Jakson Power Private Limited vs Central Board Of Indirect Taxes And ... on 6 May, 2024

Here's a summary of the judgment:

1. Outcome
The Delhi High Court allowed the writ petitions. The impugned Instruction dated 09 July 2022, issued by the Central Board of Indirect Taxes and Customs (CBIC), which mandated the review of existing licenses and the taking of "follow-up" action, was quashed. Consequently, the Show Cause Notices (SCNs) issued in purported implementation of this Instruction were also quashed. The order dated 19 July 2022, cancelling one of the petitioner's warehouse licenses, was also quashed.

2. Core Issue
The core issue was the validity of a CBIC Instruction that declared the Manufacture and other Operations in Warehouse (No.2) Regulations, 2019 (MOOWR Regulations) inapplicable to solar power generating units, and directed customs authorities to review and cancel existing licenses and deny new ones. This raised questions regarding:
* The scope of the Board's powers under Section 151A of the Customs Act, 1962, particularly concerning interference with quasi-judicial functions.
* The interpretation of Sections 61 and 65 of the Customs Act, 1962, and the MOOWR Regulations regarding the warehousing of imported capital goods for solar power generation.
* Whether "generation of electricity" constitutes a "manufacturing process or other operations in relation to such goods" under Section 65.
* The applicability of purposive interpretation in construing taxing statutes vis-à-vis perceived policy objectives and distortion of the level playing field for domestic industry.

3. Key Facts
* The petitioners are solar power generating units that obtained licenses under Sections 58 and 65 of the Customs Act, 1962, read with the MOOWR Regulations, to import capital goods (solar panels/modules) and undertake power generation in customs bonded warehouses. This allowed for duty deferment on imported capital goods.
* The petitioners had explicitly declared their intention to generate electrical energy using imported capital goods in their license applications.
* The MOOWR Regulations (effective 01 October 2019) and accompanying CBIC FAQs and "Invest India" portal material explicitly stated that capital goods could be imported and warehoused with duty deferment "without any time limitation" until clearance for home consumption, and that duty on capital goods does not get incorporated into finished goods.
* Prior to 01 April 2022, Basic Customs Duty (BCD) on solar cells and modules was Nil, though a safeguard duty was in force until July 2021. BCD of 25%/40% was imposed on solar cells/modules from 01 April 2022.
* The Ministry of New and Renewable Energy (MNRE) communicated to the Department of Revenue (OM dated 27 July 2022) concerns that solar power developers were "misusing" MOOWR provisions to avoid duties on imported equipment, thereby gaining an unfair advantage over domestic manufacturers.
* The CBIC issued Instruction No. 13/2022-Customs dated 09 July 2022, concluding that solar power generation fell outside the scope of MOOWR 2019. The Instruction cited the inability to affix a "one-time-lock" to electricity for removal from a warehouse (Regulation 15) and that electricity cannot be ordinarily deposited in a warehouse. It directed immediate review and "necessary follow-up action" for existing permissions and prohibited new grants.
* Following the Instruction, SCNs were issued to the petitioners proposing cancellation of their licenses. In one case, a license was actually cancelled.

