IGST Refunds with Benefits under Advance Authorization –Important Observations

Background

1. Notification No. 18/2015 – Customs dt. 01.04.2015 as amended by Notification No. 79/2017 dt. 13.10.2017 issued in exercise of powers granted u/s 25 of the Customs Act, 1962 grants exemption w.e.f. 13.10.2017 from the payment of IGST on goods imported into India against a valid Advance Authorisation issued by the Regional Authority in terms of paragraph 4.03 of the FTP.

2. Now Rule 96(10) of the CGST Rules, 2017 contains the provisions which restrict an exporter from claiming the refund of the IGST paid on exports if the exporter avails any of the benefits of the notifications stipulated therein which includes the benefits in terms of IGST exemption on imports made under the scheme of Advance Authorisation.

3. With the above brief background, recently notices have been issued to the exporters initiating proceedings to examine the validity of the refunds claimed of the IGST paid on exports in situations where the exporters have availed the benefits of IGST exemption under Advance Authorisation.

4. In the above context, we seek to examine certain important issues emanating from the brewing controversy.

Date from which the restrictions under Rule 96(10) should apply

5. Rule 96(10) has a peculiar history. Same is tabulated as under (in the context of availment of IGST exemption on imports against advance license):

Notification Summary of the contents
Notification No. 3/2018 – Central Tax dt. 23.01.2018 The persons claiming refund of IGST paid on exports should not have received the supplies on which the supplier has availed the benefit of Notf. No. 79/2017 – Customs dt. 13.10.2017. Therefore the plain reading suggested that the restriction in claiming the refund shall apply only if the supplier has availed the benefit. Since in the case of imports under Advance Authorization the benefit of IGST exemption has been availed by the importer and not the supplier (who is located outside India), the given restriction would not apply.
Notification no. 39/2018- Central Tax dt. 04.09.2018 The language of Rule 96(10) was modified to the effect that the persons claiming refund of IGST paid on exports should not have availed the benefit under Notf. No. 79/2017 – Customs dt. 13.10.2017. Therefore the anomaly in Notf. No. 3/2018 stood corrected. Further, the said substituted language was made applicable retrospectively from 23.10.2017.
Notification No. 53/2018 – Central Tax dt. 09.10.2018 The language of Rule 96(10) was again modified to the first version wherein the restriction applied only if the supplier (who is located outside India) has availed the benefit. The same was also made applicable retrospectively from 23.10.2017.
Notification No. 54/2018 – Central Tax dt. 09.10.2018 The language of Rule 96(10) was again modified to the second version wherein under the restriction applied if the person availed the benefit under Notf. No. 79/2017 – Customs dt. 13.10.2017. Said amendment was applied only w.e.f. 09.10.2018
Notification No. 16/2020- Central Tax dt. 23.03.2020 An explanation has been inserted in Rule 96(10) w.e.f. 23.10.2017 to clarify that the restriction shall not apply if the person has only availed basic customs duty exemption and not IGST exemption. In other words, if the person has paid IGST on imports under Advance Authorization the said person can claim the refund of IGST paid on exports.

6. Now paragraph no. 1(2) of the last issued Notification (54/2018 – Central Tax dt. 09.10.2018) which replaced the earlier erroneously drafted notification in the context of Rule 96(10) reads as follows:

“They shall come into force on the date of their publication in the Official Gazette.”

7. Therefore the restrictions under Rule 96(10) as envisaged under Notification No. 54/2018 – Central Tax dt. 09.10.2018 only came into force from the date of the publication of the said notification (i.e. 09.10.2018). Therefore the restrictions under Rule 96(10) cannot apply to the period prior to 09.10.2018.

8. Further, it is a cardinal principle of law that the construction of every statute shall be prospective unless it is expressly or by necessary implication made to have retrospective operation (Keshvan v. State of Bombay AIR 1951 SC 128). In the present context Notification No. 53/2018 – Central Tax dt. 09.10.2018 which preceded the Notification No. 54/2018 – Central Tax dt. 09.10.2018 provided for the retrospective operation of the restriction under Rule 96(10). However the issuance of Notification No. 54/2018 – Central Tax dt. 09.10.2018 on the same day by replacing the earlier notification and expressly providing that it shall come into force on the date of their publication in the Official Gazette leads to an unmistakable conclusion that the restrictions under Rule 96(10) cannot apply to the period before 09.10.2018.

