Union Of India vs Cosmo Films Limited on 28 April, 2023

Outcome
The Supreme Court allowed the appeals filed by the Union of India, thereby setting aside the judgment and order of the Gujarat High Court. The Court upheld the validity of the 'pre-import condition' for claiming IGST and compensation cess exemption under Advance Authorizations (AAs) during the period from October 13, 2017, to January 9, 2019. However, acknowledging the interim orders enjoyed by the respondents, the Court directed the Revenue to permit them to claim refund or input credit (whichever applicable) on a case-by-case basis, with the Revenue issuing a circular to specify the appropriate procedure within six weeks.

Core Issue
The core issue was the legality and reasonableness of the 'pre-import condition' introduced by Notification No. 33/2015-2020 (amending the Foreign Trade Policy, FTP) and Notification No. 79/2017-Customs (amending Notification No. 18/2015-Customs), both dated October 13, 2017. These notifications mandated that for imports under Advance Authorization to be exempt from Integrated Goods and Services Tax (IGST) and GST compensation cess, the inputs had to be imported before the finished goods (produced from these inputs) were exported.

Key Facts

• Pre-GST Regime: The Advance Authorization (AA) scheme, under the Foreign Trade (Development & Regulation) Act, 1992 (FTDRA) and Foreign Trade Policy (FTP), allowed duty-free import of inputs (e.g., Basic Customs Duty, Additional Customs Duty, Safeguard Duty, Anti-Dumping Duty) for the manufacture of export products. Exports in anticipation of authorization were generally permitted (Para 4.27 of the Handbook of Procedures, HBP).
• GST Introduction (July 1, 2017): The GST regime introduced IGST and GST compensation cess on imports. Initially, no specific exemption was granted for these new levies under the AA scheme, requiring exporters to pay them and claim Input Tax Credit (ITC).
• Impugned Notifications (October 13, 2017):
  • Notification No. 79/2017-Customs amended Notification No. 18/2015-Customs to grant exemption from IGST and compensation cess. This exemption was made subject to two conditions: (i) export obligation fulfillment only by physical exports, and (ii) a mandatory 'pre-import condition'.
  • Notification No. 33/2015-2020 simultaneously amended paragraph 4.14 of the FTP to incorporate this 'pre-import condition'.
  • The HBP was also amended to insert paragraph 4.27(d), which stated that Duty Free Import Authorizations for inputs subject to 'pre-import condition' could not be issued.
• Exporters' Contentions: Manufacturer-exporters argued that the 'pre-import condition' disrupted their continuous export-import cycle, made the exemption practically impossible to avail, and was discriminatory.
• Subsequent Policy Change (January 10, 2019): Notification No. 01/2019-Cus was issued, omitting the 'pre-import condition'.

Arguments

• Taxpayer (Cosmo Films Limited & Ors.)
  • The 'pre-import condition' was arbitrary, unreasonable, and contrary to the Advance Authorization (AA) scheme's object of promoting exports.
  • It rendered the IGST and compensation cess exemption illusory, as fulfilling the condition was practically impossible for regular manufacturer-exporters given typical short export delivery schedules (e.g., 4-8 weeks) versus the time needed for pre-import and manufacturing (e.g., 6 months).
  • The AA scheme had operated successfully for decades without such a condition (since 1986), and the subsequent deletion of the condition in 2019 proved its unworkable nature.
  • It was discriminatory (violating Article 14 of the Constitution) to impose the 'pre-import condition' only for IGST and compensation cess, while other duties (BCD, ADD, Safeguard Duty) continued to be exempt without this condition under the same AA.
  • The retrospective application of the 'pre-import condition' to existing AAs was unfair and impossible to comply with.
  • The condition "effaced" the entire AA scheme, infringing on the right to carry on trade (Article 19(1)(g)).
• Revenue (Union of India)
  • Exemption from duty is a concession, not a right, and can be granted with conditions that are within the government's power.
  • The core principle of AA (Para 4.03 FTP) is the physical incorporation of imported duty-free inputs into the export product, which inherently implies 'pre-import'.
  • Para 4.13(i) of the FTP granted broad power to the DGFT to impose 'pre-import conditions' on any inputs, not just those listed in Appendix-4J.
  • Para 4.27(d) of the HBP specifically excluded inputs subject to 'pre-import condition' from the benefit of "exports in anticipation of authorization." The FTP is supreme over the HBP.
  • The introduction of GST fundamentally altered the indirect tax structure, necessitating new conditions for new levies (IGST/cess) within a comprehensive input credit and refund system. This was a policy decision to avoid cash blockage without granting double benefits.
  • Hardship or inconvenience to businesses, while regrettable, is not a valid ground for courts to strike down or interpret fiscal legislation differently, given the judicial deference to economic policy.
  • The subsequent deletion of the 'pre-import condition' in 2019 was a prospective policy change and could not be given retrospective effect by judicial interpretation, as the FTDRA does not permit retrospective subordinate legislation.

