Impact of recent SC decision in Cosmos Films case

MAY 05, 2023 [Tax India Online]

By S C Jain, Managing Partner-Advocate, RSA Legal Solutions

RECENTLY, the Supreme Court has pronounced the verdict in the case of Union of India Vs Cosmos Films & Ors in Civil Appeal No.290/2023 – 2023-TIOL-45-SC-CUS on the aspect of legality of pre-import condition inserted by No.79/2017-Cus dated 13.10.2017 in Customs Notification No.18/2015-Cus dated 01.04.2015. By this Order, the Hon’ble Supreme Court has set aside the verdict of the Hon’ble Gujarat High Court wherein it was held by the Gujarat High Court that the pre-import condition inserted by Notification NO. No.79/2017-Cus dated 13.10.2017 is arbitrary and illegal since it is contrary to the Advance Authorization Scheme. Now, by the said Judgment, the Hon’ble Supreme Court has held that the pre-import condition inserted in Notification No.18/2015-Cus dated 01.04.2015 vide Notification No.79/2017-Cus dated 13.10.2017 is legal and cannot be said to be arbitrary. This decision of the Hon’ble Supreme Court is bound to create enormous litigation/ correspondence/ investigations in respect of the various exporters who have imported and exported the goods under the Advance Authorization during the period from 13 th October 2017 (when the pre-import condition was inserted) to 10 th January 2019 (when the pre-import condition was deleted).


2. Historically, Advance Authorization Scheme under the Foreign Trade Policy conferred exemption from various duties like Basic Customs Duty, Surcharge, Cess, CVD, SAD, Anti-Dumping duty etc. against the import of inputs subject to the condition that the goods manufactured as per norms are eventually exported out of India. This is why all types of customs duties on import of inputs were exempted under the Advance Authorization Scheme. There has always been a provision in the Foreign Trade Policy (currently paragraph 4.27/4.28 of Handbook) providing that the exports made prior to the import are also permissible under the Scheme to provide flexibility to the exporters so that they can fulfil their export commitment in time without waiting for the import of inputs. In such a situation, the exporter used to import the inputs as replenishment of the inputs used in the manufacture of the export goods. The Advance Authorization Scheme in the aforesaid manner was working smoothly throughout the length and breadth of the country.

3. However, on introduction of the GST w.e.f. 1.7.2017, no exemption was provided on the IGST on the inputs imported under the Advance Authorization Scheme, even though rest of the duties continued to be exempted as earlier. Consequently, the inputs could be imported on payment of IGST even under the Advance Authorization Scheme w.e.f 1.7.2017. This resulted in working capital outflow and blockage of credit for a long period which created the liquidity issue for the exporters. After a lot of representations by the exporters and their associations, export promotion councils, Notification No.79/2017-Cus dated 13.10.2017 amending Notification No.18/2015 dated 01.04.2015 providing the exemption from IGST was issued. However, two additional conditions were inserted by the said Notification No.79/2017-Cus dated 13.10.2017 viz.

(i) pre-import condition and;

(ii) the export obligation shall be fulfilled only through physical exports.

4. As soon as this Notification No.79/2017-Cus dated 13.10.2017 was issued, I had written an article which was published in TIOL on dated 15.12.2017 titled as the Pre- Import Condition-cure is worse than the diseaseThe exemption was meant to provide relief to the exporters but obviously it was likely to create multiple problems before the exporters as it was issued without analyzing its pros and cons. The said apprehension came to be true.

5. Several Advance Authorization holders imported goods under the Advance Authorization Scheme by availing the exemption from IGST without knowing/taking care of the pre-import condition. As a matter of fact, some of the exporters had already exported the goods and had imported subsequently as replenishment materials in accordance with the prevailing practice for the Advance Authorization Scheme. After analyzing the contravention of the said pre-import condition, the DRI and other Customs authorities at various places started investigations in the matter. A few Advance Authorization holders approached the Hon’ble Gujarat High Court. The Hon’ble Gujarat High Court while disposing of the bunch of petitions, held that the pre-import condition inserted vide No.79/2017-Cus dated 13.10.2017 is arbitrary and struck it down.