4. Arguments (Taxpayer vs Revenue)

Taxpayer (Jakson Power, ACME, AVAADA):
* Against Impugned Instruction:
* The grant and cancellation of licenses under Sections 58 and 65 are quasi-judicial functions, requiring independent application of mind by customs officers.
* The Instruction, by declaring MOOWR inapplicable to solar power units and directing review/cancellation of existing licenses, usurps the quasi-judicial discretion of customs officers and violates the proviso to Section 151A, which prohibits the Board from dictating specific assessments or interfering with discretion.
* The Instruction is ultra vires Section 151A, as it goes beyond issuing general directions for uniformity and imposes a pre-determined outcome on adjudicating authorities.
* On Merits (Interpretation of Sections 61, 65 & MOOWR):
* Section 65 allows "any manufacturing process or other operations in relation to such goods." "Any" and "other operations" are broad terms.
* "In relation to" is a wide, comprehensive phrase signifying a causal link, connection, or association, not necessarily direct physical transformation or consumption of the imported goods. Solar panels are "used in relation to" electricity generation.
* Section 61(1)(a) specifically deals with "capital goods" intended for use in a warehouse permitted under Section 65, allowing them to remain warehoused "till their clearance from the warehouse," implying no time limit and no requirement for physical consumption in the final product.
* MOOWR Regulations and contemporaneous material (FAQs, Circulars, Invest India portal) consistently supported the indefinite deferment of duty on imported capital goods used in manufacturing operations, without requiring them to be consumed or form part of the resultant product. They explicitly clarified that duty on capital goods is payable only upon their clearance to the domestic market, not incorporated into the finished goods.
* The inability to affix a one-time-lock to electricity (Regulation 15) is irrelevant as electricity is an intangible product, and the regulation primarily addresses physical goods for export. Regulations should not be read to exclude entire categories of legitimate manufacturing activities simply due to a procedural impossibility for a specific type of resultant good.

Revenue (CBIC):
* Policy Context: The Instruction aligns with the Union Government's policy to promote domestic manufacturing of solar cells/modules ("Make in India," "Atma Nirbhar Bharat") and reduce import dependency, which was being undermined by MOOWR benefits.
* Interpretation of Sections 61, 65 & MOOWR:
* The phrase "manufacturing process or other operations in relation to such goods" in Section 65 implies that the "warehoused goods" (capital goods in this case) must themselves undergo a manufacturing process or transformation, or at least be consumed as inputs in the resultant product.
* Sunlight is not "imported goods" or "warehoused goods." The solar panels, as warehoused capital goods, do not undergo any manufacturing process; they merely facilitate conversion of sunlight to electricity.
* Regulation 14 (removal for home consumption) and 15 (removal for export) of MOOWR contemplate "warehoused goods contained in so much of the resultant goods," necessitating an input-output ratio. This is impossible for electricity, where the capital goods are not "contained" in the electricity.
* The "one-time-lock" requirement in Regulation 15 (for export of resultant goods) cannot be met by electricity, demonstrating that such intangible goods were not contemplated by the MOOWR scheme.
* The Board had not exercised its power under Regulation 20 to exempt electricity from these provisions, further indicating its ineligibility.
* The petitioners are exploiting a loophole, avoiding BCD and IGST on imported capital goods by perpetually deferring duty, as electricity is exempt from GST. This creates an uneven playing field.
* Validity of Instruction: The Instruction was a necessary policy clarification to ensure uniformity and prevent misuse, within the Board's powers under Section 151A.

