1

REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO(S). 290 OF 2023

UNION OF INDIA & ORS. ...APPELLANT(S)

VERSUS

COSMO FILMS LIMITED ...RESPONDENT(S)

WITH

CIVIL APPEAL NO(S). 298 OF 2023

CIVIL APPEAL NO(S). 303 OF 2023

CIVIL APPEAL NO(S). 297 OF 2023

CIVIL APPEAL NO(S). 296 OF 2023

CIVIL APPEAL NO(S). 295 OF 2023

CIVIL APPEAL NO(S). 294 OF 2023

CIVIL APPEAL NO(S). 293 OF 2023

CIVIL APPEAL NO(S). 292 OF 2023

TRANSFER PETITION (CIVIL) NO(S). 1526 OF 2020

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J U D G M E N T

S. RAVINDRA BHAT, J.

1. These appeals are directed against a judgment and order of the Gujarat

High Court,

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wherein mandatory fulfilment of a ‘pre-import condition’

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incorporated in the Foreign Trade Policy of 2015-2020 (“FTP”) and Handbook

of Procedures 2015-2020 (“HBP”) by Notification No. 33 / 2015-20 and

Notification No. 79 / 2015-Customs, both dated 13.10.2017, was set aside.

According to the High Court, such fulfilment in order to claim exemption of

Integrated Goods and Services Tax (“IGST”)

3

and GST compensation cess

4

on

input imported into India for the production of goods to be exported from India,

on the strength of an advance authorization

5

(“AA”) was arbitrary and

unreasonable.

I. Background

2. In terms of the Foreign Trade (Development & Regulation) Act, 1992

(“FTDRA”) the Central Government (“Union”) had been framing, from time to

time, Export-Import Policies (or FTPs) for the development, regulation and

control of imports and exports in the country. The Union announced duty

1

M/s Shri Jagdamba Polymers Ltd. & Ors. v Union of India & Ors., Special Civil Application

No. 19324 of 2018.

2

Paragraph 4.13 of FTP, read with the HBP.

3

Leviable under Section 3(7) of The Customs Tariff Act, 1975.

4

Leviable under Section 3(9) of The Customs Tariff Act, 1975.

5

Paragraph 4.03 of FTP.

3

exemption schemes as well. One among these was the AA. To regulate and guide

the procedure to be followed for implementing the provisions of the FTP and the

rules framed thereunder, the Director General of Foreign Trade (“DGFT”)

notified the HBP, chapter 4 of which prescribed the procedure for availing duty

exemption / remission schemes. By paragraph 4.27, exports in “anticipation of

authorisation” were permitted, so as not to create hindrances and delays in

execution of export orders. At the time, Notification No. 18 / 2015-Customs

dated 1.04.2015 exempted payment of basic customs duty (“BCD”), additional

duty (countervailing duty (“CVD”), special additional duty (“SAD”)), safeguard

duty and anti-dumping duty on inputs imported against a valid AA.

3. The GST regime was introduced with effect from 01.07.2017. However,

no amendment was made to Notification No. 18 / 2015-Customs with respect to

IGST and compensation cess, resulting in the collection of these levies for the

inputs imported into India against AAs.

4. On 13.10.2017, six existing notifications were amended. Notification No.

79 / 2017-Customs amended Notification No. 18 / 2015-Customs by granting

IGST and compensation cess exemption, subject to the following two conditions:

“Provided further that notwithstanding anything contained

hereinabove for the said authorisations where the exemption from

integrated tax and the goods and services tax compensation cess

leviable thereon under sub-section (7) and sub-section (9) of section 3

of the said Customs Tariff Act, has been availed, the export obligation

shall be fulfilled by physical exports only.”

6

6

Proviso to clause (viii), as contained in Notification No. 79 / 2017.

4

***

“That the exemption from integrated tax and the goods and services tax

compensation cess leviable thereon under sub-section (7) and sub-

section (9) of section 3 of the said Customs Tariff Act shall be subject

to pre-import condition”

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(emphasis supplied)

At the same time, Notification No. 33 / 2015-2020 was issued, amending various

provisions of the FTP, whereby this ‘pre-import condition’ was incorporated in

paragraph 4.14 thereof with effect from 13.10.2017. The writ petitioners before

the High Court / respondents herein claimed that they were unaware about this

condition, and continued exports in anticipation of grant of AA, and consequently

expected exemption from all custom duty levies, including IGST and

compensation cess.

5. The Directorate of Revenue Intelligence (“DRI”) Kolkata noticed the

above amendments and thereupon, initiated investigation and issued summons to

various manufacturers located across the country importing goods against AAs.

The respondents were of the view that the scope of ‘pre-import condition’ was

unclear, whereas the DRI officers conducting the inquiry and investigation,

however, were of the view that ‘pre-import condition’ meant that goods had to be

imported first, and then the final products manufactured with such imported

goods were to be exported. When it was established that goods imported against

a particular AA were used in relation to manufacture of finished goods exported

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Addition of clause (xii), as contained in Notification No. 79 / 2017.

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for fulfilment of export obligation of that particular authorisation, the ‘pre-import

condition’ stood satisfied.

6. In view of this development, the exemption granted by Notification No. 18

/ 2015-Customs was inadmissible where manufacturer-exporters, who undertook

manufacturing and export of goods in a continuous cycle, could not prove the

above. Exemption was also not admissible when goods manufactured were

exported in anticipation of licence / authorisation, since they were exports made

first, with duty-free import against the authorisation having been undertaken later.

Consequently, the manufacturer-exporters aggrieved by this interpretation

approached the High Court.

II. Arguments of the Revenue before the High Court

7. The Revenue contended that exemption from paying duty was not a matter

of right, and was granted by the State keeping in mind general public interest.

The criterion for determination of legality of any notification was always whether

the authority acted within its jurisdiction while issuing such notification or not,

and not if the Union benefitted from the same. The Revenue contended that

exporters were free to export first and import at a later stage in terms of

paragraphs 4.27 and 4.28 of the HBP. Those provisions however did not offer

absolute freedom to the importers to regulate their imports and exports without

complying with other conditions imposed in the policy and the relevant customs

notification. The provisions were an exception, to keep the option open for

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willing exporters, subject to the condition that it would be availed at their risk.

Further, exercising the option was available only when either of the ‘pre-import

conditions’ was not fixed in the SION

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, or exporters were willing to first fulfil

their export obligation. As the process of fixing norms was time consuming, the

provisions granted an opportunity to importers to export in advance, at the risk of

not being considered towards discharge of export obligation.

8. The Revenue submitted that before the introduction of the GST regime,

imports allowed under AAs were exempt from payment of many duties.

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Thereafter, CVD and SAD were subsumed in IGST. Under Section 3 of the

Customs Tariff Act, 1975, IGST was made payable at specified rates upon

imports. However, a major change that was brought into the policy was to not

allow exemption from payment of IGST directly at the time of import under AA.

Such exemption was allowed indirectly by allowing refund of IGST paid at the

time of imports under AA within a specified time. The importers, therefore,

started paying IGST on goods imported under AA with effect from 1.7.2017, and

were getting outright exemption from BCD, ADD, safeguard duty, etc., and IGST

paid was refunded. The legislative intent was clear in imposing IGST on all

imports made under AAs, on or after 1.7.2017, without differentiating between

the status of such authorisations, whether or not it was issued prior to or after

8

Standard Input Output Norms, which are standard norms which define the number of

input/inputs required to manufacture units of output for export purposes. They are applicable

differently for different products.

9

Supra, para 2.

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introduction of GST. It was a policy decision, which could have been reversed or

altered only by the GST Council. The Revenue also pointed out that due to

problems in Goods and Service Tax Network (GSTN)

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, the committed refund of

IGST was getting delayed. This resulted in blocking of working capital for many

business houses. To obviate this problem, the GST Council allowed exemption

from IGST when imported under AAs. The Directorate General of Foreign Trade

(“DGFT”) accordingly, issued Notification No. 33/2015-20 dated 13.10.2017

which was backed by Customs Notification No. 79/2017 dated 13.10.2017, issued

by the Department of Revenue, amending the Notification No. 18 / 2015-

Customs, dated 1.4.2015. The Revenue further urged that exemption from the

IGST leviable under Section 3 (7) was available and subject to two specific

conditions. The conditions were (i) export obligation was to be fulfilled through

physical exports only; and (ii) the exemption was subject to ‘pre-import

condition’, which implied that only after the import of the goods commenced,

were they required to be used for manufacture of export goods, which were

ultimately exported.

9. According to the Revenue, a cut-off date could have been declared, and

only AAs issued after 13.10.2017 could have been declared eligible for such

benefits, but the same was not done. It was kept open-ended to extend benefit to

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Which provides shared IT infrastructure and service to both central and state governments

including taxpayers and other stakeholders. The registration front end services, returns, and

payments to all taxpayers were provided by GSTN.

