Supreme Court of India
UNION OF INDIA AND ORS.versusCOSMO FILMS LIMITED
- Citation
- 2023 INSC 463
- Decided
- 28 April 2023
- Disposal
- Appeal(s) allowed
- Bench
- S RAVINDRA BHAT
Holding
The pre‑import condition is a valid legislative measure, not arbitrary or discriminatory, and the Gujarat High Court's decision striking it down is set aside.
Summary
The case concerned the validity of the "pre‑import condition" introduced by the 2017 amendments to the Foreign Trade Policy 2015‑2020 and related customs notifications, which required exporters to pay IGST and compensation cess on inputs imported under an Advance Authorization (AA) and to satisfy a physical export requirement before claiming exemption. The Gujarat High Court had held that this condition was arbitrary, unreasonable and violative of Article 14, striking down the notifications. The Supreme Court examined whether the condition was within the legislative competence, whether it was discriminatory, and whether the hardship caused to exporters could render the provision unconstitutional. The Court observed that the pre‑import condition was a permissible policy tool retained under paragraph 4.13 of the FTP, that exporters had been duly notified of the change via Trade Notice 11/2017, and that the GST regime represented a substantial fiscal overhaul justifying new conditions. It held that the condition was not arbitrary, that the classification was reasonable, and that the notifications could not be read retrospectively. Consequently, the High Court’s judgment was set aside and the revenue’s appeal was allowed, with directions for refund or input‑credit claims.
Issues considered
- The pre‑import condition imposed on inputs imported under an Advance Authorization is constitutionally valid under the Foreign Trade (Development & Regulation) Act, 1992.
- Whether the condition violates the principle of equality under Article 14 by treating different duties differently.
- Whether the notifications can be given retrospective effect to cover periods before their issuance.
- Whether the hardship caused to exporters by the new GST regime can render the condition arbitrary or unreasonable.
Legislation cited
Subjects
Advance Authorizationpre‑import conditionGSTIGSTcustoms duty exemptionForeign Trade PolicyArticle 14classificationretrospective legislationexport obligationphysical export
Judgment
[2023] 7 S.C.R. 185 185
UNION OF INDIA AND ORS. A
v.
COSMO FILMS LIMITED
(Civil Appeal No. 290 of 2023)
APRIL 28, 2023 B
[S. RAVINDRA BHAT AND DIPANKAR DATTA, JJ.]
Foreign Trade (Development & Regulation) Act, 1992 –
Foreign Trade Policy of 2015-2020 (FTP) – Handbook of Procedures
2015-2020 (HBP) – Notification No.18/2015-Customs exempted
C
payment of basic customs duty, additional duty (countervailing duty,
special additional duty), safeguard duty and anti-dumping duty on
inputs imported against a valid Advance Authorization (AA) – GST
regime was introduced w.e.f 01.07.2017 – However, no
corresponding amendment was made to the aforesaid Notification
w.r.t IGST and compensation cess – Notification No.79/2017- D
Customs amended the aforesaid Notification by granting IGST and
compensation cess exemption, subject to the conditions that the
export obligation shall be fulfilled by physical exports only and
shall also be subject to ‘pre-import condition’ – Notification No.
33/2015-2020 was also issued, amending various provisions of the
E
FTP, whereby this ‘pre-import condition’ was incorporated in
paragraph 4.14 – High Court set aside the mandatory fulfilment of
the ‘pre-import condition’ incorporated in the FTP and HBP by the
aforesaid two Notifications – As per the High Court, such fulfilment
in order to claim exemption of IGST and GST compensation cess on
input imported into India for the production of export goods, on F
the strength of an AA was arbitrary and unreasonable –
Sustainability of – Held: Not sustainable – Exporters were made
aware of the changes brought about due to the introduction of GST,
through a trade notice – However, this trade notice escaped the
attention of the High Court – Further, the concept of ‘pre-import
G
condition’ was not alien – Appendix-4J (mentioned in paragraph
4.13 (ii) of the FTP) listed several articles 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 –
