Acme Dhaulpur Powertech Private ... vs Central Board Of Indirect Taxes And ... on 6 May, 2024

Outcome**
The Delhi High Court allowed the writ petitions, quashing the Central Board of Indirect Taxes and Customs (CBIC) Instruction dated 09 July 2022 insofar as it mandated the review and "follow-up action" on existing licenses. Consequently, all Show Cause Notices (SCNs) issued to the petitioners based on this instruction were quashed. An order dated 19 July 2022 cancelling a petitioner's license was also quashed. The Court affirmed that it is open for the respondents to proceed further in accordance with law, but not by enforcing the impugned instruction or its underlying rationale.

2. Core Issue
The core issue was the validity of the CBIC Instruction dated 09 July 2022, which declared that the Manufacture and other Operations in Warehouse (No.2) Regulations, 2019 (MOOWR Regulations) framed under Section 65 of the Customs Act, 1962 (the Act), were inapplicable to solar power generating units using imported capital goods (like solar panels and cells) to produce electricity for home consumption. The petitioners also challenged the SCNs and cancellation orders issued in purported implementation of this instruction. A larger question regarding the scope and ambit of Sections 61 and 65 of the Act and the MOOWR Regulations for solar power generation was also addressed by the Court.

3. Key Facts
* MOOWR Regulations (01 October 2019): Introduced duty deferment on imported capital goods and inputs used in manufacturing/operations within customs bonded warehouses (Section 65 of the Act).
* Petitioners' Operations: Solar power generating units (e.g., Acme Heergarh Powertech) imported solar panels/modules as capital goods and applied for licenses under Sections 58 and 65 of the Act to establish bonded warehouses for electricity generation. They transparently declared "electrical energy" as the final product in their applications.
* Prior Policy/Guidance:
* Up to FY 2019-20, import of solar cells/modules was duty-free (Nil BCD). Safeguard duties were imposed from 2018-2021.
* CBIC FAQs and a Circular (01 October 2019) explained MOOWR benefits, explicitly stating that both Basic Customs Duty (BCD) and Integrated Goods and Service Tax (IGST) on imported capital goods would be deferred without any time limitation until they are cleared from the warehouse for home consumption, and that duty on capital goods would not be incorporated into finished goods. The "Invest India" portal also promoted these benefits without exclusions for electricity generation.
* 2016 Amendments to Section 61: Removed the specific time limit (previously five years) for capital goods to remain in a warehouse when used for operations under Section 65, allowing them to remain till their clearance.
* Impugned Instruction (09 July 2022): Issued by CBIC under Section 151A of the Act.
* Rationale: Argued that electricity (the resultant good) cannot comply with Regulation 15's requirement of affixing a "one-time-lock to the load compartment of the means of transport" for export, nor can it be "deposited in a warehouse." Also noted that no exemption was provided under Regulation 20.
* Directive: Concluded that permissions granted to solar power generating units were "not in accordance with the MOOWR 2019 provisions or principles" and directed an "immediate review" of existing permissions and "necessary follow up action," prohibiting further permissions.
* Consequential Actions: SCNs were issued to petitioners for license cancellation, and in at least one case (Avaada MH Sustainable Pvt Ltd), a license was cancelled.

4. Arguments (Taxpayer vs Revenue)

Taxpayer (Petitioners - ACME, AVAADA, Jakson Power):
* Validity of Instruction:
* Grant/cancellation of a license under Sections 58/65 is a quasi-judicial function requiring independent application of mind, inquiry, and adherence to natural justice.
* The impugned Instruction, by pre-determining the inapplicability of MOOWR to solar power and mandating review/cancellation of existing licenses, acts as a dictation to quasi-judicial authorities, violating the proviso to Section 151A of the Act.
* Section 151A allows broad policy directives for uniformity, not specific assessments or interference with discretion.
* Merits (Interpretation of Sections 61 & 65 and MOOWR):
* Section 65 uses "any warehoused goods" and "any manufacturing process or other operations," making no distinction between tangible/intangible products or industries.
* Section 61(1)(a) (post-2016 amendment) allows capital goods to remain in a warehouse indefinitely until clearance, without being consumed or having an input-output ratio.
* The phrase "in relation to such goods" in Section 65 has a wide, comprehensive meaning ("connection with," "association with," "pertaining to"), covering direct and indirect participation of capital goods in manufacturing/operations. It does not mean the capital goods themselves must be transformed or consumed.
* The MOOWR Regulations' provisions for input-output norms (Regulation 14) are for consumables, not capital goods, and their inapplicability to electricity generation is not a legislative oversight.
* Petitioners' imports largely occurred when BCD on solar components was Nil, refuting allegations of duty circumvention.
* The CBIC's own FAQs, Circular (2019), and "Invest India" portal unequivocally supported the eligibility of capital goods for duty deferment without time limits for any manufacturing operation, without excluding electricity generation.