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the importers, who followed those two conditions, even in respect of the AAs

issued to them earlier. A cut-off date would have made exporters ineligible for

the benefit. Therefore, policy makers, in their own wisdom, kept the door open

for the eligible importers, to enjoy the benefit, irrespective of the date / period of

issuance of AA, subject to compliance with the conditions imposed.

10. The Revenue further stated that paragraph 4.13 of the FTP had been in

existence under different paragraphs in different policy periods for years. Since

2003, all drug companies had been importing their raw materials sourced from

unregistered sources, under the ‘pre-import condition’. Silk in any form, raw

sugars, natural rubbers, tea, spices and precious metals etc., were allowed to be

imported under ‘pre-import condition’ only. The ‘pre-import condition’ was in-

built within the AA scheme itself under paragraph 4.03 of the policy.

11. Additionally, the AA scheme was not a replenishment scheme. Were it so,

the DGFT would not have launched other schemes like ‘Duty-Free Incentive

Scheme’, which allowed exports prior to import, and transferable licences under

the FTP. To prevent cash blockage of exporters due to upfront payment of IGST

and compensation cess on imports of inputs, the exemption from their payment

was granted, subject to ‘pre-import condition’. In case of replenishment imports

after exports, the issue of cash blockage did not arise. Since exports had already

taken place and GST legislation provided for complete zero-rating, extending

IGST exemption on replenishment imports would imply double benefit to the

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authorisation holder. Therefore, the AA holders were not adversely affected and

not prejudiced by the impugned notifications. The IGST paid on replenishment

material could be availed as input tax credit for payment of GST.

III. Findings of the High Court

12. The High Court, after considering the notifications and taking into account

the exporters’ submissions, held that paragraph 4.27 of the FTP envisaged exports

in anticipation of authorisation, in terms of the cycle of import-manufacture-

export carried out, including delivery time of 3-4 months allowed normally by

overseas buyers, within minimum six months’ time for completion of the cycle.

The court considered this to be an unfeasible condition:

“Considering the above interpretation of the condition of physical

export and pre-import put forth by the DRI, it is more or less impossible

to make any exports under an Advance Authorisation without violating

the condition of pre-import. In effect and substance, what is given by

one hand is taken away by the other. In other words, in the light of the

condition of pre-import, the benefit of exemption from levy of integrated

tax and GST compensation cess becomes more or less illusory.”

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13. It was noted that while the ‘pre-import condition’ was levied on duties

collected under Sections 3 (7) and (9) of the Customs Tariff Act, 1975, in respect

of the levies under Sections 3 (1), (3) and (5) no ‘pre-import condition’ was

imposed. The result was that if the importer wanted benefit of exemption from

the levy of integrated tax and compensation cess, the fact that other levies were

not subject to ‘pre-import condition’ was immaterial because the same inputs

11

Supra note 1, para 27.

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were subject to it. This resulted in inputs being subject to ‘pre-import condition’

in respect of all the levies. The High Court then took note of the objects of the

FTDRA and the FTP, and the subsequent Notification No. 01/2019-Cus dated 10-

01-2019, whereby condition (xii) was omitted. The court held that the Union

found it to be in public interest not to continue with the ‘pre-import condition’,

for availing exemption from IGST and compensation cess leviable on material

imported against an AA. This, according to the impugned judgment, vindicated

the exporter/respondents’ stand. It was held accordingly that:

“The condition of pre-import militates against the Advance

Authorisation Scheme and therefore, the impugned condition (xii) in

Notification No. 18/2015-Cus dated 1st April, 2015 introduced vide

Notification No. 79/2017 : MANU/CUST/0095/2017 dated 13th

October, 2017 as well as the amendment in paragraph 4.14 of the

Foreign Trade Policy made vide Notification No. 33/2015-2020 dated

13th October, 2017, to the extent the same imposes a "pre-import

condition" in case of imports under Advance Authorisation for physical

export for exemption from the whole of the integrated tax and GST

compensation cess leviable under sub-section (7) and sub-section (9)

respectively, of section 3 of the Customs Tariff Act, do not meet with the

test of reasonableness and are also not in consonance with the scheme

of Advance Authorisation”.12

14. The court also concluded that though paragraph 4.27 of HBP clearly

permitted exports in anticipation of authorisation by endorsing the file number or

authorisation number to establish co-relation of export/supplies with

authorisation issued, the Revenue wished to treat such permissible imports made

in anticipation of authorisation as replenishment. This was despite the fact that

for the purpose of exemption from the other levies imposed under Sections 3(1),

12

Supra note 1.

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3(3) and 3(5) of the Customs Tariff Act, 1975 for decades the procedure was

permitted, and continued to be permitted, (for the purpose of exemption from levy

of IGST and compensation cess), yet, such imports were “suddenly” treated as

“replenishment imports” which was held to be “incomprehensible”.

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The court

held that that the impugned exemption notification and paragraph 4.14 of the

FTP, to the extent they were impugned did not meet with the test of

reasonableness and were held to be ultra vires the scheme of the FTP.

IV. The Union’s Contentions before this Court

15. Mr. N. Venkatraman, learned Additional Solicitor General (“ASG”)

appearing for the Union, urged that the essence of the AA was that the exporters

were expected to import duty-free materials first, and use them for the purpose of

manufacture of products to be exported out of India or be supplied under deemed

export, if allowed by the FTP or the customs notifications. This aspect of physical

incorporation of input materials in the export goods was covered under paragraph

4.03 of the FTP, which specifically demanded physical incorporation of imported

materials in export goods which was possible only if imports were made prior to

export. Therefore, such authorizations principally had an inbuilt ‘pre-import

condition’ which had to be followed. Paragraph 4.27 of the HBP for the relevant

period allowed exports / supplies in anticipation of an authorization. This was an

exception, to meet requirement in case of exigencies. However, importers and

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Supra note 1.

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exporters were availing the benefit of that provision without exception and the

export goods were made out of domestically or otherwise procured materials and

duty-free imported goods were used for purposes other than for the manufacture

of the export goods. Paragraph 4.27 (d) of the HBP barred benefit of export in

anticipation of authorization for the inputs with ‘pre-import condition’. The ASG

contested the exporters’ argument that there was no change in paragraph 4.27 of

HBP and that it merely imposed conditions in terms of paragraph 4.14 of the FTP

by way of ‘pre-import condition’.

16. It was stated that under paragraph 4.27(d), exports / supplies made in

anticipation of authorisation were not eligible for inputs with ‘pre-import

condition’. That meant that the moment input materials were subject to ‘pre-

import condition’, they were ineligible for export in anticipation of authorization,

by virtue of paragraph 4.27 (d). Therefore, the respondent pleaded based on

wrong notion and understanding and knowledge of the relevant provisions, and

the High Court erroneously relied upon such an incorrect submission.

17. It was argued that paragraph 4.27 (a) & (b), i.e., export in anticipation of

authorization and the ‘pre-import condition’ on the input materials were mutually

exclusive and could not go hand in hand. The impugned order did not take into

consideration this aspect of paragraph 4.27(d). Therefore, holding ‘pre-import

condition’ as unreasonable as the same was in contrast with paragraph 4.27 (a)

and also that the Government did not take enough care to eradicate such apparent

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paradox, was based on the wrong set of facts, and was contrary to the provisions

of the law.

18. It was argued that the High Court erred in setting aside paragraph 4.14 of

the FTP and the corresponding provisions of the customs notifications, that

imposed ‘pre-import’ and ‘physical export’ conditions, and held that the

contention of physical incorporation of the duty-free materials under paragraph

4.03 of the FTP was contrary to paragraph 4.27 of the HBP which specifically

allowed imports in anticipation of authorization. The observation of the court was

without merit. The court erroneously granted primacy to paragraph 4.27 of the

HBP over paragraph 4.03 of the FTP, when infact the FTP had pre-eminence over

the HBP for laying down the procedures to be followed by an exporter or importer

in terms of paragraph 1.03 of the FTP. Therefore, provision of the HBP could not

override the FTP in case of a conflict. It was argued that paragraph 4.27(d) limited

and confined the scope of paragraph 4.27(a). The moment paragraph 4.27(d)

came into picture, paragraph 4.27(a) became inoperative.

19. It was also urged that there was no conflict between paragraph 4.03 of the

FTP and that of 4.27(a) of the HBP. The scope and field of operation of individual

paragraphs were completely different. Paragraph 4.03(a) of the FTP provided

that:

“(a) Advance Authorisation is issued to allow duty free import of input,

which is physically incorporated in export product (making normal

allowance for wastage). In addition, fuel, oil, catalyst which is

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consumed / utilized in the process of production of export product, may

also be allowed.”14

20. The object and spirit of the AA scheme to allow duty free import of input,

which was to be physically incorporated in export product, was clear. The

relevant customs notifications too, referred to paragraph 4.03, which provided

that the AA was issued in terms of its provision for extending exemption. The

provision of physical incorporation of the inputs in the export goods, was

necessary for the purpose of the scheme, for two reasons. One, that input materials

actually imported were to be physically incorporated in the export goods and two,

that the goods physically incorporated in the export goods only could be imported

as input. As far as the first situation was concerned, there was no question of

replenishment, because the inputs imported became part of the exports. Such

goods were to be imported prior to the commencement of export to enable the

importer to manufacture finished goods from them. Therefore, for one had to

follow the ‘pre-import condition’ and at the same time they could not avail the

benefit of export in anticipation of authorization. In the second situation however,

the importer could use materials procured otherwise, instead of duty-free

materials to manufacture export goods, but the nature of materials (so procured)

had to be identical in all respects with the input materials to be imported. In other

words, materials which were to be used in export goods could only be allowed

for import. In this case, there was no need to follow the ‘pre-import condition’ -

14

Paragraph 4.03(a) of the FTP.