Retention of the power to impose ‘pre-import conditions’ on articles H
185
186 SUPREME COURT REPORTS [2023] 7 S.C.R.
A other than those specified in Appendix-4J, meant that the DGFT
could exercise it, in relation to any goods – High Court did not
discuss this aspect and proceeded on the assumption that only
specified goods were subject to the pre-import condition – Any
category of supply, other than actual exports to other country and
supply to SEZ cannot be considered as physical exports – In case
B
the entire exports were not physical exports, the AAs were
automatically ineligible for exemption – The introduction of the GST
regime resulted in a substantial and fundamental overhaul of the
indirect tax structure – There is no constitutional compulsion that
whilst framing new law or policies, particularly when an entirely
C different set of fiscal norms are created, overhauling the taxation
structure, concessions hitherto granted should necessarily be
continued in the same fashion as they were in the past – 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
D
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, u/s.3 (7) and (9) of 1975 Act, with the ‘pre-import
E condition’, cannot be characterized as arbitrary or unreasonable
– Impugned notifications cannot be faulted for arbitrariness or
under classification – Impugned judgment of the High Court set
aside – Customs Tariff Act, 1975 – ss.3 (7), (9).
Foreign Trade (Development & Regulation) Act, 1992 – s.5 –
F Foreign Trade Policy of 2015-2020 (FTP) vis-à-vis Handbook of
Procedures 2015-2020 (HBP) – Held: FTPs are statutory and are
framed by the Union, exercising its powers u/s.5 of the FTRA –
Whereas, the HBP does not have the status of rules or regulations –
It merely contains guidelines.
G Tax/Taxation – Validity or constitutionality of fiscal laws/
economic measures – Hardship/inconvenience, if relevant – Held:
Court is not concerned with the wisdom or unwisdom, the justice or
injustice of the law as Parliament and State Legislatures – Hardship
is not relevant in pronouncing on the constitutional validity of a
fiscal statute or economic law – When reform by way of new
H
UNION OF INDIA AND ORS. v. COSMO FILMS LIMITED 187
legislation is introduced, the doctrine of classification cannot be A
applied strictly, and that some allowance for experimentation, to
observe the effect of the law, is available to the executive or
legislature – Doctrine of Classification.
Allowing the appeals, the Court
HELD: 1.1 Exporters were made aware of the changes B
brought about due to the introduction of GST, through a trade
notice, (Trade Notice 11/2017, dated 30-06-2017). 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 C
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 free
authorisation for inputs subject to ‘pre-import condition’ could
not be issued. By virtue of the trade notice, exporters were made
aware of the fact that under the GST regime, no exemption from D
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. [Paras 49, 50, 51][215-A;
216-B,C,D,E]
1.2 The FTP, inter alia, facilitated AAs for duty-free import E
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. F
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 G
4.13 of the FTP, the DGFT could impose ‘pre-import conditions’
on articles other than those specified. 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 H
188 SUPREME COURT REPORTS [2023] 7 S.C.R.
A 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 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
B
HBP are serious infirmities in the impugned judgment. [Paras
56, 57][217-G-H; 218-A-D]
1.3 ‘Physical export’ is defined in paragraph 4.05(c) and
paragraph 9.20 of the FTP read with Section 2(e) of the FTDRA.
Essentially, therefore, export involves taking goods out of India.
C 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. The definition extends
in specific terms (under Chapter 4 of FTP) - supplies made to
D 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
E 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
F 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. [Para 59][218-F-H; 219-
A-E]
G
1.4 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
H
UNION OF INDIA AND ORS. v. COSMO FILMS LIMITED 189
dispensation required them to pay the two duties, and then claim A
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.
B
[Para 62][220-D-F]
1.5 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, C
was discriminatory. As far as the first aspect is concerned, the
impugned judgment 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 D
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, E
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 F
administrators, 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. G
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.
