Avaada Mh Sustainable Pvt Ltd 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, 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" (cancellation) of existing licenses for solar power generating units under the Manufacture and other Operations in Warehouse (No.2) Regulations, 2019 (MOOWR Regulations). All Show Cause Notices (SCNs) issued in furtherance of this Instruction were also quashed. In one specific case (W.P.(C) 10838/2022), the impugned cancellation order dated 19 July 2022 was also quashed. The Court left it open to the respondents to proceed further in accordance with law.

2. Core Issue

The core issue was the validity of CBIC Instruction No. 13/2022-Customs dated 09 July 2022, which declared the MOOWR Regulations (framed under Section 65 of the Customs Act, 1962) inapplicable to solar power generating units. This Instruction led to the issuance of SCNs for the cancellation of existing warehousing licenses granted to solar power developers for importing capital goods (solar panels/modules) without upfront customs duty, to be used for electricity generation. The broader question before the Court was whether solar power generation constitutes an "operation or activity permissible" under Section 65 of the Customs Act read with the MOOWR Regulations.

3. Key Facts

• Petitioners (e.g., Avaada Mh, ACME, Jakson Power) are solar power developers who entered into Power Purchase Agreements (PPAs) for electricity supply.
• They obtained licenses under Sections 58 and 65 of the Customs Act, read with MOOWR Regulations, to establish private bonded warehouses.
• Under these licenses, they imported capital goods (solar panels, PV modules, inverters) for setting up solar power plants, deferring payment of Basic Customs Duty (BCD) and Integrated Goods and Services Tax (IGST).
• Their license applications explicitly declared "Electrical energy" as the final product of their operations.
• Historically, import of solar cells and modules was often 'Nil' BCD until April 1, 2022, when BCD of 25%/40% was imposed. Safeguard duties were applicable earlier.
• On 09 July 2022, CBIC issued the impugned Instruction, stating that MOOWR Regulations are inapplicable to solar power units because:
  • Electricity (the resultant good) cannot be subjected to a "one-time-lock" on a "load compartment of the means of transport" as required by Regulation 15 for export.
  • Electricity is not "ordinarily capable of being deposited in a warehouse."
  • No specific exemption for electricity was granted under Regulation 20.
• The Instruction directed Customs authorities to "immediately review" existing permissions and cease granting new ones.
• The Ministry of New and Renewable Energy (MNRE) and industry associations had raised concerns about solar power developers "misusing" MOOWR to avoid duties, creating a disadvantage for domestic manufacturers.
• CBIC's prior communications (FAQs, Circular No. 34/2019-Customs, "Invest India" portal) had promoted the MOOWR scheme, explicitly stating duty deferment on capital goods without any time limitation, and that duty on capital goods would be payable only when cleared to the domestic market, not incorporated into finished goods.

4. Arguments (Taxpayer vs Revenue)

• Taxpayer (Petitioners):

  • Violation of Section 151A: The Instruction usurps the quasi-judicial discretion of Customs officers in granting/cancelling licenses, violating the proviso to Section 151A which bars the Board from directing particular assessments or interfering with discretion.
  • "Manufacturing Process or Other Operations": Section 65's phrase "manufacturing process or other operations in relation to such goods" is broad and includes generating electricity using imported solar panels. "In relation to" means a causal link or association, not necessarily consumption or physical transformation of the capital goods into the final product.
  • Sections 61 & 65 Scope: These sections do not exclude any specific industry, type of product (tangible/intangible), or require capital goods to be consumed in the final product. Post-2016, Section 61(1)(a) allows capital goods to remain warehoused indefinitely until clearance.
  • MOOWR Regulations: Requirements like input-output norms and "one-time-lock" are not universally applicable (e.g., for non-consumable capital goods or intangible products like electricity) and do not define the scope of the entire scheme.
  • Legitimate Expectation: Prior CBIC FAQs and promotional materials clearly allowed indefinite duty deferment for imported capital goods used in manufacturing in a bonded warehouse, without mandating their consumption in the final product.
  • Transparency: Petitioners had openly declared "electrical energy" as their final product, and licenses were granted after due verification.