Revenue (Central Board of Indirect Taxes and Customs & Anr.):
* Policy Context:
* The Instruction was issued in light of the Union Government's policy to promote domestic manufacturing of solar cells/modules (Make in India, Atma Nirbhar Bharat) and achieve renewable energy targets.
* MNRE reports indicated "misuse" of MOOWR by solar developers to avoid BCD (imposed from 01 April 2022) and GST (electricity being GST exempt), creating an uneven playing field for domestic manufacturers. Subsequent policy changes (e.g., removal of solar projects from Project Import benefits) reinforced this intent.
* Interpretation of Sections 61 & 65 and MOOWR:
* Section 65 implies that the "warehoused goods" themselves must undergo a manufacturing process or other operations. Solar panels merely convert sunlight (which is not an "imported good" or "warehoused good") into electricity; they are not themselves manufactured or altered.
* The phrase "in relation to such goods" must be interpreted contextually and narrowly to mean the goods themselves are processed, rather than broadly to include mere use of capital goods.
* Regulation 15's requirement of a "one-time-lock" for export implies the resultant goods must be physical and transportable, which electricity is not.
* Electricity is not ordinarily capable of being deposited in a warehouse, violating the fundamental premise of warehousing.
* Regulation 14 (home consumption) refers to "warehoused goods contained in so much of the resultant goods," which applies only when imported inputs become part of the final product, not when capital goods are merely used.
* The broad benefits granted by the petitioners distort the "level playing field" for domestic manufacturers.
* Purposive Interpretation: The Court should interpret the provisions purposively to align with the larger policy objective of promoting domestic manufacturing and preventing unintended consequences like duty avoidance.

5. Court’s Reasoning
The Court addressed the arguments in two main parts: the validity of the impugned instruction and the substantive interpretation of the statutory provisions.

• Validity of the Impugned Instruction:

  • The Court found that the Instruction, particularly Paragraph 5, overstepped the powers conferred upon the Board by Section 151A of the Act. Section 151A allows the Board to issue general instructions for uniformity but expressly prohibits directives requiring officers to make a "particular assessment or to dispose of a particular case in a particular manner" or interfering with their discretion.
  • By declaring that all existing permissions to solar power generating units under Section 65/MOOWR are "not in accordance with law" and directing "immediate review" and "necessary follow up action" (which was understood by the officers as cancellation, as evidenced by the SCNs), the Instruction usurped the quasi-judicial discretion of the licensing authorities.
  • The petitioners had transparently disclosed their intent to generate electricity using imported capital goods. The decision to grant or cancel a license under Section 58B is a quasi-judicial function that requires independent examination by the proper officer, not pre-determination by a superior authority.
  • Citing various precedents (Orient Paper Mills Ltd., Faridabad Iron & Steel Traders Association, Varsha Plastics Pvt. Ltd., Anirudhsinhji Karansinhji Jadeja, Bullion and Jewellers Association), the Court reiterated that statutory authorities vested with discretion must exercise it independently, not under dictation from others.

• Interplay between Sections 61 and 65 of the Act and MOOWR Regulations:

  • Section 61 Amendments: The 2016 amendments to Section 61(1)(a) explicitly removed the time limit for capital goods used in operations permitted under Section 65, allowing them to remain in a warehouse "till their clearance." This was a significant legislative change, indicating an intent for indefinite deferral for capital goods.
  • Scope of Section 65: Section 65 uses broad terms like "any warehoused goods" and "any manufacturing process or other operations." It does not explicitly exclude any specific industry, type of goods, or the generation of intangible products like electricity.
  • "in relation to such goods": The Court held that this phrase should be interpreted broadly, as affirmed by Supreme Court precedents (Doypack Systems, Mansukhlal Dhanraj Jain). It signifies a "causal link," "connection with," "association with," or "pertaining to" the imported goods and the manufacturing process. It does not mandate that the capital goods themselves must undergo transformation or be consumed in the resultant product. Capital goods are durable and typically contribute to manufacturing without being consumed.
  • Input-Output Norms: The Court clarified that while MOOWR (and Section 65(2)) contains provisions for input-output ratios, these are primarily relevant for raw materials or inputs that get consumed in the resultant product. Their inapplicability to capital goods (which are not consumed) or electricity generation does not render the activity ineligible, as capital goods manufacturing processes often do not involve the capital goods themselves becoming part of the end product (e.g., machinery for textiles).
  • Contemporaneous Interpretation: The CBIC's own FAQs, Circular of 01 October 2019, and promotional material on the "Invest India" portal consistently stated that capital goods could be imported under MOOWR without upfront duty, with deferment without time limitation, and that duty on capital goods would be paid only on their clearance to the domestic market, not incorporated in finished goods. This contemporaneous understanding supports the petitioners' interpretation.
  • Purposive Interpretation: The Court declined to apply purposive interpretation to re-interpret clear statutory language. It emphasized that courts interpret statutes as they are, and should not "reconstruct" or "amend" a provision to address perceived policy imbalances (like a "level playing field" or duty avoidance) that were not explicitly legislated, especially in taxing statutes where literal interpretation is paramount. Such changes are for the legislature.