[Para 65][222-C-H]
H
190 SUPREME COURT REPORTS [2023] 7 S.C.R.
A 1.6 The introduction of the GST regime resulted in a
substantial and fundamental overhaul of the indirect tax structure,
at the State and Central levels. 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,
B
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
C and obligations, 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
D
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. [Paras 60,
E 67][219-F; 225-F-H; 226-A-B]
Rohitash Kumar & Ors. v Om Prakash Sharma & Ors
(2013) 11 SCC 451 : [2012] 13 SCR 47; State of
Madhya Pradesh v Rakesh Kohli [2012] 6 SCR 661;
State of Gujarat v Shri Ambica Mills 1974 (3) SCR 760;
F Ajoy Kumar Banerjee & Ors. v. Union of India & Ors
[1984] 3 SCR 252; Javed v. State of Haryana (2003) 8
SCC 369 : [2003] 1 Suppl. SCR 947; State of Madhya
Pradesh v Nandlal Jaiswal [1987] 1 SCR 01; Ashirwad
Films v. Union of India (2007) 6 SCC 624 : [2007] 7
SCR 310 – relied on.
G
1.7 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
H
UNION OF INDIA AND ORS. v. COSMO FILMS LIMITED 191
condition’; as held earlier, that is the import of paragraph 4.03 A
(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
B
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 C
that stage, there is no question of 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,
D
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. [Para 69][226-H; 227-A-E]
1.8 The High Court was persuaded to hold that the
subsequent notification of 10.01.2019 withdrew the ‘pre-import E
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.
The reasoning is faulty. It is now settled that the FTPRA contains
no power to frame retrospective regulations. To give F
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. [Paras 70, 71][227-E-F; 228-A-B]
1.9 The impugned judgment and orders of the Gujarat High G
Court are 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 applicable and/or wherever customs
duty was paid). [Para 75][229-E]
H
192 SUPREME COURT REPORTS [2023] 7 S.C.R.
A Director General of Foreign Trade & Ors. v Kanak
Exports & Ors [2015] 15 SCR 287; Union of India
(UOI) & Ors. v VKC Footsteps India Pvt. Ltd [2021] 15
SCR 169; R.K. Garg v Union of India [1981] 1 SCR
947: Union of India v VKC Footsteps India (P) Ltd.
2022 (2) SCC 603 – relied on.
B
MRF Ltd., Kottayam v. Asst. Commissioner (Assessment)
Sales Tax & Ors. [2006] Supp 6 SCR 417 – held
inapplicable.
Khandige Sham Bhat v Agricultural Income Tax Officer
C [1963] 3 SCR 809; Assistant Commissioner of Urban
Land Tax v Buckingham & Carnatic Co Ltd. [1970] 1
SCR 268; Laxmi Khandsari vs. State of Uttar Pradesh
[1981] 3 SCR 92; State of Haryana v Jai Singh 2003
(9) SCC 114; Welfare Association ARP v Ranjit P. Gohil
[2003] 9 SCC 358; Union of India (UOI) and Ors. vs.
D N.S. Rathnam & Sons [2015] 8 SCR 751; Vasu Dev
Singh v. Union of India [2006] Supp 9 SCR 565; P. J.
Irani v. State of Madras [1962] 2 SCR 169; Union of
India v. Asian Food Industries, [2006] Supp 8 SCR 485;
Hindustan Granites v Union of India [2007] 4 SCR
E 743; Bannari Amman Sugars Ltd. vs. Commercial Tax
Officer & Ors [2004] 6 Suppl. SCR 264 – referred to.
Case Law Reference
1963 (3) SCR 809 referred to para 24
1970 (1) SCR 268 referred to para 24
F [1981] 1 SCR 947 relied on para 24
[1981] 3 SCR 92 referred to para 31
[2015] 8 SCR 751 referred to para 35
[2006] Supp 6 SCR 417 held inapplicable para 35
G [2006] Supp 9 SCR 565 referred to para 36
[1962] 2 SCR 169 referred to para 36
[2006] Supp 8 SCR 485 referred to para 52
[2007] 4 SCR 743 referred to para 52
H [2012] 13 SCR 47 relied on para 62
UNION OF INDIA AND ORS. v. COSMO FILMS LIMITED 193
[2012] 6 SCR 661 relied on para 62 A
1974 (3) SCR 760 relied on para 66
[1984] 3 SCR 252 relied on para 66
[2003] 1 Suppl. SCR 947 relied on para 66
[1987] 1 SCR 01 relied on para 68 B
[2007] 7 SCR 310 relied on para 68
[2015] 15 SCR 287 relied on para 70
[2021] 15 SCR 169 relied on para 72
[2004] 6 Suppl. SCR 264 referred to para 73
C
CIVIL APPELLATE JURISDICTION : Civil Appeal No.290 of
2023.