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the importer could avail the benefit of export in anticipation of authorization. The

Revenue contended that therefore paragraph 4.03 of FTP was not in conflict with

paragraph 4.27 of the HBP. In the absence of 4.27(d), these two provisions were

considered as complementary rather than in conflict. By inserting 4.27 (d), the

intent was clarified that the importer had to follow the provision of paragraph

4.03 of the FTP.

21. It was urged that the High Court erred in holding that ‘pre-import

condition’ had to be in respect of inputs, mentioned in paragraph 4.13 of the FTP,

which was not so in the present case. The court’s insistence that pre-import goods

were to be specifically mentioned under paragraph 4.13 of the FTP, it was

submitted, was misplaced. The Revenue pointed out that paragraph 4.13 (1) itself

left the issue of which inputs was to be subjected to ‘pre import condition’ open

to the DGFT to notify:

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"DGFT may, by Notification, impose pre-import condition for inputs

under this Chapter."

The provision clearly left open, the scope of imposing ‘pre-import condition’ on

any goods which could have been covered by the said Chapter 4 of the Policy.

Therefore, imposing, such condition across the board for all goods imported

under AA was well within the competence and authority of the policy makers. It

was argued that the High Court failed to notice that DGFT was duly empowered

to issue Notification No.33/2015-20 dated 13.10.2017. This notification was

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Paragraph 4.13(1) of FTP.

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general in nature and did not exclude any goods from its purview. The only

condition was that wherever the importer wanted to avail the benefit of IGST and

compensation cess exemption, the ‘pre-import condition’ had to be satisfied. In

absence of any negative list containing specific mention of a set of goods, which

were not to be covered by the said provision, all goods were covered by the said

notification and subject to a uniform condition. It was also urged that it was

neither practicable nor possible to specify each conceivable item for that purpose.

In absence of any negative list in the notification, such ‘pre-import condition’ was

applicable for all goods to be imported.

22. The ASG urged that the High Court erred in construing the purpose of

Appendix 4J- issued in tandem with paragraph 4.22 of the FTP during the

material period (under paragraph 4.42 of the HBP), which stated the export

obligation period with respect to various goods that were allowed to be imported.

Paragraph 4.22 was a general provision, specifying 18 months as the export

obligation period in general. It also provided that such a period was different for

a set of goods mentioned in Appendix-4J. Therefore, Appendix-4J was a part of

paragraph 4.22 and not a part of paragraph 4.13. Further, Appendix-4J was a

negative list for the purpose of paragraph 4.22, which specified a set of goods for

which export obligation period was different from the general provision. In

addition, in respect of those items additionally the ‘pre-import condition’ was

applicable. The heading of Appendix-4J ("Export Obligation Period for Specified

Inputs") clearly referred to paragraph 4.22 of the FTP and paragraph 4.42 of the

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HBP. It was clear that its purpose was to define export obligation period of

specified goods. It was submitted that merely because Appendix-4J provided for

compliance of ‘pre-import condition’, that did not mean that it became the list

meant for only goods on which the ‘pre-import condition’ was applicable.

23. It was argued that there was no conflict between paragraph 4.14 of the HBP

and paragraph 4.13 of the FTP because paragraph 4.14 imposed ‘pre-import

condition’ even in case of inputs not falling within the ambit of paragraph 4.13.

This conclusion was drawn based on an erroneous understanding that only limited

items covered under Appendix-4J were covered by paragraph 4.13. All articles

intended to be imported under AA, availing exemption from payment of IGST,

were covered by the Notification No. 33 / 2015-20 dated 13.10.2017, issued in

terms of paragraph 4.13 of the FTP. By virtue of the said notification, the moment

any manufacturer decided to import any item under AA availing IGST benefit,

the ‘pre-import’ requirement, as enumerated under paragraph 4.14, was attracted.

The notification acted as a bridge between paragraph 4.13 and 4.14 of the FTP.

They were in harmony with the spirit of the FTP.

24. The learned ASG urged that the notifications interpreted by the High Court

amended the conditions for granting exemption from the levy of certain taxes.

The respondent exporters had not challenged the power to impose the levies; their

only argument was that the ‘pre-import’ condition, which was introduced for the

first time in the notification, was burdensome. They also contend that these

conditions were contradictory and made business cumbersome. The ASG

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submitted that once the power to levy was undisputed, the conditions under which

such levies were imposed, and the manner in which they were collected, were

within the domain of the legislature or Parliament. Unless it was shown that the

statute imposed a method of collection that was capricious, or arbitrary, the courts

ought not to interfere with the levy. Similarly, a levy could fail if there was no

mechanism for assessment and collection. Reliance was placed on the decisions

reported as Khandige Sham Bhat v Agricultural Income Tax Officer

16

; Assistant

Commissioner of Urban Land Tax v Buckingham & Carnatic Co Ltd.

17

; R.K.

Garg v Union of India

18

; Union of India v VKC Footsteps India (P) Ltd

19

. It was

submitted that the courts ought to be circumspect while interpreting any fiscal

legislation, and not hold either the provisions or terms of exemptions, or

conditions imposed by the law, or through delegated legislation, as unreasonable,

or arbitrary. The learned ASG urged that being a new legislation, the Union had

to take into account divergent views and norms, and refashioning of the entire

indirect tax spectrum was called for.

25. It was lastly urged that the introduction of Notification No. 01/2019-Cus

dated 10-01-2019 by the Union, whereby, condition (xii) requiring the ‘pre-

import condition’, was omitted, could not be a ground to say that for the period

such a condition existed, it could be disregarded. It was argued that the said latter

16

1963 (3) SCR 809.

17

1970 (1) SCR 268.

18

1981 (1) SCR 947.

19

2022 (2) SCC 603.

19

notification could not by a process of judicial reasoning, be given retrospective

effect to, as even the substantive provisions of FTDRA did not permit subordinate

retrospective legislation.

V. Contentions of the Respondent-Exporters

26. Ms. Meenakshi Arora, learned senior counsel, argued that an AA under the

FTP could be issued either to a manufacturer-exporter or a merchant exporter tied

with a supporting manufacturer with past export performance (in at least the

preceding two financial years). The entitlement in terms of CIF value of imports

provided was up to 300% of the FOB value of the physical export and / or FOB

value of deemed export in preceding financial year or ₹ 1 crore, whichever was

higher. On fulfilment of the conditions prescribed under paragraph 4.03

of the FTP, respondents were issued AA licenses.

27. Upon notification of the levy IGST, the benefits of upfront

exemption granted to exporters through AA in the erstwhile FTP regime

were rescinded through the amendment introduced in the scheme by Notification

No. 26 / 2017-Customs dated 29 June 2017 (“Amending GST Notification”).

28. It was submitted that the AA scheme was operating without hitch or

misuse, from its inception since 1986, without any ‘pre-import condition’. It had

been successfully operating even from 10.01.2019 onwards when the Central

Government deleted the ‘pre-import condition’ in public interest. Thus, there was

no rationale or justification in imposing the ‘pre-import condition’ only for a

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limited period from 13.10.2017 to 09.01.2019 to a scheme operating successfully

without any such condition.

29. It was urged that the ‘pre-import condition’ was made applicable for such

limited period only for exemption from IGST and compensation cess,

whereas other import duties, namely, BCD, ADD, Safeguard Duty etc. were

exempt even during this period of about 13 months without the ‘pre-import

condition’.

30. It was submitted that no reason or justification was provided for subjecting

IGST and compensation cess to this ‘pre-import condition’, and not applying this

condition for other types of import duties. If ‘pre-import condition’ was

applicable for AA, then the whole scheme would be nullified because it

was impossible for any manufacturer-importer to satisfy the ‘pre-import

condition’ when the export orders were to be executed by supplying the final

products within a short period of 4 weeks to 8 weeks after receiving the

purchase orders from overseas customers. In a typical case, the manufacturer-

exporter could export goods only after more than six months from receiving the

purchase orders, if the ‘pre-import condition’ was to be satisfied. Consequently,

the delivery schedule of about 4 to 8 weeks from receiving purchase orders could

not have been fulfilled. It was additionally argued that all imports under an

authorization were subject to "actual user condition". Therefore, manufacturer

exporters were not allowed to sell or dispose of input raw materials imported free

of duties against any authorization. Regular exporters conducted their business in

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a cycle, i.e., by importing input-raw materials free of duties against several

authorizations granted to them, and utilizing such goods for manufacturing final

products for export with reference to those several authorizations. Consequently,

there could be no ‘one to one’ correlation between import of a consignment of

inputs against one particular authorization and utilization of such inputs for

manufacturing final products for export against those particular authorizations

only – such a scenario was not possible for regular manufacturer-exporters. On

realizing that the ‘pre-import condition’ did not serve any purpose, the Union

deleted the condition on 10.01.2019, which vindicated the exporters’ stand that

the condition was irrelevant to the scheme, and that condition had no nexus with

the objectives of the AA scheme.

