Explore the implications of the Supreme Court’s judgment in the Cosmos Films case on the pre-import condition and its impact on exporters benefiting from the Advance Authorization scheme. The article analyzes Circular No.16/2023-Cus issued by the CBIC, aiming to provide clarity on recrediting/refunding taxes due to the judgment. Delve into the background of the Foreign Trade Policy amendments, the Gujarat High Court’s intervention, and the subsequent Supreme Court ruling. The circular’s prescribed procedures for re-availing Input Tax Credit and obtaining refunds are discussed, along with critical questions that remain unanswered, creating potential areas for litigation. The article emphasizes the need for government clarity to ease the compliance burden on exporters and avoid prolonged legal battles.
Supreme Court in its judgement in case of Cosmos Films has upheld validity of the pre-import condition and has upheld the contentions of the revenue. Said case is applicable to those exporters who had availed benefit of Advance Authorization scheme (AA) against relevant imports that did not meet the pre-import condition as mandated by DGFT notification No.33/2015-20 dated 13.10.2017 without paying IGST and Compensation Cess. These exporters will now have to pay the IGST and Cess. Supreme Court in its judgement had directed the government to clarify the procedure for availing recredit / refund of the taxesfication that the exporters will now pay due to this judgement. In compliance with this directive, CBIC has now issued circular No.16/2023-Cus dated 07.06.2023. This article makes an attempt to declutter this circular and attempt to answer questions that have been left unanswered.
1. Background
- Foreign Trade Policy (FTP) was amended on 13.10.2017 vide DGFT notification No.33/2015-20 dated 13.10.2017, wherein it was provided that Import under AA scheme are exempted from whole of IGST and Compensation Cess leviable thereon under 3(7) and 3(9) of the Customs Tariff Act provided the goods were:
- Physically exported,
- Pre-Import condition for Inputs is fulfilled.
- The Question that arose for every exporter availing benefits of AA was whether fulfillment of Pre-Import condition was practically and commercially feasible because waiting to use those imported raw material till the exportation of final goods took place was a time consuming affair and could involve a huge working capital requirement and export orders would not wait that long, hence they ignored the pre-import conditions on the plea of impossibility and availed exemption benefits.
- Department started inquiries against a few exporters, who then approached the Gujarat High Court wherein they claimed they were unaware of such condition and continued export in anticipation of grant of AA, which is otherwise permitted under the FTP, and expected an exemption from all Custom duty levies including IGST and Cess.
- To remove the ambiguity and to provide relief, High Court of Gujarat had withdrawn the Pre-Import condition mentioned in Para 4.14 of FTP 2015-20 in public interest.
- Aggrieved, with the High Court Judgement, an Appeal was preferred by the Revenue against the same with the Supreme Court.
- The Supreme Court upheld the contentions of the Revenue and an order was passed to set aside the judgement of the Gujarat High court.
- Meanwhile the said condition of Pre-Import was removed vide Notification 01/2019 dated 10.01.2019.
- As a result of this Judgement, exporters who were importing goods in contravention of the Pre-import condition would now be required to forego the exemption and pay IGST and Cess (wherever applicable). As the final goods were exported, these persons were eligible for availing Input tax credit (ITC) of these paid taxes and they were also eligible to claim refund thereof if the same is paid against the goods that were eventually exported. In view of this, the Supreme Court directed the government to issue a circular clarifying these issues.
2. Procedure prescribed by the circular to Re-avail Input Tax Credit
- As per this judgement, Importer is required to pay IGST and Compensation Cess (wherever applicable) on the relevant import of goods to the extent it did not fulfill meet the said pre-import condition at the relevant time.
- The Importer will have to approach the concerned assessment group at Port of Import (POI) with relevant details of each Bill of Entry for the purpose of payment of IGST and Cess along with applicable Interest.
- The Assessment group at POI shall cancel the Out of Charge (OoC) granted on these BEs earlier and indicate reason in remark. The Bill of Entry (BE) shall be assessed again so as to charge IGST and Cess in accordance with the said Judgement to the extent the IGST saved imports do not meet the said pre-import condition
- The payment of IGST and Cess along with Interest shall be made against the Electronic Challan generated on Customs EDI System.