From the Judgment and Order dated 04.02.2019 of the High Court
of Gujarat at Ahmedabad in SCA No.15186 of 2018.
With D
Civil Appeal Nos.298, 303, 297, 296, 295, 294, 293, 292 of 2023
And Transfer Petition (Civil) No.1526 of 2020.
R. Venkataramani, AG, N. Venkatraman, A.S.G., Mukesh Kumar
Maroria, Sharath Nambiar, Ankur Talwar, Ms. Chinmayee Chandra,
Siddhant Kohli, B. Krishna Prasad, Abhishek A. Rastogi, Nikhil Jain, E
Pratyushprava Saha, Ms. Divya Jain, Rohan Shah, Ajay Bhargava, Mrs.
Vanita Bhargava, Ayush Mehrotra, Ms. Trishala Trivedi, Upkar Agarwal,
Ms. Abhipriya, Laksh Minocha, M/s. Khaitan & Co., Paresh M. Dave,
Shamik Shirishbhai Sanjanwala, Sagar Juneja, Prashant Mohla, Ms. Nupur
Prasad, Amar Dave, P. S. Sudheer, Rishi Maheshwari, Ms. Anne Mathew, F
Bharat Sood, Ms. Shruti Jose, Ashok Basoya, Sudhanshu S. Choudhari,
Advs. for the appearing parties.
The Judgment of the Court was delivered by
S. RAVINDRA BHAT, J.
1. These appeals are directed against a judgment and order of the G
Gujarat High Court,1 wherein mandatory fulfilment of a ‘pre-import
condition’2 incorporated in the Foreign Trade Policy of 2015-2020 (“FTP”)
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. H
194 SUPREME COURT REPORTS [2023] 7 S.C.R.
A 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 cess4 on input imported into India for
the production of goods to be exported from India, on the strength of an
B
advance authorization5 (“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
C 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 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
D 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
E 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
F 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:
G
“Provided further that notwithstanding anything contained
hereinabove for the said authorisations where the exemption
from integrated tax and the goods and services tax
3
Leviable under Section 3(7) of The Customs Tariff Act, 1975.
4
Leviable under Section 3(9) of The Customs Tariff Act, 1975.
H 5
Paragraph 4.03 of FTP.
UNION OF INDIA AND ORS. v. COSMO FILMS LIMITED 195
[S. RAVINDRA BHAT, J.]
compensation cess leviable thereon under sub-section (7) and A
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
***
“That the exemption from integrated tax and the goods and B
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”7
(emphasis supplied)
C
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 D
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 E
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 F
be exported. When it was established that goods imported against a
particular AA were used in relation to manufacture of finished goods
exported 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
G
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
6
Proviso to clause (viii), as contained in Notification No. 79 / 2017.
7
Addition of clause (xii), as contained in Notification No. 79 / 2017.
H
196 SUPREME COURT REPORTS [2023] 7 S.C.R.
A 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.
B 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
C 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
D customs notification. The provisions were an exception, to keep the option
open for 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 SION8, or exporters
were willing to first fulfil their export obligation. As the process of fixing
E 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
F duties.9 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
G a specified time. The importers, therefore, started paying IGST on goods
imported under AA with effect from 1.7.2017, and were getting outright
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.
H
UNION OF INDIA AND ORS. v. COSMO FILMS LIMITED 197
[S. RAVINDRA BHAT, J.]
exemption from BCD, ADD, safeguard duty, etc., and IGST paid was A
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 introduction of GST. It was a policy decision, which could have
been reversed or altered only by the GST Council. The Revenue also
B
pointed out that due to problems in Goods and Service Tax Network
(GSTN)10, 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 C
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)
D
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 E
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 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, F
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 G
for years. Since 2003, all drug companies had been importing their raw
materials sourced from unregistered sources, under the ‘pre-import
10
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. H
198 SUPREME COURT REPORTS [2023] 7 S.C.R.
A 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.