• Revenue (CBIC/Customs):

  • Policy Objective: The Instruction was issued to address the "misuse" of MOOWR Regulations by solar developers, which undermined the government's policy of promoting domestic solar manufacturing and imposing BCD on imports.
  • Interpretation of Section 65: The phrase "in relation to such goods" implies that the warehoused goods (solar panels) must themselves undergo a manufacturing process or be physically contained in the resultant goods. Sunlight is not "warehoused goods."
  • MOOWR Conditions: The resultant electricity cannot be "deposited in a warehouse" or have a "one-time-lock" affixed for removal as required by Regulations 14 and 15, making the scheme inapplicable. The lack of exemption under Regulation 20 reinforces this.
  • Purposive Interpretation: The Court should interpret the provisions purposively to align with the broader policy of discouraging duty-free imports and protecting domestic industry from unfair competition.

5. Court’s Reasoning

• Invalidity of the Impugned Instruction:

  • The Court found that granting/cancelling licenses under Sections 58 and 65 (read with 58B) is a quasi-judicial function.
  • Section 151A allows CBIC to issue general instructions for uniformity but explicitly prohibits directives that compel a Customs officer to make a particular assessment, dispose of a case in a specific manner, or interfere with their discretion.
  • Paragraph 5 of the impugned Instruction "unabashedly" declared existing permissions "contrary to law" and directed immediate "review" and "follow-up action." This was a "dictate" to licensing authorities, foreclosing their independent judgment and reducing the SCN process to a "mere formality," thus violating the proviso to Section 151A and established principles of administrative law against abdication of discretion or acting under dictation.
  • The petitioners had transparently disclosed their activity in their applications, and the licenses were granted after due consideration.

• Interpretation of Sections 61 and 65 (MOOWR Applicability):

  • Section 61: Post-2016 amendments, Section 61(1)(a) explicitly allows "capital goods intended for use in any... warehouse wherein manufacture or other operations have been permitted under Section 65" to remain warehoused indefinitely ("till their clearance from the warehouse"). This removed the previous time limit (5 years).
  • Section 65: The provision allows "any manufacturing process or other operations in the warehouse in relation to such goods."
    • The statute does not explicitly exclude any specific manufacturing activity or product type (tangible/intangible) or require capital goods to be consumed or transformed.
    • Capital goods are inherently durable and for repetitive use, not necessarily for consumption in the final product. To argue otherwise would place a "narrow construction" on the phrase "manufacturing process or other operations." The phrase "other operations" is expansive.
    • The inapplicability of input-output norms or "one-time-lock" for electricity generation is not a statutory bar, as these are meant for consumable inputs or physical goods for transport, not for intangible output or non-consumable capital goods.
  • "In relation to": Citing precedents (Doypack Systems, Mansukhlal Dhanraj Jain, Maruti Suzuki Limited), the Court affirmed that "in relation to" means a "causal link," "connection," "association," or "concern" between the imported capital goods and the manufacturing activity. It does not mean the capital goods themselves must undergo transformation or be subsumed.
  • Contemporaneous Material: CBIC's own FAQs and "Invest India" portal clearly promoted the scheme as allowing duty deferment on capital goods for an "unlimited period" until they are cleared for the domestic market, and explicitly stated that duty on capital goods is "not incorporated in the finished goods." This supports the petitioners' interpretation.

• Purposive Interpretation and Policy:

  • The Court acknowledged the Union's policy objectives (promoting domestic manufacturing, renewable energy).
  • However, it held that judicial interpretation must adhere to the plain, unambiguous language of the statute. Courts cannot "reconstruct" or "reassemble" a statutory provision to introduce conditions of ineligibility based on subsequent executive experience, perceived "negative impact" on domestic industry, or "asserted anomaly."
  • The statutory provisions (Sections 61 and 65) are clear and do not lead to absurdity or contradiction, hence the literal rule of interpretation applies, and purposive interpretation to address policy concerns is not warranted in this case. "It is not evading an Act to keep outside it."

6. Statutory References

• Customs Act, 1962: Sections 2(43), 2(44), 12(1), 14, 15, 46, 47, 48, 57, 58, 58A, 58B, 59, 60, 61, 61(1)(a), 61(1)(b), 61(1)(c), 65, 65(1), 65(2), 65A, 68, 69, 143AA, 151A.
• Customs Tariff Act, 1975: Section 3(7), 3(9), 8B; CTH 8541 42 00, 8541 43 00, 9801.
• Manufacture and other Operations in Warehouse (No.2) Regulations, 2019 (MOOWR Regulations): Regulations 3, 4, 5, 6, 8, 10, 11, 13, 14, 15, 20.
• Central Goods and Service 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).
• Other: Arms Act, 1959, Limitation Act.

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
• 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
• 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
• 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
• Suresh Kumar v. State of Uttar Pradesh & Ors (Judgment dated 19 April 2019 in Writ (A) No. 27260/2018)
• 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