Acme Aklera Power Technology Private ... vs Central Board Of Indirect Taxes And ... on 6 May, 2024

Here's a summary of the judgment from the perspective of a Senior GST Legal Analyst:

1. Outcome

The Delhi High Court allowed the writ petitions. It quashed the Central Board of Indirect Taxes and Customs (CBIC) Instruction dated 09 July 2022, insofar as it mandated the review and "follow-up" action (cancellation) of existing licenses for solar power generating units under the Manufacture and Other Operations in Warehouse (No.2) Regulations, 2019 (MOOWR Regulations). Consequently, all Show Cause Notices (SCNs) issued to the petitioners based on this instruction were also quashed. A specific order dated 19 July 2022 cancelling one petitioner's license was also quashed. The Court left it open to the respondents to proceed further in accordance with law, implying that legislative amendment, rather than executive instruction, would be the appropriate recourse for policy changes.

2. Core Issue

The core issue was two-fold:
a) The validity of CBIC Instruction No. 13/2022-Customs dated 09 July 2022, which declared the MOOWR Regulations, 2019 inapplicable to solar power generating units and mandated review and cancellation of existing licenses.
b) Whether solar power generation using imported capital goods (solar panels, modules, inverters) in a customs bonded warehouse qualifies as a permissible "manufacturing process or other operations in relation to such goods" under Section 65 of the Customs Act, 1962, thus entitling the units to duty deferment benefits under the MOOWR Scheme.

3. Key Facts

• Petitioners' Business: Petitioners (e.g., Acme, Avaada, Jakson Power) are solar power generating units that had entered into Power Purchase Agreements with state electricity distribution companies.
• MOOWR Scheme: The Manufacture and Other Operations in Warehouse (No.2) Regulations, 2019 (MOOWR Regulations) came into effect on 01 October 2019, providing for duty deferment on imported capital goods and inputs used in manufacturing/operations within a customs bonded warehouse under Section 65 of the Customs Act, 1962.
• License Grant: Petitioners applied for and were granted licenses for private bonded warehouses under Section 58 and permission to undertake manufacturing/other operations under Section 65 read with the MOOWR Regulations in late 2021. Their applications explicitly declared their intent to import capital goods (solar panels, modules, inverters) to generate electrical energy.
• Duty Regime: Prior to 01 April 2022, import of solar modules and cells attracted 'Nil' Basic Customs Duty (BCD), though safeguard duties were applicable during 2018-2021. BCD of 40% on solar modules and 25% on solar cells was imposed with effect from 01 April 2022.
• Impugned Instruction: CBIC issued Instruction No. 13/2022-Customs on 09 July 2022, stating that MOOWR Regulations were inapplicable to solar power generating units. The instruction cited the inability to affix a "one-time-lock" to electricity (the resultant good) as required by Regulation 15 for export, and the fact that electricity cannot be "deposited in a warehouse". It directed customs authorities to immediately review and cancel existing licenses and not grant any new ones.
• Consequential Actions: In purported implementation of the Instruction, SCNs were issued to petitioners proposing cancellation of their licenses. One petitioner's license was indeed cancelled. The High Court had granted interim relief staying coercive action.
• Policy Context: The Ministry of New and Renewable Energy (MNRE) and industry associations (e.g., Indian Solar Manufacturers Association) had raised concerns about alleged misuse of MOOWR benefits by solar power developers, asserting that it created an uneven playing field for domestic manufacturers, thereby undermining "Make in India" and "Atma Nirbhar Bharat" initiatives. Subsequent legislative changes (exclusion of solar power projects from Project Import Regulations and CTH 9801) reflected the Union Government's policy to incentivize domestic manufacturing.