- On Completion of the above payment, POI shall make a notional OoC for the BE on the Customs EDI System so that the information can be transmitted to GSTN indicating the amount and date of payment.
- The procedure specified above can be applied to a Bill of Entry only once.
- Once the BE is assessed the ITC will be available subject to conditions and eligibility for taking ITC under Section 16,17 and 18 of the CGST Act 2017 and rules made there under.
3. Procedure prescribed by the circular to avail Refund.
This Circular provides that ITC utilized for payment of IGST on outward zero-rated supplies (such as Export with or without Payment of Tax or Supply to SEZ unit/Developers.) then the benefit of refund of such IGST and Cess paid shall be made available to the registered person as per the provision of IGST and CGST Act, 2017 and the rules made there under, subject to condition and restrictions under the law.
4. Questions that remain unanswered in this circular
Q.1 Whether the Advance Authorisation License issued prior to 13.10.2017 would come under the purview of this SC judgement?
A.1 As per circular No.16/2023-Cus dated 07.06.2023.there is no specific exclusion mentioned for AAs issued prior to 13.10.2017. However, the demand of IGST and cess do not pertain to AA, but are based on non-compliance of the conditions prescribed in FTP, hence if AA issued prior to 13.10.2017 is utilized post 13.10.2017 and pre-import condition is not fulfilled, then one will have to pay IGST and Cess irrespective of the date of AA licenses.
Q.2 Whether Circular is justified in saying interest would be payable along with IGST and Cess, what would be the consequence if one chooses to pay tax but not the interest?
A.2 Circular is very clear in saying that the importers will have to approach the concerned POI, get the BE reassessed and pay the IGST and Cess along with interest. There have been various instances in the past wherein ‘Doctrine of Revenue Neutrality’ has played a major role in deciding whether imposing Interest and/or Penalty is appropriate or not when there is no loss of actual revenue to the state. One of such instances had been examined in the case of Formica India Division 2002 -TIOL-620-SC-CX wherein the Supreme Court said “the matter to the Collector of Central Excise with a direction to permit the appellants to comply at this stage with the requirements of Rule 56A of the Central Excise Rules and claim set off of the duty payable on the intermediary product by satisfying the Collector that the same was used in the manufacture of the end product on which full duty had already been paid. On such satisfaction being recorded, the appropriate consequential orders would be passed.” Even though revenue neutrality is not specifically mentioned in this judgment, the underlying principle is the same.
Similar view on revenue neutrality has been taken in many other cases including that of Jet Airways, British Airways, and Jain Irrigation etc. Courts have also gone to the extent of dropping demand of tax also based on this doctrine. Therefore, the Revenue should have considered the concept of Revenue Neutrality and foregone the implication of Interest to provide relief to the Importers.
In our humble view, they could have asked the exporters to demonstrate that there was no loss of revenue to the government and sought interest only to the extent of actual revenue lost or sought interest on for the time period between importation and actual exportation of those goods as that was the only period till when the Government had lost revenue.
In case any person chooses to pay tax and not interest, based on this circular, officials at the POI will not reassess the BEs and consequently the data would not be transmitted to the GSTN and ITC would not be reflected in GSTR 2B which would mean the person would not be eligible to avail ITC and refund thereof.
Q.3 Can a person choose to pay the taxes as regular payment and interest under protest?
A.3 There is no clarity on this aspect as well, but going by past experience, once can choose to pay the tax under regular Challan and interest can be paid under protest and choose to litigate the interest portion with the department, however officials at the POI may not consider this as compliance of the circular and can deny reassessment of the BEs.
Q.4 Is the taxpayer eligible to avail ITC or will the same be ineligible because the import of goods and BE are beyond the time-limit prescribed in section 16(4) of the CGST Act.
A.4 Circular says that ITC with respect to such assessed BE shall be enabled to be available subject to the eligibility and conditions for taking input tax credit under Section 16, Section 17 and Section 18 of the CGST Act, 2017 and rules made there under. Section 16 (4) provides that a person will not be entitled to take ITC in respect of any invoice or debit note for supply of goods after 30th November following the end of financial year to which such invoice or debit note pertains. Circular could have been more specific in clarifying this issue so that any misinterpretation at the end of department or trade would have been avoided. In our view, condition of time limit will not be violated on two counts:
a. Tax will be paid now and BE will be reassessed in current date as per the procedure and therefore data of the tax paid will be transmitted now.
b. Section 16 (4) does not prescribe any time limit for ITC availed basis Bill of Entry.