31. It was submitted that the ‘pre-import condition’ violated Article 14, which

permitted reasonable classification to achieve specific ends. The respondents

relied on Laxmi Khandsari vs. State of Uttar Pradesh

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; State of Haryana v Jai

Singh

21

; Welfare Association ARP v Ranjit P. Gohil

22

; and urged that for

classification to be reasonable, it should fulfil the two tests. One, it should not be

arbitrary, artificial or evasive, and should be based on intelligible differentia,

some real and substantial distinction, which distinguished persons or things

grouped together in the class from others left out of it. Two, the differentia

20

1981(3) SCR 92.

21

2003 (9) SCC 114.

22

2003 (9) SCC 358.

22

adopted as the basis of classification must have a rationale or reasonable nexus

with the object sought to be achieved by the statute in question.

32. Counsel argued that the High Court concluded, correctly, that the

introduction of the ‘pre-import condition’ was an instance of class legislation.

The Union meted out differential treatment to the same class of license holders by

enabling only certain class of license holders to avail the IGST benefit. This was

because those who fulfilled the export obligation before importing the goods

were denied the opportunity to avail the benefit of IGST exemption.

33. The imposition of ‘pre-import condition’ on AAs issued prior to

13.10.2017 placed the exporter-respondents in the shoes of any importer who did

not hold any license. The respondents had imported the goods after fulfilling the

corresponding export obligation. It was impossible to fulfil the ‘pre-import

condition’ mandated for old AAs through a retrospective application of an

amendment in the impugned notifications, even though the respondents could

demonstrate that all imported goods were subsequently used for

manufacturing export products.

34. Learned counsel for the respondents highlighted that there was no reason

for differential treatment of BCD and IGST under the AA scheme. When the levy

of IGST on imported goods was treated like the levy of BCD, there was no reason

why the unconditional exemption of BCD granted to license holders under the

scheme could not be extended to the IGST exemption available for goods

imported under the same scheme. This differential treatment meted out to

23

the IGST benefit when compared to the BCD exemption under the original

Notification No. 18 / 2015-Customs was not justified and failed the test of

reasonable classification under Article 14 of the Constitution. There was no

intelligible differentia between the two in denying the benefit for IGST while

granting exemption for BCD. There was also no rationale behind the

classification IGST and BCD for exemption, at par with the objectives under the

scheme.

35. Learned counsel for the respondents relied on Union of India (UOI)

and Ors. vs. N.S. Rathnam & Sons

23

which held that grant of different

exemption based on unintelligible differentia between two categories of

assesses for payment of customs duty was discriminatory and unreasonable.

Learned counsel also cited MRF Ltd., Kottayam v. Asst. Commissioner

(Assessment) Sales Tax & Ors.

24

to submit that imposing the ‘pre-import’

stipulation in respect of two levies was arbitrary and unreasonable.

36. Reliance was also placed upon the decision of this court in the case of Vasu

Dev Singh v. Union of India

25

, for the proposition that the nature of delegated

legislation could be broadly classified as rule- making power and grant of

exemption from the operation of a statute. In the latter category, the scope of

judicial review would be wider as the statutory authority while exercising

its statutory power must show that the same had not only been done within the

23

2015 (8) SCR 751.

24

2006 Supp (6) SCR417.

25

2006 Supp (9) SCR 565.

24

four corners thereof but otherwise fulfilled the criteria laid down by this court in

P. J. Irani v. State of Madras

26

. The court held that if by a notification, the Act

was effaced, it was liable to be struck down.

37. It was submitted that the entire AA scheme was effaced by virtue of the

‘pre-import condition’ and therefore, such condition was required to be

struck down. Reliance was placed upon Laxmi Khandsari (supra), where the

court held that in imposing restrictions, the State ought to adopt an objective

standard amounting to social control by restricting the rights of the citizens

·where the necessities of the situation demand. When the validity of a law placing

restrictions upon the exercise of fundamental rights in Article 19(1)(g) is

challenged, the onus of proving to the satisfaction of the court that the restriction

is reasonable lies upon the State. It was submitted that this is not a case of first-

time exemption. As the Union sought to place restrictions, it had to show that the

conditions were remedial and necessary. It was hence contended that as there was

no rationale behind introducing the ‘pre-import condition’ (which had no nexus

with the object sought to be achieved by the AA scheme), it violated Article 19(1)

(g) of the Constitution, and was accordingly set aside.

VI. Analysis and Findings

38. The AA scheme is a duty exemption scheme introduced by the Union,

under the FTP. Under the scheme, exemption from the payment of import duties

26

1962 (2) SCR 169

25

is given to raw materials / inputs required for the manufacture of export products

i.e., one can import raw materials or inputs at zero customs duty for production

of export products. The purpose of this scheme is to ensure competitiveness of

India’s products in the global market. When duties paid on raw materials are

saved, it reduces the cost of the final export product. In terms of the scheme, the

exporter can import raw materials duty-free.

27

These inputs either can be in a raw

/ natural / unrefined / unmanufactured or manufactured state. Advance Licenses

are issued to allow duty-free import of inputs, which are then physically

incorporated in export goods (after making normal allowance for wastage). In

addition to this, fuel, oil, the catalyst which is consumed / utilized in the process

of production of export product, may also be allowed. Imports under an AA were

exempted from the payment of Basic Customs Duty (BCD), Additional Customs

Duty, Education Cess, Anti-dumping Duty, Countervailing Duty (CVD),

Safeguard Duty, and Transition Product Specific Safeguard Duty, wherever

applicable.

39. The principal challenge before the High Court, was to the ‘pre-import

condition’ in paragraph 4.14 of FTP inserted by Notification No. 33/2015-2020

dated 13.10.2017 and the ‘pre-import condition’ introduced by clause (xii) in

Notification No. 18/2015-Cus dated 01.04.2015 by Notification 79/2017-

Customs dated 13.10.2017.

27

As per Chapter 9 of FTP paragraph 9.44, “Raw material” is input(s) required for

manufacturing of goods.

26

40. Chapter IV of the FTP provides for "Duty Exemption/Remission

Schemes". One of the duty exemption schemes is the AA. Paragraph 4.03 of the

policy makes provision for AA and reads thus:

"4.03 Advance Authorisation

(a) Advance Authorisation is issued to allow duty free import of input,

which is physically incorporated in export product (making normal

allowance for wastage). In addition, fuel, oil, catalyst which is

consumed/utilized in the process of production of export product, may

also be allowed.

(b) Advance Authorisation is issued for inputs in relation to resultant

product, on the following basis:

(i) As per Standard Input Output Norms (SION) notified (available in

Hand Book of Procedures);

OR

(ii) On the basis of self declaration as per paragraph 4.07 of Handbook

of Procedures."28

41. The other relevant provisions of the FTP for purposes of this case, are

paragraphs 4.13, 4.14 and 4.16, which, as they stood at the relevant time when

FTP 2015-2020 was introduced, read as follows:

"4.13 "pre-import condition" in certain cases

(i) DGFT may, by Notification, impose "pre-import condition" for

inputs under this Chapter.

(ii) Import items subject to "pre-import condition" are listed in

Appendix 4-J or will be as indicated in Standard Input Output Norms

(SION).

(iii) Import of drugs from unregistered sources shall have pre-import

condition."

4.14 Details of Duties exempted

Imports under Advance Authorisation are exempted from payment of

Basic Customs Duty, Additional Customs Duty, Education Cess, Anti-

dumping Duty, Countervailing Duty, Safeguard Duty, Transition

Product Specific Safeguard Duty, wherever applicable. Import against

supplies covered under paragraph 7.02 (c), (d) and (g) of FTP will not

be exempted from payment of applicable Anti-dumping Duty,

Countervailing Duty, Safeguard Duty and Transition Product Specific

Safeguard Duty, if any.

**************

28

Paragraph 4.03 of the FTP.

27

4.16 Actual User Condition for Advance Authorisation

(i) Advance Authorisation and/or material imported under Advance

Authorisation shall be subject to 'Actual User' condition. The same

shall not be transferable even after completion of export obligation.

However, Authorisation holder will have option to dispose of product

manufactured out of duty free input once export obligation is

completed.

(ii) In case where CENVAT/input tax credit facility on input has been

availed for the exported goods, even after completion of export

obligation, the goods imported against such Advance Authorisation

shall be utilized only in the manufacture of dutiable goods whether

within the same factory or outside (by a supporting manufacturer). For

this, the Authorisation holder shall produce a certificate from either the

jurisdictional Customs Authority or Chartered Accountant, at the

option of the exporter, at the time of filing application for Export

Obligation Discharge Certificate to Regional Authority concerned.

