be faulted for arbitrariness or under
classification. [Para 69][226-H; 227-A-E]
1.8 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.
The reasoning is faulty. It is now settled that the FTPRA contains
no power to frame retrospective regulations. 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. [Paras 70, 71][227-E-F; 228-A-B]
1.9 The impugned judgment and orders of the Gujarat High
Court are set aside. However, since the respondents were
enjoying interim orders, till the impugned judgments were
delivered, the Revenue is directed to permit them to claim refund
or input credit (whichever applicable and/or wherever customs
duty was paid). [Para 75][229-E]
UNION OF INDIA AND ORS. v. COSMO FILMS LIMITED
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Director General of Foreign Trade & Ors. v Kanak
Exports & Ors [2015] 15 SCR 287; Union of India
(UOI) & Ors. v VKC Footsteps India Pvt. Ltd [2021] 15
SCR 169; R.K. Garg v Union of India [1981] 1 SCR
947: Union of India v VKC Footsteps India (P) Ltd.
2022 (2) SCC 603 - relied on.
MRF Ltd., Kottayam v. Asst. Commissioner (Assessment)
Sales Tax & Ors. [2006] Supp 6 SCR 417 - held
inapplicable.
Khandige Sham Bhat v Agricultural Income Tax Officer
[1963] 3 SCR 809; Assistant Commissioner of Urban
Land Tax v Buckingham & Carnatic Co Ltd. [1970] 1
SCR 268; Laxmi Khandsari vs. State of Uttar Pradesh
[1981] 3 SCR 92; State of Haryana v Jai Singh 2003
(9) SCC 114; Welfare Association ARP v Ranjit P. Gohil
[2003] 9 SCC 358; Union of India (UOI) and Ors. vs.
N.S. Rathnam & Sons [2015] 8 SCR 751; Vasu Dev
Singh v. Union of India [2006] Supp 9 SCR 565; P. J.
Irani v. State of Madras [1962] 2 SCR 169; Union of
India v. Asian Food Industries, [2006] Supp 8 SCR 485;
Hindustan Granites v Union of India [2007] 4 SCR
743; Bannari Amman Sugars Ltd. vs. Commercial Tax
Officer & Ors [2004] 6 Suppl. SCR 264 - referred to.
Case Law Reference
1963 (3) SCR 809
referred to
para 24
1970 (1) SCR 268
referred to
para 24
[1981] 1 SCR 947
relied on
para 24
[1981] 3 SCR 92
referred to
para 31
[2015] 8 SCR 751
referred to
para 35
[2006] Supp 6 SCR 417
held inapplicable
para 35
[2006] Supp 9 SCR 565
referred to
para 36
[1962] 2 SCR 169
referred to
para 36
[2006] Supp 8 SCR 485
referred to
para 52
[2007] 4 SCR 743
referred to
para 52
[2012] 13 SCR 47
relied on
para 62
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[2012] 6 SCR 661
relied on
para 62
1974 (3) SCR 760
relied on
para 66
[1984] 3 SCR 252
relied on
para 66
[2003] 1 Suppl. SCR 947
relied on
para 66
[1987] 1 SCR 01
relied on
para 68
[2007] 7 SCR 310
relied on
para 68
[2015] 15 SCR 287
relied on
para 70
[2021] 15 SCR 169
relied on
para 72
[2004] 6 Suppl. SCR 264
referred to
para 73
CIVIL APPELLATE JURISDICTION : Civil Appeal No.290 of
2023.
From the Judgment and Order dated 04.02.2019 of the High Court
of Gujarat at Ahmedabad in SCA No.15186 of 2018.
With
Civil Appeal Nos.298, 303, 297, 296, 295, 294, 293, 292 of 2023
And Transfer Petition (Civil) No.1526 of 2020.
R. Venkataramani, AG, N. Venkatraman, A.S.G., Mukesh Kumar
Maroria, Sharath Nambiar, Ankur Talwar, Ms. Chinmayee Chandra,
Siddhant Kohli, B. Krishna Prasad, Abhishek A. Rastogi, Nikhil Jain,
Pratyushprava Saha, Ms. Divya Jain, Rohan Shah, Ajay Bhargava, Mrs.
