Supreme court upholds validity of pre-import condition under Advance Authorisation scheme

This tax alert summarizes a recent ruling of the Supreme Court (SC). The question involved was whether the pre-import condition for claiming exemption of integrated tax and compensation cess on import of goods against Advance Authorisation (AA) is arbitrary and unreasonable.

Gujarat High Court (HC) had struck down the pre-import condition contained in para 4.14 of Foreign Trade Policy 2015-2020 (FTP). Aggrieved, Revenue preferred an appeal before the SC.

SC upheld the validity of pre-import condition under Advance Authorization (AA) scheme on the following grounds:

• Upon introduction of GST, exporters, through trade notices, were made aware that AA and its utilization would not continue in the same manner as the AA scheme operating earlier. 

• Para 4.13 of FTP gave powers to the Directorate General of Foreign Trade (DGFT) to impose pre-import condition. Also, para 4.27 of Handbook of Procedure (HBP) was amended to provide that duty free authorization cannot be issued for inputs which are subject to pre-import condition. 

• The exporter’s argument that there is no rationale for differential treatment of Basic custom duty (BCD) and IGST under AA scheme is without merit. There is justification for a separate treatment of the two levies as BCD is a customs levy at the point of import with no question of credit. On the other hand, IGST is levied at multiple points (including at the stage of import) and input credit is available.

• Undue hardship to the taxpayer cannot be a sufficient ground to hold the insertion of pre-import condition as arbitrary.
  

Comments

• Importers may need to examine the applicability of SC ruling in their case and identify non-fulfilment of pre-import condition while responding to notices received in this regard.

• Earlier, the Madras HC in case of Vedanta Ltd.[2018-VIL-490-MAD] had upheld the pre-import condition imposed under AA scheme.

• Further, it would be relevant to determine whether the recovery of integrated tax and compensation cess should be made under the Customs law or GST law since it may impact the powers of officer who can initiate the recovery and invoke the limitation period. 

• In case the tax dues are paid through TR-6 challan, its credit eligibility will need to be analyzed under the GST law.