Avaada Sunrays Energy Private Limited 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 review of existing licenses and taking "follow-up" action, as well as the consequential Show Cause Notices (SCNs) issued to the petitioners. In W.P.(C) 10838/2022, the impugned order dated 19 July 2022 cancelling the petitioner's license was also quashed. W.P.(C) 12386/2022, pertaining to a provisional duty bond, was disposed of in line with previous interim orders. The Court left it open to the respondents to proceed further in accordance with law.

2. Core Issue
The core issues before the Court were:
a. The validity of CBIC Instruction No. 13/2022-Customs dated 09 July 2022, concerning the inapplicability of the Manufacture and other Operations in Warehouse (No.2) Regulations, 2019 (MOOWR Regulations) to solar power generating units using imported capital goods.
b. Whether solar power generation qualifies as "manufacture or other operations" permissible under Section 65 of the Customs Act, 1962, thus allowing duty deferment on imported capital goods (solar panels/modules) under the MOOWR scheme.
c. The legality of the consequential SCNs proposing cancellation of MOOWR licenses for solar power generation units.

3. Key Facts
* The petitioners are solar power generating units that had entered into Power Purchase Agreements (PPAs) for electricity supply.
* They obtained licenses under the MOOWR Regulations, 2019 (referable to Sections 58 and 65 of the Customs Act, 1962) to operate private bonded warehouses and undertake manufacturing/other operations.
* In their applications, the petitioners explicitly declared their intent to import capital goods (solar panels, PV modules, inverters) to set up solar power plants and generate electrical energy.
* The MOOWR scheme allows duty deferment on imported capital goods and inputs used in manufacturing within a customs bonded warehouse.
* Prior to April 1, 2022, Basic Customs Duty (BCD) on solar cells and modules was nil, though safeguard duties were applicable during 2018-2021. BCD of 25%/40% was imposed on solar cells/modules from April 1, 2022.
* CBIC issued Instruction No. 13/2022-Customs on July 09, 2022, asserting that solar power generation falls outside the scope of MOOWR Regulations. The instruction reasoned that resultant electricity cannot comply with physical requirements like affixing a "one-time-lock" for removal (Regulation 15) and cannot be warehoused. It directed immediate review and "necessary follow-up action" (i.e., cancellation) of existing licenses and prohibited new permissions.
* Following the instruction, SCNs were issued to petitioners for license cancellation, and in one case, a license was actually cancelled.

4. Arguments (Taxpayer vs Revenue)

• Taxpayer (Petitioners - ACME, AVAADA, Jakson Power):

  • Invalidity of Instruction: The grant/cancellation of a license under Sections 58/65/58B is a quasi-judicial function. The impugned instruction dictates the outcome (cancellation/refusal) and interferes with the independent discretion of Customs officers, thus violating the proviso to Section 151A of the Customs Act and settled legal principles that quasi-judicial authorities cannot be controlled by executive directives.
  • Applicability of MOOWR: Section 65 permits "any manufacturing process or other operations in relation to such goods." This phrase is broad and not restrictive to tangible goods or processes where imported capital goods are consumed or transformed into the final product. "In relation to" signifies a connection or association, which is met as solar panels are used to generate electricity. Section 61(1)(a) specifically allows capital goods to be warehoused indefinitely until clearance, without a consumption requirement. The inapplicability of input-output norms or one-time locks for electricity is merely a practical aspect for some goods, not a basis to exclude solar power generation from the entire scheme.
  • Contemporaneous Interpretation: CBIC's own previous FAQs, Circulars (e.g., 01 October 2019), and promotional material on the "Invest India" portal unequivocally represented that MOOWR benefits extended to imported capital goods with duty deferment "without any time limitation" and that duty on capital goods is payable only upon their clearance to the domestic market, not when the resultant goods are produced. The petitioners relied on this understanding.

• Revenue (Respondents - CBIC, Union of India):

  • Policy Imperative: The instruction was issued to address the "misuse" of the MOOWR scheme by solar power developers who circumvented BCD and GST on imported solar equipment, creating an uneven playing field for domestic manufacturers. This was contrary to the Union Government's policy of promoting domestic solar manufacturing (Make in India, Atma Nirbhar Bharat, PLI Scheme).
  • Strict Interpretation of Section 65: The phrase "in relation to such goods" implies that the warehoused goods (solar panels/cells) must themselves undergo manufacturing or operations leading to their transformation or consumption. Sunlight, which is converted, is not an "imported" or "warehoused" good. Since solar panels are merely used to generate electricity (an intangible output) and are not physically consumed or transformed, this activity falls outside Section 65.
  • MOOWR Regulations' Conditions: Regulation 15 (for export removal) requires affixing a "one-time-lock" to the means of transport, which is impossible for electricity. The proviso to Regulation 14 also refers to "warehoused goods contained in so much of the resultant goods," implying physical presence of imported goods in the output. Regulation 20, providing for exemptions, was not utilized for electricity, reinforcing its non-applicability.
  • Purposive Interpretation: The Court should adopt a purposive interpretation to prevent unintended benefits and align the scheme with the broader policy objectives of incentivizing domestic manufacturing.