Court’s Reasoning

• Flaws in High Court's Reasoning: The Supreme Court found the High Court's reasoning flawed for overlooking Trade Notice 11/2017 (forewarning changes due to GST) and Para 4.27(d) of the HBP (explicitly barring exports in anticipation for pre-import condition inputs).
• Nature of FTP vs. HBP: The Court reiterated that FTPs are statutory, while HBP contains guidelines. Para 4.13(i) of the FTP explicitly allowed the DGFT to impose 'pre-import conditions' on any inputs, not just those specified in Appendix-4J.
• Judicial Deference to Economic Policy: The Court emphasized that in matters of complex economic legislation and fiscal policy, especially during a transformative reform like GST, courts must exercise judicial restraint. Hardship or inconvenience to a section of businesses is not a sufficient ground to hold a policy arbitrary or unreasonable unless it is "patently arbitrary, discriminatory or mala fide" (Nandlal Jaiswal, R.K. Garg).
• Reasonableness of 'Pre-Import Condition': The 'pre-import condition' aligns with the fundamental principle of AA (physical incorporation of imported inputs before export). The differentiation for IGST/cess versus other duties was justified because IGST is part of a unified, comprehensive input tax credit and refund mechanism, unlike BCD which is a customs levy at the point of import without credit implications at that stage. This distinction constitutes an intelligible differentia.
• No Retrospective Application: The Court rejected the argument that the later deletion of the 'pre-import condition' in 2019 should apply retrospectively. It affirmed that the FTDRA does not confer power to frame retrospective subordinate legislation (Kanak Exports), and judicial interpretation cannot achieve what is legally impermissible.
• Exemption as a Concession: The right to an exemption is a concession from the State, not a fundamental right, and can be modified or withdrawn prospectively (VKC Footsteps, Bannari Amman Sugars Ltd.).
• GST as a Reform: The Court acknowledged GST as a significant tax reform that inevitably leads to some disruption, but such disruption alone cannot lead to a conclusion of unreasonableness or arbitrariness in the policy.

Statutory References

• Foreign Trade (Development & Regulation) Act, 1992 (FTDRA): Section 2(e), Section 5
• Foreign Trade Policy (FTP) 2015-2020: Paragraphs 1.02, 1.03, 4.03, 4.05, 4.13, 4.14, 4.16, 7.02, 9.20, 9.44
• Handbook of Procedures (HBP) 2015-2020: Chapter 4, Paragraphs 4.27, 4.28, 4.42, Appendix 4J
• Customs Act, 1962: Section 25(1)
• Customs Tariff Act, 1975: Section 3(1), 3(3), 3(5), 3(7), 3(8), 3(9), 3(10), 8B, 8C, 9A, First Schedule
• Integrated Goods and Services Tax Act, 2017: Section 5
• Goods and Services Tax (Compensation to States) Cess Act, 2017: Section 8
• Constitution of India: Articles 14, 19(1)(g), 246A, 269A, 279A, 286, 366, Seventh Schedule
• Notification No. 18/2015-Customs dated 01.04.2015
• Notification No. 33/2015-2020 dated 13.10.2017
• Notification No. 79/2017-Customs dated 13.10.2017
• Notification No. 01/2019-Cus dated 10.01.2019
• Trade Notice 11/2017 dated 30.06.2017

Precedents Cited

• Khandige Sham Bhat v Agricultural Income Tax Officer (1963 (3) SCR 809)
• Assistant Commissioner of Urban Land Tax v Buckingham & Carnatic Co Ltd. (1970 (1) SCR 268)
• R.K. Garg v Union of India (1981 (1) SCR 947)
• Union of India v VKC Footsteps India (P) Ltd (2022 (2) SCC 603; 2021 (15) SCR 169)
• Laxmi Khandsari vs. State of Uttar Pradesh (1981(3) SCR 92)
• State of Haryana v Jai Singh (2003 (9) SCC 114)
• Welfare Association ARP v Ranjit P. Gohil (2003 (9) SCC 358)
• Union of India (UOI) and Ors. vs. N.S. Rathnam & Sons (2015 (8) SCR 751)
• MRF Ltd., Kottayam v. Asst. Commissioner (Assessment) Sales Tax & Ors. (2006 Supp (6) SCR 417)
• Vasu Dev Singh v. Union of India (2006 Supp (9) SCR 565)
• P. J. Irani v. State of Madras (1962 (2) SCR 169)
• Union of India v. Asian Food Industries (2006 Supp (8) SCR 485)
• Hindustan Granites v Union of India (2007 (4) SCR 743)
• Rohitash Kumar & Ors. v Om Prakash Sharma & Ors (2013) 11 SCC 451)
• Mysore SEB v. Bangalore Woolen Cotton & Silk Mills Ltd. (AIR 1963 SC 1128)
• Martin Burn Ltd. V. Corpn. Of Calcutta (AIR 1966 SC 529)
• State of Madhya Pradesh v Rakesh Kohli (2012 (6) SCR 661)
• State of Gujarat v Shri Ambica Mills (1974 (3) SCR 760)
• Ajoy Kumar Banerjee & Ors. v. Union of India & Ors (1984 (3) SCR 252)
• Javed v. State of Haryana ((2003) 8 SCC 369)
• State of Madhya Pradesh v Nandlal Jaiswal (1987 (1) SCR 01)
• Ashirwad Films v. Union of India ((2007) 6 SCC 624)
• Director General of Foreign Trade & Ors. v Kanak Exports & Ors (2015 (15) SCR 287)
• Bannari Amman Sugars Ltd. vs. Commercial Tax Officer & Ors (2004 (6) Suppl. SCR 264)