(iii) Waste/Scrap arising out of manufacturing process, as allowed, can

be disposed off on payment of applicable duty even before fulfillment of

export obligation."

42. Exercising powers conferred under paragraph 1.03 of FTP, the DGFT

notified the HBP by a Public Notice dated 01.04.2015. Paragraph 4.27 (a)

provides for "Exports in Anticipation of Authorisation" which is extracted below:

"4.27 Exports in Anticipation of Authorisation

Exports/supplies made from the date of EDI generated file number for

an Advance Authorisation, may be accepted towards discharge of EO.

Shipping/Supply document(s) should be endorsed with File Number or

Authorisation Number to establish co-relation of exports/supplies with

Authorisation issued.

(b) If application is approved, authorisation shall be issued based on

input / output norms in force on the date of receipt of application by

Regional Authority. If in the intervening period (i.e from date of filing

of application and date of issue of authorisation) the norms get

changed, the authorization will be issued in proportion to provisional

exports / supplies already made till any amendment in norms is notified.

For remaining exports, Policy / Procedures in force on date of issue of

authorisation shall be applicable.

(c) The export of SCOMET items shall not be permitted against an

Authorisation until and unless the requisite SCOMET Authorisation is

obtained by the applicant.”

28

43. The provision permitted exports in anticipation of authorisation and

permits exports towards discharge of export obligation on the basis of the file

number even prior to the grant of AAs. The High Court held that this condition

had not been modified and export in anticipation of authorisation was permitted.

44. By the Notification No. 18/2015-Cus dated 01.04.2015, issued in exercise

of powers under Section 25 (1) of the Customs Act, 1962, goods imported into

India against valid AAs were exempted from the whole of the duty of customs

leviable thereon which was specified in the First Schedule to the Customs Tariff

Act, 1975 and from the whole of the additional duty, safeguard duty, transitional

product specific safeguard duty and anti-dumping duty leviable thereon,

respectively, under Sections 3, 8B, 8C and 9A of the Act. The GST regime came

into force with effect from 01-07-2017. However, no corresponding amendment

was carried out to this notification but Section 3 of the Customs Tariff Act, 1975

was amended by substituting Sections 3 (7) and (9), whereby levy of integrated

tax [under Section 5 of the Integrated Goods and Services Tax Act, 2017 and levy

of Goods and Service Tax compensation cess leviable under Section 8 of the GST

Act (Compensation to States) Cess Act, 2017] was incorporated:

"(7) Any article which is imported into India shall, in addition, be liable

to integrated tax at such rate, not exceeding 40% as is leviable under

section 5 of the Integrated Goods and Services Tax Act, 2017 on a like

article on its supply in India, on the value of the imported article as

determined under sub-section (8).

********* ****************

(9) Any article which is imported into India shall, in addition, be liable

to the Goods and Services Tax compensation cess at such rate, as is

leviable under section 8 of the Goods and Services Tax (Compensation

29

to States) Cess Act, 2017 on a like article on its supply in India, on the

value of the imported article as determined under sub-section (10)."

45. Section 3 of the Customs Tariff Act, 1975 as amended after the coming

into force of the GST regime, provided for levy of the following additional duties:

(1) levy of a duty (referred to as additional duty) equal to the excise duty

for the time being leviable on a like article if produced or manufactured in

India [Section 3 (1) CTA];

(2) levy of such additional duty as would counter-balance the excise duty

leviable on any raw materials, components, and ingredients of the same

nature as, or similar to those, used in the production or manufacture of such

article [Section 3 (3) CTA];

(3) levy of additional duty as would counter-balance the sales tax, value

added tax, local tax or any other charges for the time being leviable on a

like article on its sale, purchase or transportation in India [SAD, under

Section 3 (5) CTA];

(4) levy of integrated tax as leviable under section 5 of the Integrated

Goods and Services Tax Act, 2017; [under Section 3 (7) CTA] and;

(5) levy of GST compensation cess at such rate as is leviable under section

8 of the Goods and Services Tax (Compensation to States) Cess Act, 2017

[SAD, under Section 3 (9) CTA].

46. As there was no corresponding notification exempting the additional duties

leviable under Sections 3 (7) and (9) CTA, exporters had to pay IGST and

compensation cess and seek input tax credit as applicable under the GST Rules.

Import under AA, however, continued to be exempt from payment of basic

customs duty and additional customs duty specified in subsections (1), (3) and

30

(5) of section 3 of the CTA, education cess, anti-dumping duty, safeguard duty

and transition product specific safeguard duty, wherever applicable.

47. Since IGST and compensation cess was levied against AAs, they were

apparently challenged before the Delhi High Court in several petitions, wherein

interim relief was granted. Because of the initial problems relating to GST, the

committed refund of IGST got delayed, resulting in blocking of working capital

for many businesses. The Union then issued an amending notification dated 13-

10-2017 in exercise of powers under Section 25 (1) of the Customs Act, 1962

(Notification 79/2017 - dated 13.10.2017) inter alia amending the opening

paragraph of Notification 18 / 2015 (dated 1.4.2015) whereby goods imported

into India were exempted from the whole of the duty of customs leviable thereon,

specified in the First Schedule to the Customs Tariff Act, 1975 and from the

whole of the additional duty leviable thereon under sub-sections (1), (3) and (5)

of Section 3, IGST leviable thereon under sub-section (7) of section 3 and

compensation cess leviable under sub-section (9) of section 3. The amending

notification also introduced a proviso in condition (viii), after the proviso which

reads thus:

"Provided further that notwithstanding anything contained

hereinabove for the said authorisations where the exemption from

integrated tax and the goods and services tax compensation cess

leviable thereon under sub-section (7) and sub-section (9) of section 3

of the Customs Tariff Act, has been availed, the export obligation shall

be fulfilled by physical exports only."

The said notification also inserted condition (xii) which reads thus:

31

"(xii) that the exemption from integrated tax and the goods and services

tax compensation cess leviable thereon under sub-section (7) and sub-

section (9) of section 3 of the Customs Tariff Act shall be subject to pre-

import condition."

48. Thus, exemption from levy of IGST under Section 3 (7) and compensation

cess leviable under Section 3 (9) of Customs Tariff Act, 1975 were subject to the

conditions that the export obligation shall be fulfilled by physical exports only

and shall also be subject to ‘pre-import condition’. Together with the amendment

of the exemption notification, by Notification No. 33/2015-2020 (dated 13-10-

2017), paragraph 4.14 of the FTP was also amended to read as follows:

"4.14: Details of Duties exempted.

Imports under Advance Authorisation are exempted from payment of

Basic Customs Duty, Additional Customs Duty, Education Cess, Anti-

dumping Duty, Countervailing Duty, Safeguard Duty, Transition

Product Specific Safeguard Duty, wherever applicable. Import against

supplies covered under paragraph 7.02 (c), (d) and (g) of FTP will not

be exempted from payment of applicable Anti-dumping Duty,

Countervailing Duty, Safeguard Duty and Transition Product Specific

Safeguard Duty, if any. However, imports under Advance Authorisation

for physical exports are also exempt from whole of the integrated tax

and Compensation Cess leviable under sub-section (7) and sub-section

(9) respectively, of section 3 of the Customs Tariff Act, 1975 (51 of

1975), as may be provided in the notification issued by Department of

Revenue, and such imports shall be subject to pre-import condition."

49. It is important to notice, at this stage, that exporters were made aware of

the changes brought about due to the introduction of GST, through a trade notice,

(Trade Notice 11/2017, dated 30-06-2017). To the extent it is relevant to the

present case, is extracted below:

“Trade Notice 11/2017

Subject: Important FTP provisions in the context of the implementation

of the GST regime applicable w.e.f 01.07.2017

32

Under the GST regime, no exemption from payment of integrated GST

and Compensation Cess would be available for imports under Advance

Authorisation.

The chapter wise provisions of the FTP 2015-20:

General Provision:

************ *************

Chapter 4

Under the GST regime, no exemption from payment of integrated GST

and Compensation Cess would be available for imports under Advance

Authorisation.

Importers would need to pay IGST and take input tax credit as

applicable under GST rules.

However, imports under Advance Authorisation would continue to be

exempted from payment of Basic Customs Duty, Additional Customs

Duty specified under Section 3( l), 3(3) and 3(5) of the Customs Tariff

Act, Education Cess, Anti-dumping Duty, Safeguard Duty and

Transition Product Specific Safeguard Duty, wherever applicable.

Applicable GST would need to be paid white making local procurement,

using an invalidation letter of Advance Authorisation IDFIA. Recipient

of goods can take Input Tax Credit CITC) of the GST paid on such local

procurement.

This Input Tax Credit can be utilized as per GST rules.