B 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,
C 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 authorisation holder. Therefore, the AA holders were not adversely
affected and not prejudiced by the impugned notifications. The IGST
D 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
E 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
F 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
G of pre-import, the benefit of exemption from levy of integrated
tax and GST compensation cess becomes more or less
illusory.”11
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
11
H Supra note 1, para 27.
UNION OF INDIA AND ORS. v. COSMO FILMS LIMITED 199
[S. RAVINDRA BHAT, J.]
Act, 1975, in respect of the levies under Sections 3 (1), (3) and (5) A
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 were
subject to it. This resulted in inputs being subject to ‘pre-import condition’
B
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, C
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 D
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 E
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 F
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 G
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), 3(3) and 3(5) of the Customs
Tariff Act, 1975 for decades the procedure was permitted, and continued
12
Supra note 1. H
200 SUPREME COURT REPORTS [2023] 7 S.C.R.
A 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”.13
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
B
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
C 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
D 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
E exigencies. However, importers and 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’.
F 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
G ‘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
13
Supra note 1.
H
UNION OF INDIA AND ORS. v. COSMO FILMS LIMITED 201
[S. RAVINDRA BHAT, J.]
knowledge of the relevant provisions, and the High Court erroneously A
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 B
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 paradox,
was based on the wrong set of facts, and was contrary to the provisions
of the law.
C
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 D
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. E
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 F
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 G
(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.”14
14
Paragraph 4.03(a) of the FTP.
H
202 SUPREME COURT REPORTS [2023] 7 S.C.R.
A 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
B
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.
C 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
D
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’ - the importer could avail the benefit of export in
E 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.
F
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
G 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:15
“DGFT may, by Notification, impose pre-import condition for
inputs under this Chapter.”
15
Paragraph 4.13(1) of FTP.
H
UNION OF INDIA AND ORS. v. COSMO FILMS LIMITED 203
[S. RAVINDRA BHAT, J.]
The provision clearly left open, the scope of imposing ‘pre-import A
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
B
No.33/2015-20 dated 13.10.2017. This notification was 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 C
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.
D
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 E
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. F
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 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’, G
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
H
204 SUPREME COURT REPORTS [2023] 7 S.C.R.
A 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
B
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
C 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’
D 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 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
E 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 Officer16; Assistant Commissioner of Urban Land Tax v
F Buckingham & Carnatic Co Ltd.17; R.K. Garg v Union of India18;
Union of India v VKC Footsteps India (P) Ltd19. 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
G legislation, the Union had to take into account divergent views and norms,
and refashioning of the entire indirect tax spectrum was called for.
16
1963 (3) SCR 809.
17
1970 (1) SCR 268.
18
1981 (1) SCR 947.
19
2022 (2) SCC 603.
H
UNION OF INDIA AND ORS. v. COSMO FILMS LIMITED 205
[S. RAVINDRA BHAT, J.]
25. It was lastly urged that the introduction of Notification No. A
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 notification could not by a process of
judicial reasoning, be given retrospective effect to, as even the substantive
B
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 C
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 1 crore, whichever was higher. On
fulfilment of the conditions prescribed under paragraph 4.03 of the FTP,
respondents were issued AA licenses. D
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”). E
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 F
the ‘pre-import condition’ only for a 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 G
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’, H
206 SUPREME COURT REPORTS [2023] 7 S.C.R.
A 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.
B
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
C 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 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
D
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
E 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.
F 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
Pradesh20; State of Haryana v Jai Singh21; Welfare Association ARP
v Ranjit P. Gohil22; and urged that for classification to be reasonable, it
should fulfil the two tests. One, it should not be arbitrary, artificial or
G 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
H 2003 (9) SCC 358.
UNION OF INDIA AND ORS. v. COSMO FILMS LIMITED 207
[S. RAVINDRA BHAT, J.]
adopted as the basis of classification must have a rationale or reasonable A
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 B
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 C
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 D
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 E
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 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 F
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.
G
35. Learned counsel for the respondents relied on Union of India
(UOI) and Ors. vs. N.S. Rathnam & Sons23 which held that grant of
different exemption based on unintelligible differentia between two categories
of assesses for payment of customs duty was discriminatory and
23
2015 (8) SCR 751.