Vanita Bhargava, Ayush Mehrotra, Ms. Trishala Trivedi, Upkar Agarwal,
Ms. Abhipriya, Laksh Minocha, M/s. Khaitan & Co., Paresh M. Dave,
Shamik Shirishbhai Sanjanwala, Sagar Juneja, Prashant Mohla, Ms. Nupur
Prasad, Amar Dave, P. S. Sudheer, Rishi Maheshwari, Ms. Anne Mathew,
Bharat Sood, Ms. Shruti Jose, Ashok Basoya, Sudhanshu S. Choudhari,
Advs. for the appearing parties.
The Judgment of the Court was delivered by
S. RAVINDRA BHAT, J.
1. These appeals are directed against a judgment and order of the
Gujarat High Court,1 wherein mandatory fulfilment of a 'pre-import
condition'2 incorporated in the Foreign Trade Policy of 2015-2020 ("FTP")
1 M/s Shri Jagdamba Polymers Ltd. & Ors. v Union of India & Ors., Special Civil
Application No. 19324 of 2018.
2 Paragraph 4.13 of FTP, read with the HBP.
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and Handbook of Procedures 2015-2020 ("HBP") by Notification No.
33 / 2015-20 and Notification No. 79 / 2015-Customs, both dated
13.10.2017, was set aside. According to the High Court, such fulfilment
in order to claim exemption of Integrated Goods and Services Tax
("IGST")3 and GST compensation cess4 on input imported into India for
the production of goods to be exported from India, on the strength of an
advance authorization5 ("AA") was arbitrary and unreasonable.
I. Background
2. In terms of the Foreign Trade (Development & Regulation)
Act, 1992 ("FTDRA") the Central Government ("Union") had been
framing, from time to time, Export-Import Policies (or FTPs) for the
development, regulation and control of imports and exports in the country.
The Union announced duty exemption schemes as well. One among
these was the AA. To regulate and guide the procedure to be followed
for implementing the provisions of the FTP and the rules framed
thereunder, the Director General of Foreign Trade ("DGFT") notified
the HBP, chapter 4 of which prescribed the procedure for availing duty
exemption / remission schemes. By paragraph 4.27, exports in
"anticipation of authorisation" were permitted, so as not to create
hindrances and delays in execution of export orders. At the time,
Notification No. 18 / 2015-Customs dated 1.04.2015 exempted payment
of basic customs duty ("BCD"), additional duty (countervailing duty
("CVD"), special additional duty ("SAD")), safeguard duty and antidumping duty on inputs imported against a valid AA.
3. The GST regime was introduced with effect from 01.07.2017.
However, no amendment was made to Notification No. 18 / 2015-Customs
with respect to IGST and compensation cess, resulting in the collection
of these levies for the inputs imported into India against AAs.
4. On 13.10.2017, six existing notifications were amended.
Notification No. 79 / 2017-Customs amended Notification No. 18 / 2015Customs by granting IGST and compensation cess exemption, subject
to the following two conditions:
"Provided further that notwithstanding anything contained
hereinabove for the said authorisations where the exemption
from integrated tax and the goods and services tax
3 Leviable under Section 3(7) of The Customs Tariff Act, 1975.
4 Leviable under Section 3(9) of The Customs Tariff Act, 1975.
5 Paragraph 4.03 of FTP.
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compensation cess leviable thereon under sub-section (7) and
sub-section (9) of section 3 of the said Customs Tariff Act,
has been availed, the export obligation shall be fulfilled by
physical exports only."6
***
"That the exemption from integrated tax and the goods and
services tax compensation cess leviable thereon under subsection (7) and sub-section (9) of section 3 of the said Customs
Tariff Act shall be subject to pre-import condition"7
 (emphasis supplied)
At the same time, Notification No. 33 / 2015-2020 was issued,
amending various provisions of the FTP, whereby this 'pre-import
condition' was incorporated in paragraph 4.14 thereof with effect from
13.10.2017. The writ petitioners before the High Court / respondents
herein claimed that they were unaware about this condition, and continued
exports in anticipation of grant of AA, and consequently expected
exemption from all custom duty levies, including IGST and compensation
cess.