Advance Release Order facility shall not be available for procurement

of inputs 11nder Advance Authorization scheme except for inputs listed

in Schedule 4 of Central Excise Act, 1944 read with The Taxation Laws

(Amendment) Act 2017 No 18 of 2017, with effect from July l, 2017. RAs

are directed not to issue ARO except for Schedulc-4 items as stated

above.

Imports/exports under the replenishment schemes for the Gems and

Jewellery sector covered under chapter 4 of FTP and HBP shall be

subject to Customs Notification issued/ to be issued in this regard.”

50. The public notice clearly forewarned that AAs and their utilisation would

not continue in the same manner as the AA scheme was operating hitherto. This

trade notice has escaped the attention of the High Court, since there is no

advertence to it in the impugned order, or a discussion about it. Likewise, the

HBP was amended, and paragraph 4.27 (d) was inserted, which stated that duty

33

free authorisation for inputs subject to ‘pre-import condition’ could not be issued.

The said clause is as follows:

“(iv) No Duty Free Import Authorisation shall be issued for an input

which is subjected to pre-import condition.”

51. By virtue of the trade notice, exporters were made aware of the fact that

under the GST regime, no exemption from payment of IGST and compensation

cess would be available for imports under AA. Importers had to pay IGST and

take input tax credit as applicable under GST rules.

52. It is a matter of law that FTPs are statutory and are framed by the Union,

exercising its powers under Section 5 of the FTRA

29

. On the other hand, the HBP

does not have the status of rules or regulations. It merely contains guidelines. In

Hindustan Granites v Union of India

30

this court observed that:

“Handbook of Procedure merely implements the policy. It does not

prevent the Central Government from changing the policy.”

53. The facts in Hindustan Granites were that on 01.04.2004, FTP 2004-2009

came into force. The said FTP permitted Domestic Tariff Area (“DTA”) sales by

units, “other than gems and jewellery units”, up to 50% of FOB value of exports

subject to fulfilment of positive Net Foreign Exchange Earnings (“NFE”) on

payment of concessional duties. Paragraph 6.8 (h) stated that:

“(h) EOU/EHTP/STP/BTP units may sell finished products, which are

freely importable under the Policy in the DTA under intimation to the

Development Commissioner against payment of full duties provided

they have achieved the positive NFE.”

29

Union of India v. Asian Food Industries, (2006) Supp (8) SCR 485.

30

2007 (4) SCR 743.

34

54. By a notification paragraph 6.8(a) and paragraph 6.8(h) of the said FTP

were amended, preventing EOUs from making DTA sales of the finished marble

made from imported rough marble, with immediate effect. The change was made

a few months after renewal of letter of permission to the unit, authorizing it to

manufacture and export marble tiles for 5 years, subject to a specified monetary

limit. The contention that the FTP could not have been amended, was negatived,

by this court.

55. The impugned judgment, in the present case, is premised broadly on the

reasoning that the amendment by Notification 79/2017 dated 13.10.2017 to the

extent it required payment of duty, and, in the case of advance authorizations, the

fulfilment of ‘pre-import conditions’ was unreasonable and arbitrary. It was

concluded that the amendment is contrary to the objective of the FTP. Further, it

has been held that ‘pre-import conditions’ are in respect of specific goods and,

the notifications impugned, inasmuch as they apply ‘pre-import condition’ to all

goods, is contrary to the provision. Further, the absence of ‘pre-import

conditions’ in respect of basic customs duty, and other levies, where in

anticipation of AAs, duty free imports can be made, in contradistinction with the

need to follow such ‘pre-import conditions’ in respect of IGST and compensation

cess, rendered the AAs worthless. Lastly, it was held that exporters, who have to

import inputs, would face impossibility in fulfilling the ‘pre-import condition’,

because the normal cycle of import of inputs and export of finished products

35

would be for a period of six months, whereas the period, which the regime

permits, would work out to three months.

56. It would be necessary to first analyse the introduction of the ‘pre-import

condition’. The FTP, inter alia, facilitated AAs for duty-free import of input,

which is physically incorporated in export product, making normal allowance for

wastage (paragraph 4.03 of the FTP). No doubt, the rationale or object behind

this was to smoothen and facilitate export trade, ensuring that finished goods,

meant for export, did not suffer a competitive price disadvantage. However, the

concept of ‘pre-import condition’ was not alien – Appendix-4J (mentioned in

paragraph 4.13 (ii) of the FTP) listed several articles, such as spices, penicillin

and its salts, tea, coconut oil, silk, drugs from unregistered sources, precious

metals, etc. as articles for which the ‘pre-import condition’ was applicable, prior

to the GST regime. Furthermore, by paragraph 4.13 of the FTP, the DGFT could

impose ‘pre-import conditions’ on articles other than those specified:

“(i) DGFT may, by Notification, impose "pre-import condition" for

inputs under this Chapter.”

57. The retention of the power to impose ‘pre-import conditions’ on articles

other than those specified in Appendix-4J, meant that the DGFT could exercise

it, in relation to any goods. The High Court has not discussed this aspect, and

proceeded on the assumption that only specified goods were subject to the ‘pre-

import condition’. The existence of paragraph 4.13 (i) reserving the power to

insist upon the ‘pre-import condition’, meant that the policy was capable of

36

change, depending on the exigencies of the time. This omission, together with the

High Court’s failure to notice paragraph 4.27 (d) of the HBP are serious

infirmities in the impugned judgment.

58. Now, coming to the notifications dated 13.10.2017 (No. 79/2017, issued

under the Customs Act, 1962) and No. 33 (issued in exercise of Section 5 of the

FTDRA read with Para 1.02 of the FTP) the exemption from payment of IGST at

the time of import of input materials under AA was granted. The exemption was,

however, not absolute. The conditions incorporated in the Notification (No.

79/2017), were one, that the exemption could only be extended so long as exports

made under the AAs were physical exports in nature and the other that to avail

such benefit, one was to follow the ‘pre-import condition’.

59. ‘Physical export’ is defined in paragraph 4.05(c) and paragraph 9.20 of the

FTP read with Section 2(e) of the FTDRA as follows:

(e) "import" and 'export" means respectively bringing into, or taking

out of, India ang goods by land, sea or air”

Essentially, therefore, export involves taking goods out of India. AAs can be

issued either to a manufacturer exporter or merchant exporter tied to supporting

manufacturer (as per paragraph 4.05). However, paragraph 4.05 of the FTP

defines categories for which AAs can be issued, somewhat expansively and

prescribes that –

“(c) Advance Authorization shall be issued for:

(i) Physical export (including export to SEZ);

(ii) Intermediate supply; and/ or

(iii) Supply of goods to the categories mentioned in paragraph 7.02 (b),

(c), (e), (f) (g) and (h) of this FTP.

37

(iv) Supply of 'stores' on board of foreign going vessel / aircraft, subject

to condition that there is specific Standard Input Output Norms in

respect of item supplied.”

The definition extends in specific terms (under Chapter 4 of FTP) - supplies made

to SEZ are considered as ‘physical exports’ despite not being an event in which

goods are being taken out of India. The other three categories defined under (c)

(ii), (iii) & (iv) are ineligible as ‘physical exports’. Supplies of intermediate goods

are covered by letter of invalidation, whereas supplies covered under Chapter 7

of the FTP are considered as ‘deemed exports’. These supplies are ineligible for

being considered ‘physical exports’. Therefore, any category of supply, be it

under letter of invalidation and/or to EOU and/or under International Competitive

Bidding (ICB) and/or to Mega Power Projects, other than actual exports to other

country and supply to SEZ, cannot be considered as ‘physical exports’. One of

the objects behind the impugned notifications was to ensure that the entire exports

made under AAs towards discharge of export orders were physical exports. In

case the entire exports were not physical exports, the AAs were automatically

ineligible for exemption.

60. The introduction of the GST regime resulted in a substantial and

fundamental overhaul of the indirect tax structure, at the State and Central levels.

The GST regime is based on the idea of removing cascading effect of the taxes.

The cascading effect of taxes mean levy of tax on tax. The GST is levied on the

net value added portion and not on the entire transaction value as the taxpayer

would enjoy input tax credit. Barring few indirect taxes, all the major indirect

38

taxes levied by the Central and State governments are subsumed into the GST.

Consequently, taxpayers and suppliers are untroubled about paying multiple

indirect taxes under different laws. In the GST framework, simple rules have been

prescribed to utilize the cross-sectional credit of input taxes. A trader who could

not claim credit of tax paid on services, can seek and get credit on goods as well

as services. This framework of seamless credit was introduced to safeguard that

taxes on supplies are paid to the extent of value additions and net liability- and to

avoid double taxation.

61. The introduction of GST meant considerable legislative exercise in the

form of repeal of several enactments (in the wake of the 101

st

Amendment to the

Constitution, introducing Articles 246A, 269A, 279A, amendment to Articles 286

and 366, besides amending List I, II and III of the Seventh Schedule) and

enactment of an entirely new set of laws. In this scheme, the new levies were

IGST and compensation cess. These were not part of the original Notification No.

