In the pre-GST period, the advance authorization license allowed an exporter to import raw materials used for manufacturing exported goods without payment of taxes on import of raw material used for past exports.
Subsequently, the scheme was amended to allow exemption from IGST as well as compensation cess by issuing Notification No.79/2017-Cus dated 13.10.2017. For availing such exemption, a pre-import condition was introduced and also, the export obligation was required to be fulfilled only by physical exports. Similar changes were made in the Foreign Trade Policy (FTP) by way of issuing Notification No. 33/2015-2020 dated 13.10.2017 whereby the “pre-import condition” was incorporated in paragraph 4.14 with effect from 13.10.2017 as well.
Subsequently, Directorate of Revenue Intelligence (DRI) commenced investigations on various persons availing exemption under advance license as to whether the pre-import conditions are fulfilled or not. The petitioner challenged the pre-import condition in the Gujarat High Court (HC).
Petitioner & DRI Contention:
Petitioner contended that there is no definition or clarification about the meaning of “pre-import condition”; but the DRI officers conducting the inquiry and investigation, hold a view that “pre-import condition” would mean 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 Authorisation were used in relation to manufacture of finished goods exported for fulfillment of Export Obligation of that particular Authorisation that the “pre-import condition” was satisfied, and accordingly, exemption was admissible to the goods imported against such Authorisation.
Further, exporters argued in the petition that the “pre-import condition” introduced post-GST violates Article 14 of the Constitution which relates to equality before the law “to the extent that it creates an artificial discrimination between exporters who proactively fulfil their export obligations prior to import of goods
High Court’s decision:
The “pre-import condition” contained in paragraph 4.14 of the Foreign Trade Policy, 2015-2020 inserted vide Notification No.33/2015-2020 dated 13.10.2017 and inserted vide clause (xii) in Notification No.18/2015-Cus vide Notification No.79/2017-Cus dated 13.10.2017, are hereby struck down as being ultra vires the Advance Authorisation Scheme as contained in the Foreign Trade Policy, 2015-2020 as well as the provisions of the Handbook of Procedures.
The key observations of HC are as follows:
1. Export in anticipation of advance authorisation in accordance with para 4.27 of the Handbook of Procedures and the pre-import condition in accordance with para 4.14 of the FTP and pre-import condition in customs notification no.79/2017-Cus dated 13.10.2017 cannot stand together.
2. Even if the interpretation of condition of physical exports and pre-import condition by DRI is considered, it becomes more or less impossible to make exports under advance authorisation without violating the condition of pre-import due to the business cycle of an exporter, and the benefit of exemption from levy of IGST and compensation cess becomes more or less illusory.
3. The pre-import condition as mentioned in the customs Notification No.79/2017-Cus dated 13.10.2017 and para 4.14 of the FTP does not meet the test of reasonableness, and are also not in consonance with the scheme of advance authorisation.
4. The pre-import condition does not have any nexus to the objective of encouraging exports for which Advance Authorisation Scheme was constituted.
5. The HC disagreed with the view taken by Madurai bench of the Madras HC on the same issue in Vedanta Limited v. Union of India.
The pre-import condition in practical term denied benefits to exporters who import input goods after their finished products are exported which was causing enormous hardships to exporters. This ruling brings major relief for such exporters. Further, industry would expect the Government not to litigate the issue further in the Supreme Court.