Recently, various inquiries have been initiated by the Directorate General of Revenue Intelligence (“DRI”) into imports made by Advance Authorisation (“AA”) specifically in cases where the importers have availed the benefit of Customs Notification No. 79/2017 dated 13.10.2017 and claimed exemption from payment of Integrated Goods and Services Tax (“IGST”) and/or Goods and Services Tax Compensation Cess (“GST Cess”).
The investigations initiated by DRI find its roots from the date of onset of Goods and Services Tax (“GST”) regime. Under the erstwhile laws, to give effect to the AA scheme prescribed under the Foreign Trade Policy 2015-20 (“FTP”), the Ministry of Finance had issued a notification under Customs laws viz. Notification No. 18/2015-Customs dated 01.04.2015 (“Customs Notification”) vide which the AA holders were given exemption from payment of basic customs duty leviable under the Customs Act. 1962 (“Customs Act”) along with additional duty, safeguard duty, anti-dumping duty etc. leviable under Section 3,8B, 8C and 9A of the Customs Tariff Act, 1975 (“Customs Tariff Act”) on import of inputs under the AA subject to fulfilment of other procedural conditions prescribed therein.
After the onset of GST regime, the said Customs Notification was not amended even though Customs Tariff Act was amended to provide for levy of IGST and GST Cess under Section 3(7) and 3(9) of the Act respectively. This led to a lot of confusion among the erstwhile AA holders as to whether the exemption from additional duties under the Customs Tariff Act still holds good or they need to pay IGST and GST Cess on imports made under the AA scheme?
However, the Government’s intention at that point of time was clear to not give option to the AA holders of either claiming outright exemption from payment of IGST and/or GST Cess or pay additional duties and later on claim refund. This is because as per the scheme of GST laws, the AA holders, if it pays IGST and/or GST Cess on inputs at the time of import, they would be anyways entitled to refund of the same in light of provisions of Section 16 of the Integrated Goods and Services Tax Act, 2017 (”IGST Act”) which provides for refund of IGST or refund of unutilized Input Tax Credit (“ITC”) in relation to exports (zero rated supplies). The AA holders, on the other hand, felt that even though they would be entitled to refund in light of Section 16 of the IGST Act, it would still be a cash flow issue and will lead to working capital blockage.
This led to filing of Writ Petitions before various High Courts of the country wherein the Hon’ble High Court of Delhi in Narender Plastics Private Limited v. Union of India [TS-325-HC-2018(DEL)-NT] in an interim order passed by it directed that for AAs issued prior to 01.07.2017, the Government should allow the Petitioner to clear the consignments of imports constituting inputs for the fulfilment of its export orders placed on it prior to 01.07.2017 without any additional levies, and subject to the quantity and value as specified in the AA licences issued to it prior to 01.07.2017.
The Central Board of Indirect Taxes and Customs, meanwhile realizing the gravity of discontent among the industry amended the Customs Notification w.e.f. 13.10.2017 (amending Notification No. 79/2017 – Customs dated 13.10.2017) and extended the benefit of exemption to IGST as well as GST Cess on imports made by AA holders. However, as it is always said that the devil lies in detail, a peculiar condition was inserted which stated that:
“(xii) that the exemption from integrated tax and the goods and services tax compensation cess leviable thereon under sub-section (7) and sub-section (9) of section 3 of the said Customs Tariff Act shall be subject to pre-import condition”
Meanwhile, the FTP was also amended and the “pre-import condition” was incorporated in paragraph 4.14 of the FTP w.e.f 13.10.2017. It is noteworthy that nowhere in the FTP or in customs notification, the pre-import condition was ever defined or clarified. However, as per DRI officers conducting enquiries, it meant that goods have to be imported first and then the final products manufactured from such imported goods have to be exported, and only 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 AA that the “pre-import condition” was satisfied.
Since AA scheme was availed by a lot of manufacturer exporters who manufacture and export in a continuous cycle, raw material was imported in anticipation of an AA and when the AA licence was granted, they used to import subsequent materials free of customs duty.
The above interpretation of DRI officers meant that for manufacturers who were manufacturing and exporting in a continuous cycle, the AA is rendered impractical because imports have to precede exports which is commercially not viable.
The first challenge to this “pre-import” condition was made by way of Writ Petition before the Hon’ble Madras High Court in M/s Vedanta Limited v. DGFT and Ors. [TS-953-HC-2018(MAD)-NT]. However, the Hon’ble High Court dismissed the Writ Petitions as it held that no case of arbitrariness is made out by the Petitioners and citing its inability to interfere in the policy matters.
Another challenge to the “pre-import” condition was made before the Hon’ble High Court of Gujarat in M/s Messrs Maxim Tubes Company Pvt Ltd. V. Union of India [TS-79-HC-2019(GUJ)-NT]. However, before the Hon’ble High Court could pronounce its judgment, another amendment was made to the Customs Notification (amending Notification No. 01/2019 – Customs dated 10.01.2019) wherein clause (xii) which was added vide amendment dated 13.10.2017 was omitted. While the disputed “pre-import” condition stood omitted, two new conditions were added to this notification which provided that:
The condition further specifies that if IGST and/or GST cess is paid on imported materials, then this condition is not applicable.
Before coming to the impact of the above two conditions which seem to have been consciously added to protect the interests of Revenue, it is imperative to note that the Hon’ble High Court of Gujarat while disagreeing with the view taken by Hon’ble Madras High Court, inter alia observed that the “pre-import“ condition had been omitted by the Government itself on 10.01.2019 as it had found the same to be not in public interest.
