Union of India and Ors. vs Cosmo Films Limited

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 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 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 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 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]

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 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]

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.