H
208 SUPREME COURT REPORTS [2023] 7 S.C.R.
A 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
B case of Vasu Dev Singh v. Union of India25, 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 four corners thereof but
C otherwise fulfilled the criteria laid down by this court in P. J. Irani v.
State of Madras26. 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
D 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
E 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
F 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
G 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 is given to raw materials / inputs required for the
24
2006 Supp (6) SCR417.
25
2006 Supp (9) SCR 565.
26
1962 (2) SCR 169
H
UNION OF INDIA AND ORS. v. COSMO FILMS LIMITED 209
[S. RAVINDRA BHAT, J.]
manufacture of export products i.e., one can import raw materials or A
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
B
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 C
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 D
‘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.
40. Chapter IV of the FTP provides for “Duty Exemption/ E
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 F
(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: G
(i) As per Standard Input Output Norms (SION) notified
(available in Hand Book of Procedures);
27
As per Chapter 9 of FTP paragraph 9.44, “Raw material” is input(s) required for
manufacturing of goods.
H
210 SUPREME COURT REPORTS [2023] 7 S.C.R.
A 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
B 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.
C (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.”
D 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
E
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.
**************
F
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
G
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
28
H Paragraph 4.03 of the FTP.
UNION OF INDIA AND ORS. v. COSMO FILMS LIMITED 211
[S. RAVINDRA BHAT, J.]
of export obligation, the goods imported against such Advance A
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
B
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.” C
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:
D
“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 E
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 F
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.
G
(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.”
43. The provision permitted exports in anticipation of authorisation
and permits exports towards discharge of export obligation on the basis H
212 SUPREME COURT REPORTS [2023] 7 S.C.R.
A 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,
B 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
C 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
D 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
E 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,
F 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 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).”
G 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
H or manufactured in India [Section 3 (1) CTA];
UNION OF INDIA AND ORS. v. COSMO FILMS LIMITED 213
[S. RAVINDRA BHAT, J.]
(2) levy of such additional duty as would counter-balance the excise A
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 B
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; C
(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 D
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 (5) of section 3 of the CTA,
education cess, anti-dumping duty, safeguard duty and transition product
specific safeguard duty, wherever applicable. E
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 F
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
G
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: H
214 SUPREME COURT REPORTS [2023] 7 S.C.R.
A “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
B
physical exports only.”
The said notification also inserted condition (xii) which reads thus:
“(xii) that the exemption from integrated tax and the goods
and services tax compensation cess leviable thereon under
C 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
D 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.
E 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
F 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
G 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.”
H
UNION OF INDIA AND ORS. v. COSMO FILMS LIMITED 215
[S. RAVINDRA BHAT, J.]
49. It is important to notice, at this stage, that exporters were A
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 B
implementation of the GST regime applicable w.e.f 01.07.2017
Under the GST regime, no exemption from payment of
integrated GST and Compensation Cess would be available
for imports under Advance Authorisation.
C
The chapter wise provisions of the FTP 2015-20:
General Provision:
************ *************
Chapter 4
D
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. E
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 F
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. G
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 H
216 SUPREME COURT REPORTS [2023] 7 S.C.R.
A 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
B 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,
C or a discussion about it. Likewise, the HBP was amended, and paragraph
4.27 (d) was inserted, which stated that duty 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
D 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
E 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 India30
F 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
G 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:
29
Union of India v. Asian Food Industries, (2006) Supp (8) SCR 485.
30
2007 (4) SCR 743.
H
UNION OF INDIA AND ORS. v. COSMO FILMS LIMITED 217
[S. RAVINDRA BHAT, J.]
“(h) EOU/EHTP/STP/BTP units may sell finished products, A
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.”
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 B
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.
C
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 D
‘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 E
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 would be for a period of six
months, whereas the period, which the regime permits, would work out F
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 G
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, H
218 SUPREME COURT REPORTS [2023] 7 S.C.R.
A 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:
B “(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
C 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 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
D 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
E 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’.
F 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.
G
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:
H
UNION OF INDIA AND ORS. v. COSMO FILMS LIMITED 219
[S. RAVINDRA BHAT, J.]
(i) Physical export (including export to SEZ); A
(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.
(iv) Supply of ‘stores’ on board of foreign going vessel / B
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 C
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 D
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 E
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 F
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 taxes levied by
the Central and State governments are subsumed into the GST.