5. The Directorate of Revenue Intelligence ("DRI") Kolkata
noticed the above amendments and thereupon, initiated investigation and
issued summons to various manufacturers located across the country
importing goods against AAs. The respondents were of the view that
the scope of 'pre-import condition' was unclear, whereas the DRI officers
conducting the inquiry and investigation, however, were of the view that
'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. When it was established that goods imported against a
particular AA were used in relation to manufacture of finished goods
exported for fulfilment of export obligation of that particular authorisation,
the 'pre-import condition' stood satisfied.
6. In view of this development, the exemption granted by
Notification No. 18 / 2015-Customs was inadmissible where
manufacturer-exporters, who undertook manufacturing and export of
goods in a continuous cycle, could not prove the above. Exemption was
6 Proviso to clause (viii), as contained in Notification No. 79 / 2017.
7 Addition of clause (xii), as contained in Notification No. 79 / 2017.
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also not admissible when goods manufactured were exported in
anticipation of licence / authorisation, since they were exports made
first, with duty-free import against the authorisation having been
undertaken later. Consequently, the manufacturer-exporters aggrieved
by this interpretation approached the High Court.
II. Arguments of the Revenue before the High Court
7. The Revenue contended that exemption from paying duty was
not a matter of right, and was granted by the State keeping in mind
general public interest. The criterion for determination of legality of any
notification was always whether the authority acted within its jurisdiction
while issuing such notification or not, and not if the Union benefitted
from the same. The Revenue contended that exporters were free to
export first and import at a later stage in terms of paragraphs 4.27 and
4.28 of the HBP. Those provisions however did not offer absolute
freedom to the importers to regulate their imports and exports without
complying with other conditions imposed in the policy and the relevant
customs notification. The provisions were an exception, to keep the option
open for willing exporters, subject to the condition that it would be availed
at their risk. Further, exercising the option was available only when either
of the 'pre-import conditions' was not fixed in the SION8, or exporters
were willing to first fulfil their export obligation. As the process of fixing
norms was time consuming, the provisions granted an opportunity to
importers to export in advance, at the risk of not being considered towards
discharge of export obligation.
8. The Revenue submitted that before the introduction of the GST
regime, imports allowed under AAs were exempt from payment of many
duties.9 Thereafter, CVD and SAD were subsumed in IGST. Under
Section 3 of the Customs Tariff Act, 1975, IGST was made payable at
specified rates upon imports. However, a major change that was brought
into the policy was to not allow exemption from payment of IGST directly
at the time of import under AA. Such exemption was allowed indirectly
by allowing refund of IGST paid at the time of imports under AA within
a specified time. The importers, therefore, started paying IGST on goods
imported under AA with effect from 1.7.2017, and were getting outright
8 Standard Input Output Norms, which are standard norms which define the number
of input/inputs required to manufacture units of output for export purposes. They are
applicable differently for different products.
9 Supra, para 2.
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exemption from BCD, ADD, safeguard duty, etc., and IGST paid was
refunded. The legislative intent was clear in imposing IGST on all imports
made under AAs, on or after 1.7.2017, without differentiating between
the status of such authorisations, whether or not it was issued prior to or
after introduction of GST. It was a policy decision, which could have
been reversed or altered only by the GST Council. The Revenue also
pointed out that due to problems in Goods and Service Tax Network
(GSTN)10, the committed refund of IGST was getting delayed. This
resulted in blocking of working capital for many business houses. To
obviate this problem, the GST Council allowed exemption from IGST
when imported under AAs. The Directorate General of Foreign Trade
("DGFT") accordingly, issued Notification No. 33/2015-20 dated
13.10.2017 which was backed by Customs Notification No. 79/2017
dated 13.10.2017, issued by the Department of Revenue, amending the
Notification No. 18 / 2015-Customs, dated 1.4.2015. The Revenue further
urged that exemption from the IGST leviable under Section 3 (7) was
available and subject to two specific conditions. The conditions were (i)
export obligation was to be fulfilled through physical exports only; and
(ii) the exemption was subject to 'pre-import condition', which implied
that only after the import of the goods commenced, were they required
to be used for manufacture of export goods, which were ultimately
exported.