Q.5 What would be the status of Penalty and fines imposed in cases where department has issued SCN and even Order against the Importers prior to this Judgement and circular?
A.5 Circular has not provided any clarification on how the adjudication of the ongoing litigation will take place after the judgement. The Circular has merely clarified the procedural issues and said that Importer needs to pay IGST and Cess along with Interest and can claim credit/refund as the case may be but the Circular has not provided any clarity on the aspect of ongoing litigation and penalty proceedings. In our humble view, penalties cannot be levied in cases where interpretational issues are involved. This is a classic case which has travelled up to the Supreme Court merely on interpretational differences.
Q.6 Whether the BEs can be partly reassessed where the taxpayer is able to prove that Pre-import condition was fulfilled for some quantity and was not met for some?
A.6 Advance Authorization licenses are issued based on quantity for a particular product. The importer then chooses to avail the benefit of AA in some BEs and not in some. Further, it may happen that the part quantity of raw material imported in a particular BE availing the exemption, is used for manufacture of final goods, which are then exported and some part is not so used before the exportation happened. So, the question arises, can the officials at the POI reassess the BE to the extent where pre-import condition was violated or they will he have to reassess the entire BE as one.
Circular has tried to clarify this issue, but it is done in a half-hearted manner. In Para 3, the circular says that relevant imports that do not meet the said pre-import condition requirements are to pay IGST and Compensation Cess to that extent. Further, in Para 5.2 circular reads as under:
5.2 Keeping above aspects in view, noting that the order of the Hon’ble Court shall have bearing on importers others than the respondents, and for purpose of carrying forward the Hon’ble Court’s directions, the following procedure can be adopted at the port of import (POI): –
(a) for the relevant imports that could not meet the said pre-import condition and are hence required to pay IGST and Compensation Cess to that extent, the importer (not limited to the respondents) may approach the concerned assessment group at the POI with relevant details for purposes of payment of the tax and cess along with applicable interest.
(b) the assessment group at POI shall cancel the OOC and indicate the reason in remarks. The BE shall be assessed again so as to charge the tax and cess, in accordance with the above judgment.
Even though the circular has not clarified this issue fully, it clearly mentions that one is required to pay IGST and Cess only to the extent the relevant imports that do not meet the pre-import condition, therefore, POIs should reassess BEs accordingly.
Q.7 What happens to the Refund claims after the importers have paid the IGST Cess along with Interest? Once the tax/cess has been paid with interest in the manner prescribed vide the said Circular, can the bar placed with effect from 09-10-2018, under the CGST Rule 96(10), against refund of the tax paid on zero-rated outward supplies shall have no effect, force and virtue against such refunds already obtained?
A.7 The Circular has not mentioned any prescribed procedure for claiming Refund of IGST utilized at the time of payment of IGST on outward zero-rated supplies. The Circular has only mentioned that the refund shall be granted as per the provision of the CGST Act and rules made there under. This creates ambiguity for the taxpayer, as in the majority of the cases the importer shall utilize this ITC towards outward zero-rated supplies. In our view, a refund already obtained, post payment of tax with interest, eligible to these exporters under the provisions of GST law, as if the import IGST was paid ab initio.
5. Conclusion
As discussed above, this judgement has answered many questions, but the circular has left many unanswered questions which can lead to litigation at multiple levels. It is the duty of the government to make the law simple for the taxpayers so that it does not become taxing for the taxpayers. Exporters need to have peace of mind to do their business and such issues generate protracted litigation which then involves huge stakes for them.
In our view, Export Councils and trade associations must represent these issues with the government to seek clarifications at the earliest so as to avoid another round of litigation. If these representations do not lead to any outcomes, they should approach the Supreme Court once again to provide clarity at the earliest.
Reviewed by Mr Subhash Modi – a leading expert on Customs Law
| Authored by | Role |
|---|---|
 Nitesh Jain |
Chartered Accountant |
 Rishabh Jain |
Article Assistant |
Author Bio