9. We also submit that even the CBIC Circular No. 125/44/2019 – GST dt. 18.11.2019 clarifies in this regard at paragraph no. 52 as under:

“Restrictions imposed by sub-rule (10) of rule 96 of the CGST Rules 52. The net effect of these changes is that any exporter who himself/herself imported any inputs/capital goods in terms of notification Nos. 78/2017-Customs and 79/2017-Customs both dated 13.10.2017, before the issuance of the notification No. 54/2018 – Central Tax dated 09.10.2018, shall be eligible to claim refund of the Integrated tax paid on exports. Further, exporters who have imported inputs in terms of notification Nos. 78/2017-Customs dated 13.10.2017, after the issuance of notification No. 54/2018 – Central Tax dated 09.10.2018, would not be eligible to claim refund of Integrated tax paid on exports.”

10. Therefore in our view, the restrictions under Rule 96(10) can apply only on and after 09.10.2018.

11. We are also privy to the fact that Hon’ble Gujarat High Court in the case of Cosmo Films Ltd. v. UOI (SCA No. 15833 of 2018) has held that Rule 96(10) as substituted w.e.f. 09.10.2018 shall apply retrospectively from 23.10.2017. We humbly submit that the decision on the said aspect is against the express language of the notification as well as the CBIC clarification which seeks to apply the rule only from the date of its publication (i.e. only from 09.10.2018). Further the said decision has also been admitted for review. We hence are of the view that the said restrictions can apply only on and after 09.10.2018.

Validity of the restriction and the issue of double benefits

12. Sec. 16(3) of the IGST Act, 2017 grants two options to the exporters to seek the refund of the accumulated ITC viz. (a) making zero-rated supplies without payment of IGST under LUT and claiming refund of the accumulated ITC or (b) making the zero-rated supplies with payment of IGST (by utilizing the accumulated ITC) and claiming refund of the IGST so paid.

13. Now Rule 96(10) has been purported to have been issued in exercise of the powers conferred by Sec. 164 of the CGST Act, 2017. Said Sec. 164 enables the Government to formulate the Rules for carrying out the provisions of the Act. Hence one needs to examine whether the provisions of the Act (Sec. 16(3) of the IGST Act, 2017 in the present context) permits the Government to restrict the “with payment” route for claiming the refunds. If the answer is negative, then the restrictions under Rule 96(10) will not be valid.

14. One needs to also consider the rationale for introducing the said restriction. Circular No. 45/19/2018-GST dt. 30.05.2018 explains the rationale as follows:

“7.1 Sub-rule (10) of rule 96 of the CGST Rules seeks to prevent an exporter, who is receiving goods from suppliers availing the benefit of certain specified notifications under which they supply goods without payment of tax or at reduced rate of tax, from exporting goods under payment of integrated tax. This is to ensure that the exporter does not utilise the input tax credit availed on other domestic supplies received for making the payment of integrated tax on export of goods.”

15. In the above context, we draw reference to a similar dispute in the pre-GST era in the case decided by Hon’ble Gujarat High Court of Zenith Spinners v. UOI 2015 (326) E.L.T. 97 (Guj.) as affirmed by the Hon’ble Supreme Court reported in 2015 (326) ELT 23 (Supreme Court). In the said case the petitioner was procuring duty-free inputs, i.e., 100% Viscose Staple Fibre under Notification No. 43/2001-C.E. (N.T.), dated 26th June, 2001 after following the procedure prescribed under the Central Excise (Removal of Goods at Concessional Rate of Duty for Manufacture of Excisable Goods) Rules, 2001. Then Notification No. 10/2004-C.E. (N.T.), dated 3-6-2004 came to be issued inserting Explanation II under Rule 19 of the Central Excise Rules, 2002 to the effect that goods manufactured or processed using the excisable goods procured without payment of duty must necessarily be exported under bond without payment of duty. In other words, such manufacturers were debarred from exporting the goods with payment of duty and claiming the rebate thereof. The petitioner challenged the validity of the said notification before the Hon’ble Court.

16. Hon’ble Gujarat High Court allowed the petition on four grounds viz.:

a. Provisions related to claiming the rebate of the duty paid on exports of excisable goods under Rule 18 and the provisions related to undertaking the exports under Rule 19 without payment of duty under bond operate in separate fields. Therefore the insistence of the authorities to the petitioner to compulsorily opt for Rule 19 is not borne out by the provisions of the Rules.

b. As per the provisions of Rule 19 since it contains the phrase “Any excisable goods may be exported” and “Any material may be removed”, an option has been granted to the exporter to export the goods with or without payment of duty. It is a settled position that by virtue of the exercise of powers of issuing a notification which is for the purposes of imposing conditions, safeguards and procedure the authority cannot exceed the jurisdiction by providing for a situation which either restricts the rights granted under the Rule itself or make the Rule itself redundant. Therefore the notification cannot seek to restrict the right of claiming the rebate which is otherwise allowable.

c. The situation shall be revenue neutral as the rebate if not allowed will result in the claim of the refund under Rule 5 of the CENVAT Credit Rules. Therefore even on these grounds, the restrictions placed by the notification is not in accordance with law.

d. Further, nothing has been brought on record to point out as to how and in what circumstances can an exporter claim double benefit.