5. Court’s Reasoning

• Invalidity of the Instruction: The Court held that the CBIC Instruction violated the proviso to Section 151A of the Customs Act. The instruction’s peremptory direction in paragraph 5, dictating that all existing permissions for solar generation units were contrary to law and requiring their immediate review and "follow-up action" (implying cancellation), directly interfered with the quasi-judicial discretion vested in the Customs officers to individually assess licenses under Section 58B. This amounts to "acting under dictation" and foreclosing independent judgment, which is impermissible in administrative law. The issuance of SCNs based on this instruction further confirmed its binding and pre-decisional nature.
• Interpretation of Sections 61 & 65:
  • The Court found no explicit or implied statutory exclusion of solar power generation from the ambit of Sections 61 and 65.
  • Post-2016 amendments to Section 61, capital goods (unlike other goods) can remain warehoused indefinitely until their clearance, indicating a legislative intent for their long-term use in operations.
  • The phrase "any manufacturing process or other operations in relation to such goods" in Section 65 is broad. "Other operations" expands the scope beyond traditional manufacturing. "In relation to" signifies a "causal link," "connection," "association," or "concern" with the imported goods, not necessarily their consumption or transformation. Capital goods like solar panels are "concerned with" electricity generation.
  • The argument that input-output norms (Regulation 14) and "one-time-lock" requirements (Regulation 15) are definitive exclusions for electricity is misplaced. These are practical provisions for tangible goods that are consumed or physically removed, not conditions defining the scope of manufacturing activities for all types of goods or capital goods.
• Contemporaneous Material: The Court emphasized that CBIC's own Circular (01 October 2019), FAQs, and promotional material on the "Invest India" portal consistently projected the MOOWR scheme as allowing duty deferment on both raw materials and capital goods without time limitation. This material explicitly stated that duty on capital goods would be paid only upon their clearance to the domestic market, and would not be incorporated into the finished goods, directly contradicting the Revenue's current interpretation.
• Purposive Interpretation & Policy: While acknowledging the Union's policy objectives (e.g., Make in India, promoting domestic solar manufacturing), the Court held that judicial interpretation must adhere to the plain, unambiguous language of the statute, especially in taxing statutes. The statutory language of Sections 61 and 65 did not present any ambiguity, absurdity, or inconsistency that would justify departing from its literal meaning. Policy considerations, however laudable, cannot be a basis for the Court to introduce new conditions or exclusions into the statute, as that would amount to judicial legislation. The onus is on the legislature to amend the law if it believes certain activities should be excluded or regulated differently.

6. Statutory References
* Customs Act, 1962: Sections 2(43), 2(44), 12(1), 15, 46, 47, 48, 57, 58, 58A, 58B, 59, 60, 61 (and its pre/post-2016 amendments), 65, 65A (not enforced), 68, 69, 143AA, 151A (and its proviso).
* Customs Tariff Act, 1975: Section 3(7), 3(9), Section 8B, First Schedule (CTH 8541 42 00, 8541 43 00, 9801).
* Manufacture and other Operations in Warehouse (No.2) Regulations, 2019: Regulations 3, 4, 5, 6, 10, 11, 13, 14 (and its proviso), 15, 20.
* Central Excise Act, 1944: Section 3 (Explanation 2(ii)), Section 35, Section 37B.
* Central Goods and Services Tax Act, 2017: Section 2(19), 2(59), 7, 9.
* Integrated Goods and Services Tax Act, 2017: Section 5.
* Private Warehouse Licensing Regulations, 2016.
* Warehoused Goods (Removal) Regulations, 2016.
* Customs (Provisional Duty Assessment) Regulations, 2011.

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
* Suresh Kumar v. State of Uttar Pradesh & Ors (Writ (A) No. 27260/2018)
* Dharambeer Singh Vs. State of U.P. and Ors. 2004 (4) ESC 2838 (Alld.)
* Alok Kumar Pandey Vs. State of U.P. and Ors. (Writ Petition No. 29107 of 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. 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)
* 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
* 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