9. According to the Revenue, a cut-off date could have been
declared, and only AAs issued after 13.10.2017 could have been declared
eligible for such benefits, but the same was not done. It was kept openended to extend benefit to the importers, who followed those two
conditions, even in respect of the AAs issued to them earlier. A cut-off
date would have made exporters ineligible for the benefit. Therefore,
policy makers, in their own wisdom, kept the door open for the eligible
importers, to enjoy the benefit, irrespective of the date / period of issuance
of AA, subject to compliance with the conditions imposed.
10. The Revenue further stated that paragraph 4.13 of the FTP
had been in existence under different paragraphs in different policy periods
for years. Since 2003, all drug companies had been importing their raw
materials sourced from unregistered sources, under the 'pre-import
10 Which provides shared IT infrastructure and service to both central and state
governments including taxpayers and other stakeholders. The registration front end
services, returns, and payments to all taxpayers were provided by GSTN.
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condition'. Silk in any form, raw sugars, natural rubbers, tea, spices and
precious metals etc., were allowed to be imported under 'pre-import
condition' only. The 'pre-import condition' was in-built within the AA
scheme itself under paragraph 4.03 of the policy.
11. Additionally, the AA scheme was not a replenishment scheme.
Were it so, the DGFT would not have launched other schemes like 'DutyFree Incentive Scheme', which allowed exports prior to import, and
transferable licences under the FTP. To prevent cash blockage of
exporters due to upfront payment of IGST and compensation cess on
imports of inputs, the exemption from their payment was granted, subject
to 'pre-import condition'. In case of replenishment imports after exports,
the issue of cash blockage did not arise. Since exports had already taken
place and GST legislation provided for complete zero-rating, extending
IGST exemption on replenishment imports would imply double benefit to
the authorisation holder. Therefore, the AA holders were not adversely
affected and not prejudiced by the impugned notifications. The IGST
paid on replenishment material could be availed as input tax credit for
payment of GST.
III. Findings of the High Court
12. 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. The court considered this to
be an unfeasible condition:
"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 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."11
13. It was noted that while the 'pre-import condition' was levied
on duties collected under Sections 3 (7) and (9) of the Customs Tariff
11 Supra note 1, para 27.
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Act, 1975, in respect of the levies under Sections 3 (1), (3) and (5)
no 'pre-import condition' was imposed. The result was that if the
importer wanted benefit of exemption from the levy of integrated tax
and compensation cess, the fact that other levies were not subject to
'pre-import condition' was immaterial because the same inputs were
subject to it. This resulted in inputs being subject to 'pre-import condition'
in respect of all the levies. The High Court then took note of the objects
of the FTDRA and the FTP, and the subsequent Notification No. 01/
2019-Cus dated 10-01-2019, whereby condition (xii) was omitted. The
court held that the Union found it to be in public interest not to continue
with the 'pre-import condition', for availing exemption from IGST and
compensation cess leviable on material imported against an AA. This,
according to the impugned judgment, vindicated the exporter/respondents'
stand. It was held accordingly that:
"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 : MANU/CUST/
0095/2017 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".12
14. The court also concluded that though paragraph 4.27 of HBP
clearly permitted exports in anticipation of authorisation by endorsing
the file number or authorisation number to establish co-relation of export/
supplies with authorisation issued, the Revenue wished to treat such
permissible imports made in anticipation of authorisation as replenishment.
This was despite the fact that for the purpose of exemption from the
other levies imposed under Sections 3(1), 3(3) and 3(5) of the Customs
Tariff Act, 1975 for decades the procedure was permitted, and continued
12 Supra note 1.
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to be permitted, (for the purpose of exemption from levy of IGST and
compensation cess), yet, such imports were "suddenly" treated as
"replenishment imports" which was held to be "incomprehensible".13
The court held that that the impugned exemption notification and
paragraph 4.14 of the FTP, to the extent they were impugned did not
meet with the test of reasonableness and were held to be ultra vires the
scheme of the FTP.