18/2015, and necessitated its amendment. Since the entire GST universe, so to

say, is dependent on a comprehensive input credit and refund system, the policy

makers (which in this case, were tax administrators and the DGFT) were of the

opinion that since countervailing duty (CVD) and special additional duty (SAD),

which were subsumed under the GST regime and the other levy (compensation

cess), the previous regime of permitting AAs to govern import of duty free

articles, as inputs, should continue, but that for the new levies, the system of input

credit, and refunds should prevail.

39

62. In this court’s opinion, the introduction of the ‘pre-import condition’ may

have resulted in hardship to the exporters, because even whilst they fulfilled the

physical export criteria, they could not continue with their former business

practices of importing inputs, after applying for AAs, to fulfil their overseas

contractual obligations. The new dispensation required them to pay the two

duties, and then claim refunds, after satisfying that the inputs had been utilized

fully (wastage excluded) for producing the final export goods. The re-shaping of

their businesses caused inconvenience to them. Yet, that cannot be a ground to

hold that the insertion of the ‘pre-import condition’, was arbitrary, as the High

Court concluded. It was held, in Rohitash Kumar & Ors. v Om Prakash Sharma

& Ors

31

that inconvenience or hardship is not a ground for the court to interpret

the plain language of the statute differently, to give relief.

“In Mysore SEB v. Bangalore Woolen Cotton & Silk Mills Ltd. AIR

1963 SC 1128 a Constitution Bench of this Court held that,

"inconvenience is not" a decisive factor to be considered while

interpreting a statute. In Martin Burn Ltd. V. Corpn. Of Calcutta AIR

1966 SC 529, this Court, while dealing with the same issue observed as

under: (AIR p. 535, para 14)

"14. . A result flowing from a statutory provision is never an evil. A

Court has no power to ignore that provision to relieve what is considers

a distress resulting from its operation. A statute must of course be given

effect to whether a court likes the result or not."

26. Therefore, it is evident that the hardship caused to an individual,

cannot be a ground for not giving effective and grammatical meaning

to every word of the provision, if the language used therein is

unequivocal."

31

(2013) 11 SCC 451.

40

Again, in State of Madhya Pradesh v Rakesh Kohli

32

it was observed that the

court is not concerned with the wisdom or unwisdom, the justice or injustice of

the law as Parliament and State Legislatures and that “hardship is not relevant in

pronouncing on the constitutional validity of a fiscal statute or economic law.”

63. The respondents had relied on some decisions, notably Laxmi Khandsari

(supra) which dealt with the general theory of reasonableness; the court observed

that imposition of reasonable restrictions and its extent would depend upon the

object which the law or policy seeks to serve. It was held that it was difficult to

lay down any hard and fast rule of universal application but in imposing such

restrictions the State must adopt an objective standard amounting to a social

control. In Ranjit P. Gohil (supra) the court in fact held that:

“It is difficult to expect the Legislature carving out a classification

which may be scientifically perfect or logically complete or which may

satisfy the expectations of all concerned, still the court would respect

the classification dictated by the wisdom of Legislature and shall

interfere only on being convinced that the classification would result in

pronounced inequality or palpable arbitrariness on the touchstone of

Article 14.”

64. The decision reported in MRF Ltd., Kottayam (supra) was relied upon to

say that withdrawal of exemptions or tax benefits cannot be resorted to. Facially,

this court’s observations with respect to withdrawal of tax exemption appear to

be favourable to the respondents. Yet, what weighed with this court was that the

power of withdrawal of exemption was not retrospective:

“Thus while Sub-section (1) authorizes the grant of an exemption or

reduction in rate with retrospective effect in respect of any tax payable

32

2012 (6) SCR 661.

41

under the Act, Sub-section (3) does not provide for any cancellation or

variation retrospectively.”

In the circumstances, this decision has no application to the facts of this case,

because the facility of AA without ‘pre import condition’ was introduced

prospectively.

65. The respondents had alleged discrimination on two counts: one, that for

purposes of classification, all exporters who were granted AAs were to be treated

alike; and two, that insisting on the ‘pre-import condition’ in respect to exemption

from two levies only, while granting that benefit in respect of other AAs, was

discriminatory. As far as the first aspect is concerned, the impugned judgment, in

this court’s opinion, is on a misreading of the FTP. As noted earlier, paragraph

4.13 (i) itself empowered the DGFT to include articles, which are not specified

in Appendix-4J. The existence of this discretion means that there is flexibility in

regard to the nature of policies to be adopted, having regard to the state of export

trade, and concessions to be extended in the trade and tax regime. Thus, the

indication of a few items by virtue of paragraph 4.13 (ii) per se never meant that

other articles could not be subjected to ‘pre import conditions’. Clearly, therefore,

all AA holders were never treated alike. On the second aspect, what hurt the

respondents was not classification of AAs per se, but their differentiation in the

newly introduced tax regimes, so far as two new levies are concerned. If one

keeps in mind that there cannot be a blanket right to claim exemption, and that

such a relief is dependent on the assessment of the State and tax administrators,

42

as well as the state of the economy and above all, the mechanism for its

administration, clearly the argument of discriminatory treatment of the two levies

on the one hand, and the other taxes on the other, has to fail. The exemption from

the requirement of pre import conditions continues in respect of the old levies,

which are, even as on date, not part of the GST regime. That clearly sets them

apart from the new levies, the payment of which is insisted (after which refund

can be sought) as a part of a unified system of levy, assessment, collection,

payment, and refund.

66. This court has held, on previous occasions, that when reform by way of

new legislation is introduced, the doctrine of classification cannot be applied

strictly, and that some allowance for experimentation, to observe the effect of the

law, is available to the executive or legislature. This was emphasized in State of

Gujarat v Shri Ambica Mills

33

“55. A classification is under-inclusive when all who are included in

the class are tainted with the mischief but there are others also tainted

whom the classification does not include. In other words, a

classification is bad as under-inclusive when a State benefits or burdens

persons in a manner that furthers a legitimate purpose but does not

confer the same benefit or place the same burden on others who are

similarly situated. A classification is over-inclusive when it includes not

only those who are similarly situated with respect to the purpose but

others who are not so situated as well. In other words, this type of

classification imposes a burden upon a wider range of individuals than

are included in the class of those attended with mischief at which the

law aims. Herod ordering the death of all male children born on a

particular day because one of them would some day bring about his

downfall employed such a classification.

56. The first question, therefore, is, whether the exclusion of

establishments carrying on business or trade and employing less than

33

1974 (3) SCR 760.

43

50 persons makes the classification under-inclusive, when it is seen that

all factories employing 10 or 20 persons, as the case may be, have been

included and that the purpose of the law is to get in unpaid

accumulations for the welfare of the labour. Since the classification

does not include all who are similarly situated with respect to the

purpose of the law, the classification might appear, at first blush, to be

unreasonable. But the Court has recognised the very real difficulties

under which legislatures operate - difficulties arising out of both the

nature of the legislative process and of the society which legislation

attempts perennially to reshape - and it has refused to strike down

indiscriminately all legislation embodying classificatory inequality

here under consideration. Mr. Justice Holmes, in urging tolerance of

under-inclusive classifications, stated that such legislation should not

be disturbed by the Court unless it can clearly see that there is no fair

reason for the law which would not require with equal force its

extension to those whom it leaves untouched.

*************** *********

64. Laws regulating economic activity would be viewed differently from

laws which touch and concern freedom of speech and religion, voting,

procreation, rights with respect to criminal procedure, etc. The

prominence given to the equal protection Clause in many modern

opinions and decisions in America all show that the Court feels less

constrained to give judicial deference to legislative judgment in the

field of human and civil rights than in that of economic Regulation and

that it is making a vigorous use of the equal protection Clause to strike

down legislative action in the area of fundamental human rights. [See

"Developments Equal Protection", 32 Harv, Law Rev 1065, 1127]

65. The question whether, Under Article 14, a classification is

reasonable or unreasonable must, in the ultimate analysis depend upon

the judicial approach to the problem. The great divide in this area lies

in the difference between emphasising the actualities or the

abstractions of legislation. The more complicated society becomes, the

greater the diversity of its problems and the more does legislation direct

itself to the diversities.

66. That the legislation is directed to practical problems, that the

economic mechanism is highly sensitive and complex, that many

problems are singular and contingent that laws are not abstract

propositions and do not relate to abstract units and are not to be

measured by abstract symmetry, that exact wisdom and nice adaption

of remedies cannot be required, that judgment is largely a prophecy

based on meagre and uninterpreted experience, should stand as

reminder that in this area the Court does not take the equal protection

requirement in a pedagogic manner [See "General theory of law and

state"

44

The same idea was echoed in Ajoy Kumar Banerjee & Ors. v. Union of

India & Ors

34

“...Article 14 does not prevent legislature from introducing a reform

i.e. by applying the legislation to some institutions or objects or areas

only according to the exigency of the situation and further classification

of selection can be sustained on historical reasons or reasons of

administrative exigency or piecemeal method of introducing reforms.