6. Statutory References
* Customs Act, 1962:
* Section 2(43) - Definition of "warehouse"
* Section 2(44) - Definition of "warehoused goods"
* Section 12(1) - Dutiable goods (charging section)
* Section 14(1) - Valuation of imported goods
* Section 15 - Date for determination of rate of duty and tariff valuation
* Section 46 - Entry for home consumption (Bill of Entry)
* Section 47 - Clearance of goods for home consumption
* Section 48 - Procedure for goods not cleared/warehoused/transhipped
* Section 57 - Licensing of public warehouses
* Section 58 - Licensing of private warehouses
* Section 58A - Licensing of special warehouses
* Section 58B - Cancellation of licence
* Section 59 - Warehousing bond
* Section 60 - Permission for removal of goods from customs station for warehousing
* Section 61 - Period for which goods may remain warehoused (pre and post 2016 amendments)
* Section 65 - Manufacture and other operations in relation to goods in a warehouse
* Section 65A - (Not yet enforced) Goods brought for operations in warehouse to have ordinarily paid certain taxes
* Section 68 - Clearance of warehoused goods for home consumption
* Section 69 - Clearance of warehoused goods for export
* Section 143AA - Power to relax procedures
* Section 151A - Instructions to officers of customs (and its proviso)
* Section 157 - Power to make regulations
* Customs Tariff Act, 1975:
* Section 3(7), 3(9) - Integrated tax, GST compensation cess
* Section 8B - Safeguard duty
* CTH 8541 40 11, 8541 40 12, 8541 42 00, 8541 43 00 (Solar cells/modules)
* CTH 9801 (Project Imports)
* Manufacture and other Operations in Warehouse (No.2) Regulations, 2019 (MOOWR Regulations):
* Regulation 3 - Application
* Regulation 4 - Eligibility for application
* Regulation 5 - Grant of permission
* Regulation 6 - Validity of permission
* Regulation 8 - Facility requirements
* Regulation 10 - Receipt of goods from customs station
* Regulation 11 - Receipt of goods from another warehouse
* Regulation 13 - Transfer of goods from a warehouse
* Regulation 14 - Removal of resultant goods for home consumption
* Regulation 15 - Removal of resultant goods for export
* Regulation 20 - Power to exempt
* Other Acts/Regulations:
* Central Goods and Services Tax Act, 2017 (Sections 2(19), 2(59), 7, 9)
* Integrated Goods and Services Tax Act, 2017 (Section 5)
* Central Excise Act, 1944 (Section 3, 37B)
* Customs (Provisional Duty Assessment) Regulations, 2011 (Regulation 2(2), 4)
* Private Warehouse Licensing Regulations, 2016 (Regulation 3(2)(e)(i), 8)
* Warehoused Goods (Removal) Regulations, 2016
* Warehouse (Custody and Handling of Goods) Regulation, 2016
* Customs (Import of goods at Concessional Rate of Duty) Rules, 2017 (Rule 3(aa))
* Customs (Import of Goods at Concessional Rate of Duty or for Specified End Use) Rules, 2022 (Rule 3(b))
* Limitation Act (Article 136)
* Arms Act, 1959
* U.P. Basic Education (Teachers) Service Rules, 1981 (Rule 8)
* U.P. Intermediate Education Act, 1921 (Regulation 1, Chapter II)