4. Arguments (Taxpayer vs Revenue)

• Taxpayer's Arguments:

  • Instruction's Invalidity: The CBIC Instruction is ultra vires Section 151A of the Customs Act, which prohibits issuing directions that mandate a particular assessment or interfere with the quasi-judicial discretion of customs officers. Granting/cancelling a license under Section 65 is a quasi-judicial function requiring independent application of mind, which the Instruction pre-empts.
  • MOOWR Applicability: Section 65, which allows "any warehoused goods" for "any manufacturing process or other operations in relation to such goods," does not explicitly or implicitly exclude solar power generation or intangible resultant goods like electricity. The phrase "in relation to such goods" should be interpreted broadly, signifying a causal link or connection, not a requirement for the capital goods to be consumed or transformed into the end product.
  • Capital Goods Treatment: Section 61(1)(a) allows capital goods to remain warehoused indefinitely until their clearance, distinguishing them from other goods. The MOOWR scheme, as clarified by CBIC's own circulars, FAQs, and "Invest India" portal, explicitly covered capital goods, with duty deferment having no time limitation and duty payable only when the capital goods themselves are cleared, not when the finished goods (electricity) are produced.
  • Operational Aspects: Requirements like "one-time-lock" in Regulation 15 apply to export of physical goods, not home consumption, and cannot be used to exclude an entire industry that otherwise meets statutory conditions. Input-output norms are for consumable inputs, not for durable capital goods like solar panels.
  • No Misrepresentation: Petitioners had fully disclosed their intent to generate electricity using imported capital goods; thus, there was no fraud or misrepresentation.

• Revenue's Arguments:

  • Policy Imperative: The Instruction was necessary to curb "misuse" of the MOOWR scheme by solar power developers, who were indefinitely deferring duties on imported capital goods to produce duty-exempt electricity, thereby creating an unfair disadvantage for domestic manufacturers and frustrating "Make in India" policy.
  • Strict Interpretation of Section 65: Section 65 implies that the "warehoused goods" themselves must undergo manufacturing or other operations, and these goods should be physically contained in the "resultant goods." Sunlight, which produces electricity, is not an "imported" or "warehoused" good.
  • Physical Manifestation of Goods: Regulations 14 and 15, particularly the "one-time-lock" requirement for export and the need to declare "warehoused goods contained in so much of the resultant goods," demonstrate that the scheme envisages physical, tangible resultant goods capable of being contained, measured, and accounted for. Electricity, being intangible and non-depositable in a warehouse, falls outside this scope.
  • Duty Avoidance: The current application of MOOWR allows solar units to avoid BCD on capital goods and IGST on imports, while the resultant electricity is GST-exempt, leading to complete duty avoidance and undermining revenue.
  • Purposive Construction: The Court should interpret the provisions purposively to align with the legislative intent of promoting domestic manufacturing and preventing unintended duty avoidance, even if it requires a narrower construction of Section 65.

5. Court’s Reasoning

• Invalidity of CBIC Instruction:

  • The Court held that the Instruction of 09 July 2022 clearly violated the proviso to Section 151A of the Customs Act. Section 151A permits the Board to issue general directions for uniformity but expressly prohibits it from dictating "a particular assessment or to dispose of a particular case in a particular manner" or interfering with the quasi-judicial discretion of customs officers.
  • Paragraph 5 of the Instruction, by declaring all permissions to solar power units as "not in accordance with law" and directing "immediate review" and "necessary follow up action," directly interfered with the independent quasi-judicial function of the licensing authorities (Principal Commissioner/Commissioner of Customs) to decide on license cancellations under Section 58B. This amounts to abdication of discretion under dictation, which is legally impermissible.
  • The SCNs, being a direct consequence and implementation of this illegal instruction, were also deemed invalid.

• Interpretation of Sections 61 and 65 & MOOWR Regulations:

  • Broad Scope: The Court emphasized that Section 65 is broad, covering "any warehoused goods" and "any manufacturing process or other operations." It found no explicit or implied exclusion for specific industries, types of goods (tangible/intangible), or manufacturing activities.
  • Capital Goods: Section 61(1)(a), amended in 2016, permits capital goods to remain warehoused "till their clearance from the warehouse" without any time limit, indicating an intent to allow long-term use. This contrasts with time limits for "other goods" in Section 61(1)(c).
  • "In Relation To Such Goods": The Court interpreted "in relation to such goods" broadly, meaning "connected with," "associated with," or "concerned with" the warehoused goods. It rejected the Revenue's narrow interpretation that capital goods must themselves undergo transformation or be consumed in the resultant product. Capital goods are durable assets used in the process of manufacture (e.g., machinery for textiles, automotive parts that don't become part of the final product). Solar panels, being capital goods used to generate electricity, satisfy this criterion.
  • Ancillary Provisions: The Court held that provisions like "one-time-lock" (Regulation 15 for export) or input-output norms (Regulation 14 for home consumption) are not universally applicable to all manufacturing activities or capital goods. They apply where relevant (e.g., for consumable inputs that form part of the resultant goods). Their inapplicability to electricity generation (an intangible output from durable capital goods) does not negate the overall applicability of the scheme.
  • Contemporaneous Material: The Court heavily relied on the CBIC's own public communications (Circulars, FAQs, "Invest India" portal) which consistently promoted the MOOWR scheme as allowing duty deferment on both imported raw materials and capital goods without any time limitation, with duty on capital goods payable only upon their eventual clearance to the domestic market. This consistent administrative interpretation prior to the impugned instruction supported the petitioners' understanding of the scheme's broad scope.