The law need not apply to all the persons in the sense of having a

universal application to all persons. A law can be sustained if it deals

equally with the people of well-defined class-employees of insurance

companies as such and such a law is not open to the charge of denial

of equal protection on the ground that it had no application to other

persons.”

Likewise, Javed v. State of Haryana

35

observed that there is no

constitutional compulsion that a law or policy should be implemented all at once:

“16. A uniform policy may be devised by the Centre or by a State.

However, there is no constitutional requirement that any such policy

must be implemented at one go. Policies are capable of being

implemented in a phased manner. More so, when the policies have far-

reaching implications and are dynamic in nature, their implementation

in a phased manner is welcome for it receives gradual willing

acceptance and invites lesser resistance.”

67. Therefore, there is no constitutional compulsion that whilst framing a new

law, or policies under a new legislation – particularly when an entirely different

set of fiscal norms are created, overhauling the taxation structure, concessions

hitherto granted or given should necessarily be continued in the same fashion as

they were in the past. When a new set of laws are enacted, the legislature’s effort

is to on the one hand, assimilate- as far as practicable, the past regime. On the

other hand, the object of the new law is creation of new rights and obligations,

34

1984 (3) SCR 252.

35

(2003) 8 SCC 369.

45

with new attendant conditions. Inevitably, this process is bound to lead to some

disruption. In this case, the disruption is in the form of exporters needing to import

inputs, pay the two duties, and claim refunds. Yet, this inconvenience is

insufficient to trump the legislative choice of creating an altogether new fiscal

legislation, and insisting that a section of assessees order their affairs, to be in

accord with the new law. Therefore, the exclusion of benefit of imports in

anticipation of AAs, and requiring payment of duties, under Sections 3 (7) and

(9) of Customs Tariff Act, 1975, with the ‘pre-import condition’, cannot be

characterized as arbitrary or unreasonable.

68. This court had also observed in State of Madhya Pradesh v Nandlal

Jaiswal

36

that “in complex economic matters every decision is necessarily

empiric, and it is based on experimentation” and that the court, while considering

the validity of executive action relating to economic matters grant a certain

measure of freedom or 'play in the joints' to the executive.” The Court crucially

emphasized that:

“The Court cannot strike down a policy decision taken by the State

Government merely because it feels that another policy decision would

have been fairer or wiser or more scientific or logical. The Court can

interfere only if the policy decision is patently arbitrary, discriminatory

or mala fide.”

In R.K. Garg (supra) this court similarly spelt out the circumscribed role

that the court has, in considering the validity or constitutionality of fiscal laws, or

economic measures, stating that “the court should feel more inclined to give

36

1987 (1) SCR 01.

46

judicial deference to legislative judgment in the field of economic Regulation than

in other areas where fundamental human rights are involved.” Likewise, in

Ashirwad Films v. Union of India

37

this court observed:

“The power of the Legislature to classify is of wide range and flexibility

so that it can adjust its system of taxation in all proper and reasonable

ways. Even so, large latitude is allowed to the State for classification

upon a reasonable basis and what is reasonable is a question of

practical details and a variety of factors which the Court will be

reluctant and perhaps ill- equipped to investigate….”

69. The object behind imposing the ‘pre-import condition’ is discernible from

paragraph 4.03 of FTP and Annexure-4J of the HBP; that only few articles were

enumerated when the FTP was published, is no ground for the exporters to

complain that other articles could not be included for the purpose of ‘pre-import

condition’; as held earlier, that is the import of paragraph 4.03 (i). The numerous

schemes in the FTP are to maintain an equilibrium between exporters’ claims, on

the one hand and on the other hand, to preserve the Revenue’s interests. Here,

what is involved is exemption and postponement of exemption of IGST, a new

levy altogether, whose mechanism was being worked out and evolved, for the

first time. The plea of impossibility to fulfil ‘pre-import conditions’ under old

AAs was made, suggesting that the notifications retrospectively mandated new

conditions. The exporter respondents’ argument that there is no rationale for

differential treatment of BCD and IGST under AA scheme is without merit. BCD

is a customs levy at the point of import. At that stage, there is no question of

37

(2007) 6 SCC 624,

47

credit. On the other hand, IGST is levied at multiple points (including at the stage

of import) and input credit gets into the stream, till the point of end user. As a

result, there is justification for a separate treatment of the two levies. IGST is

levied under the IGST Act, 2017 and is collected, for convenience, at the customs

point through the machinery under the Customs Act, 1962. The impugned

notifications, therefore, cannot be faulted for arbitrariness or under classification.

70. The High Court was persuaded to hold that the subsequent notification of

10.01.2019 withdrew the ‘pre-import condition’ meant that the Union itself

recognized its unworkable and unfeasible nature, and consequently the condition

should not be insisted upon for the period it existed, i.e., after 13.10.2017. This

court is of the opinion that the reasoning is faulty. It is now settled that the FTPRA

contains no power to frame retrospective regulations. Construing the later

notification of 10.01.2019 as being effective from 13.10.2017 would be giving

effect to it from a date prior to the date of its existence; in other words the court

would impart retrospectivity. In Director General of Foreign Trade & Ors. v

Kanak Exports & Ors

38

this court held that:

“Section 5 of the Act does not give any such power specifically to the

Central Government to make rules retrospective. No doubt, this Section

confer powers upon the Central Government to 'amend' the policy

which has been framed under the aforesaid provisions. However, that

by itself would not mean that such a provision empowers the

Government to do so retrospective.”

38

2015 (15) SCR 287.

48

71. To give retrospective effect, to the notification of 10.01.2019 through

interpretation, would be to achieve what is impermissible in law. Therefore, the

impugned judgment cannot be sustained on this score as well.

72. This court recollects its recent decision, on the question of entitlement to

refund, under the old tax regime, which was subsumed and resulted in some

businesses being affected. Negativing the challenge to constitutionality of the

provisions of GST, it was held, in Union of India (UOI) & Ors. v VKC Footsteps

India Pvt. Ltd

39

. that:

“A claim to refund is governed by statute. There is no constitutional

entitlement to seek a refund. Parliament has in Clause (i) of the first

proviso allowed a refund of the unutilized ITC in the case of zero-rated

supplies made without payment of tax. Under Clause (ii) of the first

proviso, Parliament has envisaged a refund of unutilized ITC, where

the credit has accumulated on account of the rate of tax on inputs being

higher than the rate of tax on output supplies. When there is neither a

constitutional guarantee nor a statutory entitlement to refund, the

submission that goods and services must necessarily be treated at par

on a matter of a refund of unutilized ITC cannot be accepted. Such an

interpretation, if carried to its logical conclusion would involve

unforeseen consequences, circumscribing the legislative discretion of

Parliament to fashion the rate of tax, concessions and exemptions. If

the judiciary were to do so, it would run the risk of encroaching upon

legislative choices, and on policy decisions which are the prerogative

of the executive.”

73. In this court’s opinion, what applies to refunds, (the right to which can be

curtailed legitimately) applies equally to exemptions. It has been held in Bannari

Amman Sugars Ltd. vs. Commercial Tax Officer & Ors

40

that if there is any tax

concession, it “can be withdrawn at any time and no time limit should be insisted

upon before it was withdrawn”.

39

2021 (15) SCR 169.

40

2004 (6) Suppl. SCR 264.

49

74. Commentators and economists have spoken about how introduction of

GST was one of the most significant tax reforms undertaken by India. It was

preceded by a series of meetings and negotiations, whereby concerns of the states,

and various other agencies were accommodated. It has ushered a unified market

driven by a single tax, converting different markets in states, with different tariffs

and governing principles. It has smoothened movement of goods between

different states. Before the advent of GST, the Union taxed production of goods and

supply of services; and the states taxed sale of goods. With GST, both the Union and

the states are entitled to share the taxes of the full value chain of goods and services.

Such a transformation cannot be painless; disruptions – especially in the beginning will

be felt. Yet, that in the process of unification, if a certain section of the business is

inconvenienced, and would have to pay taxes (which exist as levies, newly introduced)

and conditions are imposed upon their ability to freely import inputs (for the purpose of

export), this alone cannot lead the court to conclude that such a change is unreasonable

or arbitrary.

75. For the foregoing reasons, this court holds that the Revenue has to succeed.

The impugned judgment and orders of the Gujarat High Court are hereby set

aside. However, since the respondents were enjoying interim orders, till the

impugned judgments were delivered, the Revenue is directed to permit them to

claim refund or input credit (whichever appliable and/or wherever customs duty

was paid). For doing so, the respondents shall approach the jurisdictional

commissioner, and apply with documentary evidence within six weeks from the

50

date of this judgment. The claim for refund/credit, shall be examined on their

merits, on a case-by-case basis. For the sake of convenience, the revenue shall

direct the appropriate procedure to be followed, conveniently, through a circular,

in this regard.

76. The Revenue’s appeals are allowed, subject to the above terms.

...............................................J.

[S. RAVINDRA BHAT]

...............................................J.

[DIPANKAR DATTA]

NEW DELHI;

APRIL 28, 2023.