7. Precedents Cited
* Indian National Congress (I) vs. Institute of Social Welfare & Ors (2002) 5 SCC 685
* Jaswant Sugar Mills Ltd v. Lakshmi Chand & Ors (1963) Supp 1 SCR 242
* Sukhlal vs Collector, Satna 1968 SCC OnLine MP 44
* State of U.P. v. Mohd. Nooh, AIR 1958 SC 86
* Orient Paper Mills Ltd. vs Union of India (1969) 1 SCR 245
* Faridabad Iron & Steel Traders Association vs. Union of India 2003 SCC Online Del 1300
* Genset Engineers Pvt. Limited v. Union of India 1989 (43) E.L.T. 24 (Guj.)
* Varsha Plastics Pvt. Ltd. vs. Union of India (2009) 3 SCC 365
* Anirudhsinhji Karansinhji Jadeja vs. State of Gujarat (1995) 5 SCC 302
* Commissioner of Police, Bombay vs. Gordhandas Bhanji 1952 SCR 135
* M/s. Doypack Systems Private Limited v. UOI & Ors (1988) 2 SCC 299
* State Wakf Board v. Abdul Azeez AIR 1968 Mad 79
* Nitai Charan Bagchi v. Suresh Chandra Paul 66 Cal WN 767
* Shyam Lal v. M. Shyamlal AIR 1933 All 649
* Maxopp Investment Limited v. CIT, New Delhi (2018) 15 SCC 523
* CIT v. Walfort Share and Stock Brokers (P) Ltd. (2010) 8 SCC 137
* Haji Ismail Noor Mohammad & Company v. State of Uttar Pradesh & Anr 1973 SCC Online All 3
* Dharambeer Singh Vs. State of U.P. and Ors. 2004 (4) ESC 2838 (Alld.)
* Suresh Kumar v. State of Uttar Pradesh & Ors Judgment dated 19 April 2019 in Writ (A) No. 27260/2018
* Alok Kumar Pandey Vs. State of U.P. and Ors., Writ Petition No. 29107 of 1999, decided on 19.7.1999
* Nirmal Chandra Mishra and Ors. v. State of U.P. and Ors., 1997 (1) ESC 412
* B.Ed. Berozgar Sangh, Sonnhadra and Ors Vs. State of U.P. and other, 1997 (30) ALR 737
* Mohd. Riazul Usman Gani and Ors. Vs. District and Session Judge, Nagpur and Ors. 2000 (2) ESC 956 (SC)
* Mansukhlal Dhanraj Jain v. Eknath Vithal Ogale (1995) 2 SCC 665
* Renusagar Power Co. Ltd. v. General Electric Co. (1984) 4 SCC 679
* Maruti Suzuki Limited v. Commissioner of Central Excise, Delhi (2009) 9 SCC 193
* The Bullion and Jewellers Association (Regd.) vs. UOI & Ors 2016 SCC Online Del 2437
* Union of India v. Madras Steel Re-rollers Association (2012) 278 ELT 584 (SC)
* Collector of Central Excise v. Dhiren Chemical Industries [2002] 254 ITR 554 (SC)
* Union of India & Ors vs. Karvy Stock Broking Ltd. 2015 SCC Online SC 1788
* Union of India v. Inter Continental (India) (2008) 226 ELT 16 (SC)
* Sandur Micro Circuits Ltd. v. CCE (2008) 11 RC 615
* UCO Bank v. CIT [1999] 237 ITR 889 (SC)
* Allen Diesel India P. Ltd. v. Union of India [2016] 37 GSTR166 (Delhi)
* Modi Rubber Ltd. v. Union of India (1978) 2 ELT 127 (Delhi)
* Navin Chemicals Mfg. and Trading Co. Ltd. v. Collector of Customs (1993) 4 SCC 320
* State of Karnataka v. Azad Coach Builders (P) Ltd. (2010) 9 SCC 524
* M K Ranjitsinh & Ors vs. Union of India & Ors 2024 SCC OnLine SC 570
* Raghunath Rai Bareja & Anr. vs. Punjab National Bank & Ors. (2007) 2 SCC 230
* Nasiruddin v. Sita Ram Agarwal (2003) 2 SCC 577
* E. Palanisamy v. Palanisamy (2003) 1 SCC 123
* Hiralal Ratanlal v. STO (1973) 1 SCC 216
* Swedish Match Abv. Securities and Exchange Board of India (2004) 11 SCC 641
* Prakash Nath Khanna v. CIT (2004) 9 SCC 686
* Delhi Financial Corpn. V. Rajiv Anand (2004) 11 SCC 625
* Govt. of A.P. v. Road Rollers Owners Welfare Assn. (2004) 6 SCC 210
* J.P. Bansal v. State of Rajasthan (2003) 5 SCC 134
* State of Jharkhand v. Govind Singh (2005) 10 SCC 437
* Jinia Keotin v. Kumar Sitaram Manjhi (2003) 1 SCC 730