6. However, in an identical matter, the Hon’ble Madras High Court in the case of Vedanta Ltd Vs Union of India reported in – 2018-TIOL-2893-HC-MAD-GST held that the pre-import condition is legal, and it is in no way arbitrary. Thus, there were conflicting decisions of the two High Courts in the subject matter. Union of India filed an SLP before the Supreme Court against the decision of the Gujarat High Court. Now, by the aforesaid decision, the Hon’ble Supreme Court has set aside the decision of the Gujarat High Court and upheld the validity of pre-import condition.

7. In the meanwhile, looking into the genuine problems of the exporters, the CBIC issued another Notification No.01/2019-Cus dated 10.01.2019 whereby the pre-import condition was removed/deleted. Now, the legal position would be that there was no pre-import condition in respect of the goods imported and exported prior to 13.10.2017 (before the introduction of Notification No.79/2017) and after 10.01.2019 (after deletion of pre-import condition). Thus, there remains a legal issue only for the intervening period of about 15 months.

8. The effect would be that for the limited period of about 15 months, the condition of pre-import will apply for the rest of the period this condition of pre-import would not apply.

Problems likely to be created by this decision:

9. Since the Supreme Court has upheld the validity of pre-import condition and there is no retrospective application of Notification No.01/2019-Cus dated 10.01.2019, hence the DRI and other Customs formations throughout the country would again start investigations against all the exporters who have exported the goods under the Advance Authorization Scheme. In case, it is observed that they have contravened the pre-import condition, the Customs authorities will cajole the exporters to pay the IGST along with interest. In some cases, the Customs authorities may propose penalties for violation of the condition of the Notification etc. It is quite likely that some customs formation/DRI also write to the DGFT office in the regard asking the DGFT office to take action under the Policy against the erring exporters. In such scenario, the exporters would get the notices from the offices of DGFT as well.

10. The exporters, without gaining a single penny out of the said exemption for pre-import condition would face the music which will continue for years together, both at the hands of the Customs/DRI and at the level of DGFT office. It is totally incomprehensible as to why this pre-import condition was inserted at the first instance particularly in the light of the fact that previously, all the duties have been exempted under the Advance Authorization Scheme. Further, once the Government realized the absurdity, the Notification No.01/2019-Cus dated 10.01.2019 was issued by deleting the pre-import condition. In order to provide the permanent burial to the unwarranted problem, the Government should have amended it retrospectively (may be through Parliament route) so that the entire unwarranted litigation could be avoided.

Way Forward:

The various options available to the Advance Authorization holders can be summed up as under: –

(i) They should make detailed representations themselves and through their Associations/Export Promotion Councils to DGFT and also CBIC to amend the Notification No.01/2019-Cus dated 10.01.2019 retrospectively i.e. from 13.10.2017.

(ii) In our considered view after the multiple representations, the Government would realize the fallacy of the pre-import condition and would take steps for its withdrawal from its inception i.e.13.10.2017. There is no reason as to why the Government cannot provide retrospective application to this Notification in order to address the genuine grievance of the exporters. This will provide relief not only to the exporters but also to the Government itself.

(iii) In case the amount of IGST involved is small, then the Advance Authorization holder can take a call to pay the same along with interest @ 15% and then take credit of the IGST paid on the strength of the Challan/Re-assessed BE. In such a situation, the interest portion would be the net loss to the Advance Authorization holder.

(iv) In cases where the Advance Authorization holder chooses to pay the IGST with interest, through a Challan and then intends to take the credit on the strength of such Challan, then such credit, in our considered view, would be admissible as per Section 16 of the CGST Act read with Rule 36 of the CGST Rules. However, the Department may dispute the availment of credit on the grounds that the Challan is not the document prescribed for taking the credit. In order to obviate the litigation on this aspect, we would suggest that the advance authorization holders should request the Assessing Officers from where the inputs were imported to do the re-assessment of the Bills of Entry charging the IGST thereon in terms of Section 149 of the Customs Act, 1962.

(v) In our view, Customs should agree to the re-assessment as all the requirements of Section 149 of the Customs Act, 1962 are satisfied. Once the re-assessment is done, then the fresh Bill of Entry would be generated and there would be payment of IGST and interest on the said Bill of Entry and consequently there would not be any difficulty for availing the credit of IGST as per the GST law.

[The views expressed are strictly personal.]

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