IV. The Union's Contentions before this Court
15. Mr. N. Venkatraman, learned Additional Solicitor General
("ASG") appearing for the Union, urged that the essence of the AA was
that the exporters were expected to import duty-free materials first, and
use them for the purpose of manufacture of products to be exported out
of India or be supplied under deemed export, if allowed by the FTP or
the customs notifications. This aspect of physical incorporation of input
materials in the export goods was covered under paragraph 4.03 of the
FTP, which specifically demanded physical incorporation of imported
materials in export goods which was possible only if imports were made
prior to export. Therefore, such authorizations principally had an inbuilt
'pre-import condition' which had to be followed. Paragraph 4.27 of the
HBP for the relevant period allowed exports / supplies in anticipation of
an authorization. This was an exception, to meet requirement in case of
exigencies. However, importers and exporters were availing the benefit
of that provision without exception and the export goods were made out
of domestically or otherwise procured materials and duty-free imported
goods were used for purposes other than for the manufacture of the
export goods. Paragraph 4.27 (d) of the HBP barred benefit of export in
anticipation of authorization for the inputs with 'pre-import condition'.
The ASG contested the exporters' argument that there was no change
in paragraph 4.27 of HBP and that it merely imposed conditions in terms
of paragraph 4.14 of the FTP by way of 'pre-import condition'.
16. It was stated that under paragraph 4.27(d), exports / supplies
made in anticipation of authorisation were not eligible for inputs with
'pre-import condition'. That meant that the moment input materials were
subject to 'pre-import condition', they were ineligible for export in
anticipation of authorization, by virtue of paragraph 4.27 (d). Therefore,
the respondent pleaded based on wrong notion and understanding and
13 Supra note 1.
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knowledge of the relevant provisions, and the High Court erroneously
relied upon such an incorrect submission.
17. It was argued that paragraph 4.27 (a) & (b), i.e., export in
anticipation of authorization and the 'pre-import condition' on the input
materials were mutually exclusive and could not go hand in hand. The
impugned order did not take into consideration this aspect of paragraph
4.27(d). Therefore, holding 'pre-import condition' as unreasonable as
the same was in contrast with paragraph 4.27 (a) and also that the
Government did not take enough care to eradicate such apparent paradox,
was based on the wrong set of facts, and was contrary to the provisions
of the law.
18. It was argued that the High Court erred in setting aside
paragraph 4.14 of the FTP and the corresponding provisions of the
customs notifications, that imposed 'pre-import' and 'physical export'
conditions, and held that the contention of physical incorporation of the
duty-free materials under paragraph 4.03 of the FTP was contrary to
paragraph 4.27 of the HBP which specifically allowed imports in
anticipation of authorization. The observation of the court was without
merit. The court erroneously granted primacy to paragraph 4.27 of the
HBP over paragraph 4.03 of the FTP, when infact the FTP had preeminence over the HBP for laying down the procedures to be followed
by an exporter or importer in terms of paragraph 1.03 of the FTP.
Therefore, provision of the HBP could not override the FTP in case of a
conflict. It was argued that paragraph 4.27(d) limited and confined the
scope of paragraph 4.27(a). The moment paragraph 4.27(d) came into
picture, paragraph 4.27(a) became inoperative.
19. It was also urged that there was no conflict between paragraph
4.03 of the FTP and that of 4.27(a) of the HBP. The scope and field of
operation of individual paragraphs were completely different. Paragraph
4.03(a) of the FTP provided that:
"(a) Advance Authorisation is issued to allow duty free import
of input, which is physically incorporated in export product
(making normal allowance for wastage). In addition, fuel,
oil, catalyst which is consumed / utilized in the process of
production of export product, may also be allowed."14
14 Paragraph 4.03(a) of the FTP.
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20. The object and spirit of the AA scheme to allow duty free
import of input, which was to be physically incorporated in export product,
was clear. The relevant customs notifications too, referred to paragraph
4.03, which provided that the AA was issued in terms of its provision for
extending exemption. The provision of physical incorporation of the inputs
in the export goods, was necessary for the purpose of the scheme, for
two reasons.