Consequently, taxpayers and suppliers are untroubled about paying G
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
H
220 SUPREME COURT REPORTS [2023] 7 S.C.R.
A 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 101st
Amendment to the Constitution, introducing Articles 246A, 269A, 279A,
B 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
C 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
D new levies, the system of input credit, and refunds should prevail.
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
E 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
F Court concluded. It was held, in Rohitash Kumar & Ors. v Om Prakash
Sharma & Ors31 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
G 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
31
(2013) 11 SCC 451.
H
UNION OF INDIA AND ORS. v. COSMO FILMS LIMITED 221
[S. RAVINDRA BHAT, J.]
dealing with the same issue observed as under: (AIR p. 535, A
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 B
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.” C
32
Again, in State of Madhya Pradesh v Rakesh Kohli 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.” D
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 E
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 F
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.” G
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
32
2012 (6) SCR 661.
H
222 SUPREME COURT REPORTS [2023] 7 S.C.R.
A 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
B respect of any tax payable 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.
C 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
D 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
E 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
F 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, 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
G 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,
H payment, and refund.
UNION OF INDIA AND ORS. v. COSMO FILMS LIMITED 223
[S. RAVINDRA BHAT, J.]
66. This court has held, on previous occasions, that when reform A
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 Mills33
“55. A classification is under-inclusive when all who are B
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 C
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 D
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 E
establishments carrying on business or trade and employing
less than 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 F
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 G
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
33
1974 (3) SCR 760.
H
224 SUPREME COURT REPORTS [2023] 7 S.C.R.
A 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.
B *************** *********
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
C 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
D 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
E 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.
F 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
G 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”
H
UNION OF INDIA AND ORS. v. COSMO FILMS LIMITED 225
[S. RAVINDRA BHAT, J.]
The same idea was echoed in Ajoy Kumar Banerjee & Ors. v. A
Union of India & Ors34
“...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 B
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 C
the charge of denial of equal protection on the ground that it
had no application to other persons.”
Likewise, Javed v. State of Haryana35 observed that there is no
constitutional compulsion that a law or policy should be implemented all
at once: D
“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 E
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 F
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 G
hand, the object of the new law is creation of new rights and obligations,
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
34
1984 (3) SCR 252.
35
(2003) 8 SCC 369. H
226 SUPREME COURT REPORTS [2023] 7 S.C.R.
A 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,
B
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 Jaiswal36 that “in complex economic matters every decision
is necessarily empiric, and it is based on experimentation” and that
C 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
D 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
E fiscal laws, or economic measures, stating that “the court should feel
more inclined to give 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 India37 this court observed:
F “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
G 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;
36
1987 (1) SCR 01.
37
H (2007) 6 SCC 624,
UNION OF INDIA AND ORS. v. COSMO FILMS LIMITED 227
[S. RAVINDRA BHAT, J.]
that only few articles were enumerated when the FTP was published, is A
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
B
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 C
scheme is without merit. BCD is a customs levy at the point of import.
At that stage, there is no question of 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
D
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 E
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 F
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 & Ors38 this court held that:
“Section 5 of the Act does not give any such power specifically G
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
38
2015 (15) SCR 287. H
228 SUPREME COURT REPORTS [2023] 7 S.C.R.
A not mean that such a provision empowers the Government to
do so retrospective.”
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
B 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
C India (UOI) & Ors. v VKC Footsteps India Pvt. Ltd39. 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
D 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
E 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
F 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
G been held in Bannari Amman Sugars Ltd. vs. Commercial Tax Officer
& Ors40 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
H 2004 (6) Suppl. SCR 264.
UNION OF INDIA AND ORS. v. COSMO FILMS LIMITED 229
[S. RAVINDRA BHAT, J.]
74. Commentators and economists have spoken about how A
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
B
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 C
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.
D
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 E
respondents shall approach the jurisdictional commissioner, and apply
with documentary evidence within six weeks from the 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 F
circular, in this regard.
76. The Revenue’s appeals are allowed, subject to the above terms.
Divya Pandey Appeals allowed.
(Assisted by : Shevali Monga, LCRA) G
H
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