The Hon’ble High Court of Gujarat also held that since the omission to clause (xii) of Customs Notification was made on 10.01.2019, the same ought to be given retrospective effect. Therefore, the Court, in its concluding paragraphs struck down the insertion of clause (xii) i.e. “pre-import” condition vide Notification No. 79/2017-Customs dated 13.10.2017 w.e.f. 13.10.2017.
It is pertinent to note here that while the Hon’ble High Court of Gujarat struck down clause (xii) of the Customs Notification w.e.f. 13.10.2017, there was no finding on the additional condition no. (vi)(a) and (vi)(b) added to the Customs Notification
|S.No.||Period||Position of Law||Pre-Import condition|
|1.||01.07.2017 – 12.10.2017||· AA holders imported inputs on payment of IGST and/or GST Cess;· The benefit of exemption granted w.e.f. from 13.10.2017 was not given retrospective effect;· Never challenged before any Court||Not Applicable|
|2.||13.10.2017 -10.01.2019||· Exemption from payment of IGST and GST Cess||Applicable. However struck down by Hon’ble High Court of Gujarat|
|3.||10.01.2019 – till date||· Exemption from payment of IGST and GST Cess||Not Applicable. However condition No. (vi)(a) and (vi)(b) of Customs Notification Applicable which, in effect places similar restrictions on use of post export imported materials akin to “pre-import” condition|
From a review of above position of law it emerges that on one hand, the Government omitted “pre-import” condition w.e.f. 10.01.2019, and on the other hand, to safeguard the interest of Revenue, it added condition no.(vi)(a) and (vi)(b) to Customs Notification. Now, if the High Court of Gujarat has struck down the “pre-import” condition w.e.f. 13.10.2017 without appreciating that these two conditions were also existing.
So, now the issue arises that DRI may still continue with investigations contending that condition no. (vi)(a) and (vi)(b) added to Customs Notification have retrospective applicability w.e.f. 13.10.2017 and the issue will be back to square one.
On a plain reading of these two conditions, it emerges that the same have been provided consciously to claim double benefit – first by importing inputs free from duty of customs and subsequently claiming refund of unutilized ITC under Section 16 of the IGST Act (An AA holder cannot claim the option of paying tax on exported goods and claim refund by virtue of Rule 96 of the Central Goods and Services Tax Rules, 2017 (“CGST Rules”). However, both are also vaguely worded and bound to give rise to new disputes for AA holders.
Let us understand this by an example.
For instance ABC Ltd. has an AA licence against which export obligation of say Rs. 100 worth of finished goods is to be made. The said AA licence entitles ABC Ltd. to import inputs of worth Rs. 50 duty free. Since there is a time lag between imports of duty free inputs and in order to complete its export order in timely manner, ABC Ltd. decides to manufacture finished goods required for fulfilment of export obligation using duty paid inputs already lying in the factory. ABC Ltd. exports the goods worth Rs. 100, subsequently imports duty free inputs worth Rs. 50 and discharges it AA licence.
Now, as per condition no. (vi) (a), if ABC Ltd. has availed the benefit of ITC, that is to say, it has taken/applied for refund of unutilized ITC under Rule 89 of the CGST Rules in relation to export products which were manufactured from duty paid materials, it has to mandatorily use the subsequently imported inputs (duty free) for manufacture and supply of taxable goods (other than nil rated or fully exempt supplies).
Now confusion arises from the phrase ‘supply of taxable goods (other than nil rated or fully exempt supplies)’ – Whether the phrase ‘taxable goods’ includes zero rated supplies of goods also or not ?
That is to say, if AA holder (where he has claimed benefit of Rule 89 earlier) can use the duty free imported inputs for making subsequent zero rated supplies or not ? The same is not clear as the terms taxable goods, nil rated and fully exempt seem to have been loosely used and ignoring the fact that these have specific connotations under the GST laws.
The intention, however appears to be contrary because these conditions have been added as a substitute to omission of ‘pre-import’ condition. Therefore, the intention seems to be that subsequently imported duty free inputs shall be used for making domestic supplies only as theoretically, on a numerical calculation, the Government might be in a loss when the AA holder claims benefit under Rule 89 and also imports duty free materials.
The above stated anomalies have not been clarified by either DGFT or Ministry of Finance till date but there is no end to the enquiries initiated by DRI.
Interestingly, CBIC has very recently issued instructions to all the Commissioners directing that in case a Writ Petition is filed on “pre-import” condition, the concerned officers should apprise the High Court of decision of Madras High Court where they have upheld “pre-import” condition as opposed to Gujarat High Court’s decision. Ideally, some instructions or circular should have been issued clarifying the purport and intent of condition no.(vi)(a) and (vi)(b) added in Customs Notification and directing officers to apprise High Court of the fact that these two conditions have been ignored by Hon’ble High Court of Gujarat.
As on date, the road is not clear for the AA holders since there are two conflicting decisions of High Courts. The misery is further broadened by the fact the even though the Hon’ble High Court of Gujarat has struck down the “pre-import” condition w.e.f. 13.10.2017, it has led to more confusion apropos clause (vi)(a) and (vi)(b) of the Customs Notification, more so regarding if the same are also applicable w.e.f. 13.10.2017 or not.
Contributed by: Rajat Bose, Partner; Abhishek Garg, Senior Associate
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