17. We submit that the ratio of the said decision shall be relevant in the context of Rule 96(10) also. We say so because:

a. 16(3) of the IGST Act, 2017 provides for the two options for seeking the refund of the accumulated input tax credits on account of zero-rated supply. We therefore submit that the option granted under Sec. 16(3)(a) (LUT route) and Sec. 16(3)(b) (with payment route) operate in different domains. Therefore the option excised u/s 16(3)(b) to supply goods on payment of integrated tax and to claim a refund of such tax cannot be restricted by virtue of Rule 96(10).

b. We also submit that Sec. 16(3) uses the phrase “A registered person making zero rated supply shall be eligible to claim refund under either of the following options”. Hence the provisions of the Act clearly grant an option to the exporter which includes an option to claim the refund of the IGST paid on exports. Therefore we submit that the authority cannot exceed the jurisdiction for the purposes of imposing conditions, safeguards and procedure by providing for a situation that restricts the option granted by the provisions of the Act itself so as to make it redundant.

c. The question of double benefits can come only if it can be demonstrated that the exporter has availed the refund amounts which is higher than what he is otherwise entitled to. This is so because the exporter will also be entitled to the refund of the accumulated ITC under the LUT route if he had done the concerned exports without payment of IGST. In many situations, it can be found that the exporter would have availed the refund amounts maximum of the balance available in the electronic credit ledgers under both the routes (viz. LUT or with payment). Hence in such situations, the question of double benefits may not arise.

18. One must also appreciate that the Finance Bill, 2021 proposes a prospective amendment u/s 16(3) of the IGST Act, 2017 which shall grant the power to the Government to specify the class of persons who may make exports on payment of IGST or class of goods or services which may be exported on payment of IGST. The said proposal therefore reveals that no such power exists in the current law.

19. We therefore submit that the determination of the above aspects shall be crucial for examining the restrictions under Rule 96(10).

Interest on the amendment of the bill of entry

20. Hon’ble Gujarat High Court in the case of Cosmo Films Ltd. (SCA No. 15833 of 2018) has permitted the exporters who have violated the provisions of Rule 96(10) to regularize the refunds by paying back IGST (originally claimed as exempt under Advance Authorization) along with interest. Hon’ble Court further held that the said exporter can avail the ITC of the IGST so paid. However, the interest shall be a cost. Now the question to ponder is whether interest is payable on the delayed payment of IGST or not in such a situation?

21. The IGST on imports is collected u/s 3(7) of the Customs Tariff Act, 1975. Now Sec. 28AA of the Customs Act, 1962 allows for the imposition of interest on the delayed payment of “duty”. The term “duty” has been defined u/s 2(15) of the Customs Act, 1962 to mean a duty of customs leviable under the said Act. Hence one needs to consider whether the IGST collected u/s 3(7) of the Customs Tariff Act, 1975 can be said to be a duty of customs leviable under the Customs Act, 1962. We may refer to the decision in the case of Jet Airways (India) Ltd. v. CC (Customs Appeal No. 54064 of 2018) wherein the Hon’ble Tribunal has held that IGST collected u/s 3(7) of the Customs Tariff Act, 1975 cannot be considered to be “duty” u/s 2(15) of the Customs Act, 1962. Therefore we submit that interest on the delayed payment of IGST cannot be imposed u/s 28AA of the Customs Act, 1962 on the amendment of the bill of entry by forgoing the IGST exemption.

22. The above discussion also leads us to a question as to whether interest on the IGST paid belatedly on imports can be levied u/s 50(1) of the CGST Act, 2017 as made applicable to the provisions of the IGST Act, 2017. Now it is interesting to note that the mechanism to recover the interest u/s 50(1) of the CGST Act, 2017 are contained u/s 73 and 74 of the said Act. Therefore it can be contended that unless the said proceedings are initiated, interest cannot be recovered on the belated payment of the IGST on imports.

23. We hence conclude by stating that the exporters must duly consider the above discussions while examining the applicability of Rule 96(10) to their business.

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