• Purposive Interpretation vs. Judicial Legislation:

  • The Court acknowledged the Union's policy objectives (e.g., promoting domestic solar manufacturing) but held that a court's role is to interpret the law as it stands, not to rewrite it based on executive experience or perceived negative impacts.
  • It emphasized that purposive interpretation is resorted to only when statutory language is ambiguous or leads to absurdity, which was not the case here. The language of Sections 61 and 65 is clear.
  • Introducing conditions of ineligibility for solar power generation through judicial interpretation, when the statute itself contains no such exclusion, would amount to impermissible "judicial legislation." If policy changes are needed, the legislative route is the appropriate one.

6. Statutory References

• Customs Act, 1962:
  • Sections 2(43), 2(44) (Definitions of 'warehouse', 'warehoused goods')
  • Section 12(1) (Dutiable goods)
  • Sections 14, 15 (Determination of duty rate and valuation)
  • Sections 46, 47, 48 (Clearance of goods)
  • Chapter IX (Warehousing)
  • Sections 57, 58, 58A (Licensing of warehouses)
  • Section 58B (Cancellation of licence)
  • Sections 59, 60 (Warehousing bond, permission to deposit)
  • Section 61 (Period for which goods may remain warehoused, especially 61(1)(a), 61(1)(c))
  • Section 65 (Manufacture and other operations in relation to goods in a warehouse, especially 65(1), 65(2))
  • Section 65A (yet to be enforced)
  • Section 68 (Clearance for home consumption)
  • Section 69 (Clearance for export)
  • Section 143AA
  • Section 151A (Instructions to officers of customs, including proviso)
• Manufacture and other Operations in Warehouse (No.2) Regulations, 2019 (MOOWR Regulations):
  • Regulations 3, 4, 5, 6 (Application, Eligibility, Grant, Validity of permission)
  • Regulations 10, 11, 13 (Receipt and Transfer of goods)
  • Regulation 14 (Removal of resultant goods for home consumption, including proviso)
  • Regulation 15 (Removal of resultant goods for export)
  • Regulation 20 (Power to exempt)
• Customs Tariff Act, 1975: Sections 3(7), 3(9), 8B; First Schedule, Tariff Entry 8541 42 00, 8541 43 00, CTH 9801.
• 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(1), Section 37B.
• Other: Arms Act, 1959; Limitation Act; Foreign Trade Policy (2004-09, 2015-20); Customs (Import of goods at Concessional Rate of Duty) Rules, 2017 and 2022.

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
• Maxopp Investment Limited v. CIT, New Delhi (2018) 15 SCC 523
• Haji Ismail Noor Mohammad & Company v. State of Uttar Pradesh & Anr 1973 SCC Online All 3
• Mansukhlal Dhanraj Jain v. Eknath Vithal Ogale (1995) 2 SCC 665
• 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 & Ors vs. Karvy Stock Broking Ltd. 2015 SCC Online SC 1788
• 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
• Numerous other judgments from Supreme Court and High Courts regarding statutory interpretation (literal rule, purposive construction) and administrative law principles (abdication of discretion).
• Legal Treatises/Lexicons: Corpus Juris Secundum, Webster's Third New International Dictionary, Black's Law Dictionary, P. Ramanatha Aiyar's The Major Law Lexicon, Wade and Forsyth's Administrative Law, De Smith's Judicial Review, GP Singh's Principles of Statutory Interpretation, Craies on Legislation, Maxwell on the Interpretation of Statutes, Wharton's Law Lexicon, The Oxford English Dictionary.