5. Court’s Reasoning
* Validity of the Impugned Instruction (Section 151A):
* The Court found that the grant/cancellation of licenses is a quasi-judicial function, requiring independent assessment by the customs officer.
* Paragraph 5 of the impugned Instruction, by definitively concluding that solar power generation is contrary to MOOWR provisions and directing "immediate review" and "necessary follow up action" (which clearly meant cancellation), dictated the outcome of individual cases and interfered with the adjudicating officers' discretion.
* This direct interference with quasi-judicial functions and mandating a specific assessment or disposal manner is ultra vires the proviso to Section 151A of the Customs Act, 1962, and established principles of administrative law (e.g., prohibition against acting under dictation).
* Interpretation of Sections 61 & 65 of Customs Act, 1962, and MOOWR Regulations:
* "Capital Goods" and "Warehousing Period": Section 61, post-2016 amendment, removed the time limit for capital goods warehoused under Section 65, allowing them to remain "till their clearance from the warehouse." This explicitly permits long-term warehousing of capital goods, which are inherently durable and repetitively used, unlike consumables.
* "Manufacturing Process or Other Operations in relation to such goods":
* The terms "any manufacturing process or other operations" are broad and not limited to processes where imported goods are physically consumed or transformed. "Other operations" expands the scope beyond conventional manufacturing.
* The phrase "in relation to" is comprehensive, denoting a causal link, connection, or association, not necessarily direct consumption or transformation. As long as capital goods are concerned with, relatable to, or referable to the manufacturing activity (like solar panels enabling electricity generation), the condition is met.
* The argument that capital goods must form part of the "resultant goods" or be capable of input-output ratio calculation is flawed. Many manufacturing activities use capital goods without consuming them (e.g., textile machinery, automotive tools). The input-output norms primarily cater to raw materials/consumables.
* MOOWR Regulations and Contemporaneous Material:
* The CBIC's own FAQs, 01 October 2019 Circular, and "Invest India" portal unequivocally promoted the MOOWR scheme for both raw materials and capital goods, stating duty deferment "without any time limitation" for capital goods until their clearance. They also clarified that duty on capital goods is not incorporated into the finished goods.
* This contemporaneous material did not indicate any exclusion for specific manufacturing activities or types of resultant goods (tangible/intangible).
* "One-time-lock" for Electricity: This procedural requirement in Regulation 15 for physical "resultant goods" being removed for export cannot be used to retrospectively exclude electricity, an intangible product, from the entire scheme. Such procedural impossibility for a specific type of output does not negate the overall intent of Sections 61 and 65 for capital goods.
* Purposive Interpretation and Policy Concerns:
* The Court acknowledged the Union's policy objectives to promote domestic solar manufacturing but held that judicial interpretation must adhere to the clear statutory language.
* A court's function is to interpret the law as enacted, not to introduce conditions of ineligibility or rewrite the statute in the garb of interpretation, especially in taxing statutes where a literal approach is preferred unless the language is ambiguous or leads to manifest absurdity/contradiction.
* The statutory provisions (Sections 61 and 65) were found to be unambiguous and did not inherently exclude solar power generation. Any perceived "distortion of the level playing field" or "misuse" is a policy matter for the legislature/executive to address through amendments, not for the judiciary to rectify through interpretative gymnastics.

6. Statutory References
* Customs Act, 1962:
* Section 2(43) (Definition of "warehouse")
* Section 2(44) (Definition of "warehoused goods")
* Section 12(1) (Charging Section)
* Section 15 (Date for determination of rate of duty and tariff valuation)
* Section 46 (Bill of Entry for home consumption)
* Section 47 (Clearance of goods for home consumption)
* Section 48 (Procedure in case of goods not cleared, warehoused, or transhipped within thirty days after unloading)
* 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 for deposit in warehouse)
* Section 61 (Period for which goods may remain warehoused) - Critically, the amendments by Act 28 of 2016 were discussed.
* Section 65 (Manufacture and other operations in relation to goods in a warehouse)
* Section 65A (Goods brought for operations in warehouse to have ordinarily paid certain taxes) - Not yet enforced.
* Section 68 (Clearance of warehoused goods for home consumption)
* Section 69 (Clearance of warehoused goods for exportation)
* Section 151A (Instructions to officers of customs) - Proviso (a) and (b) were central.
* Section 157 (Power to make regulations)
* Section 143AA (Facilitation of compliance and trade)
* Customs Tariff Act, 1975:
* Section 3(7), 3(9) (Integrated Tax, GST Compensation Cess)
* Section 8B (Safeguard Duty)
* First Schedule, CTH 8541 42 00, 8541 43 00, 9801
* 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 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 Statutes/Rules:
* Central Excise Act, 1944 (Section 37B - pari materia to Customs Act's 151A)
* Central Goods and Services Tax Act, 2017 (Section 2(19) - capital goods, Section 2(59) - input)
* Customs (Provisional Duty Assessment) Regulations, 2011 (Regulation 2(2))
* Project Import Regulations, 1986
* Foreign Trade Policy 2004-09, 2015-20 (Definition of Capital Goods)
* 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))

7. Precedents Cited
* On Quasi-Judicial Function & Dictation:
* 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
* 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
* 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)
* On "In relation to" / Statutory Interpretation:
* 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
* 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
* 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]
* On Policy & Climate Change:
* M K Ranjitsinh & Ors vs. Union of India & Ors 2024 SCC OnLine SC 570