Supreme Court on IGST Exemption for Advance Authorisation: Pre-Import Condition Upheld – Cosmo Films [2023 INSC 463]

IGST exemption advance authorisation – Supreme Court ruling explained with headnote, key holdings, important paragraphs and FAQs.

The Supreme Court has upheld the "pre-import condition" attached to the IGST and GST compensation cess exemption on inputs imported under Advance Authorisation (AA). The condition was introduced by Customs Notification No. 79/2017 and DGFT Notification No. 33/2015-20, both dated 13.10.2017. The Court reversed the Gujarat High Court, which had held the condition arbitrary and ultra vires the AA scheme. It held that the condition is neither arbitrary nor discriminatory, that IGST may be treated differently from basic customs duty because it is a credit-based GST levy, and that the January 2019 withdrawal of the condition cannot be applied retrospectively. Since the exporters had been enjoying interim orders, the Revenue was directed to let them claim refund or input credit on applications made within six weeks (paras 1, 57, 65–71, 73–76).

Headnote

Customs / IGST — Advance Authorisation — Exemption from IGST and GST compensation cess on imports — "Pre-import condition" — Validity — Customs Tariff Act, 1975, Ss. 3(7), 3(9); Customs Act, 1962, S. 25(1); Foreign Trade (Development & Regulation) Act, 1992, S. 5; FTP 2015-20, paras 4.03, 4.13, 4.14; HBP para 4.27; Constitution, Art. 14

On 13.10.2017, Notification No. 79/2017-Customs amended Notification No. 18/2015-Customs to exempt IGST and compensation cess on AA imports, subject to the conditions of physical exports and a "pre-import condition"; FTP para 4.14 was amended to the same effect; the Gujarat High Court struck down the pre-import condition as unreasonable and contrary to the AA scheme — Held, (i) the pre-import condition was not alien to the FTP and para 4.13(i) empowered the DGFT to impose it on any input; the High Court overlooked this and HBP para 4.27(d); (ii) hardship and inconvenience to exporters is not a ground to hold the condition arbitrary; (iii) in a new tax regime, concessions need not continue in the same form, and fiscal and economic measures receive greater judicial deference; (iv) BCD and IGST may be treated differently because IGST is a multi-point levy with input credit; (v) the notification of 10.01.2019 omitting the condition cannot be given retrospective effect by interpretation; (vi) what applies to refunds applies equally to exemptions; Revenue's appeals allowed, with liberty to the exporters to claim refund or input credit.

(Paras 56–57, 62–75)

Judgment Intelligence

Key Holdings

• The pre-import condition was not alien to the FTP. Appendix-4J already listed items subject to it, and para 4.13(i) empowered the DGFT to impose it on any input. The High Court's failure to notice this and HBP para 4.27(d) were "serious infirmities" (paras 56–57).
• The new regime may have caused hardship to exporters, who now had to pay the two levies and claim refunds, but inconvenience is not a ground to hold the pre-import condition arbitrary (para 62).
• All AA holders were never treated alike, and there is no blanket right to an exemption. Continuing the pre-import exemption for old levies outside GST, while requiring payment and refund for the new GST levies, is not discriminatory (para 65).
• When a new fiscal regime is introduced, there is no constitutional compulsion to continue past concessions in the same form. Excluding imports made in anticipation of AAs and requiring payment of IGST and cess under Sections 3(7) and 3(9) is not arbitrary or unreasonable (paras 66–67).
• BCD is a customs levy at the point of import with no question of credit, whereas IGST is levied at multiple points with input credit flowing through. This justifies separate treatment of the two levies (para 69).
• The notification dated 10.01.2019 omitting the condition cannot be read as effective from 13.10.2017. The FTDRA contains no power to make retrospective regulations, and courts cannot impart retrospectivity through interpretation (paras 70–71).
• Following VKC Footsteps, what applies to refunds applies equally to exemptions, and a tax concession can be withdrawn at any time (paras 72–73).

Brief Facts

Under the AA scheme in the FTP 2015-20, inputs physically incorporated in export products could be imported duty-free. Notification No. 18/2015-Customs exempted AA imports from BCD, additional duties, safeguard duty and anti-dumping duty. When GST came into force on 01.07.2017, IGST and compensation cess were levied on imports under Sections 3(7) and 3(9) of the Customs Tariff Act, and no exemption was initially given for AA imports (paras 2–3, 44–46). On 13.10.2017, Notification No. 79/2017-Customs granted the IGST and cess exemption subject to two conditions: export obligation by physical exports only, and a "pre-import condition". DGFT Notification No. 33/2015-20 amended FTP para 4.14 correspondingly (paras 4, 47–48). The condition was omitted by Notification No. 01/2019-Cus dated 10.01.2019 (para 13).

The DRI read the pre-import condition to mean that inputs had to be imported first and then used to make the exported goods, so exports made in anticipation of authorisation did not qualify (paras 5–6). The exporters challenged the condition. The Gujarat High Court held that it made the exemption "more or less illusory", militated against the AA scheme, did not meet the test of reasonableness and was ultra vires the FTP (paras 12–14). The Union appealed (para 1).

Issue (para 55)

1. Is the pre-import condition attached to the IGST and compensation cess exemption on AA imports (Notification No. 79/2017-Customs and amended FTP para 4.14) arbitrary, unreasonable or contrary to the FTP?
2. Does the condition discriminate between AA holders, or between IGST/cess and other customs levies such as BCD, in breach of Article 14?
3. Can the later withdrawal of the condition on 10.01.2019 be relied on to disregard it for the period from 13.10.2017?

Court's Findings

Policy power and HBP's status: FTPs are statutory and framed under Section 5 of the FTDRA, while the HBP only contains guidelines. Following Hindustan Granites, the HBP implements the policy and does not stop the Government from changing it. The Court noted that Trade Notice 11/2017 dated 30.06.2017 had warned exporters that no IGST or cess exemption would be available for AA imports under GST, and that this notice "escaped the attention" of the High Court. The HBP had also been amended to bar duty-free authorisation for inputs subject to the pre-import condition (paras 49–54).

DGFT's power to impose the condition: Paragraph 4.13(i) of the FTP let the DGFT impose a pre-import condition on inputs under Chapter 4 beyond those listed in Appendix-4J. The High Court wrongly assumed that only specified goods could be subjected to it (paras 56–57, 65).

Hardship versus arbitrariness: The Court accepted that the condition caused inconvenience and forced exporters to re-shape their business practices. Relying on Rohitash Kumar and Rakesh Kohli, it held that hardship does not make a fiscal measure arbitrary. Laxmi Khandsari and Ranjit P. Gohil did not help the exporters, and MRF Ltd. was distinguished because the withdrawal there was retrospective, while here the change was prospective (paras 62–64).

Classification in a new tax regime: Relying on Shri Ambica Mills, Ajoy Kumar Banerjee, Javed, Nandlal Jaiswal, R.K. Garg and Ashirwad Films, the Court held that reforms may be introduced in phases and that economic measures deserve "play in the joints". The disruption of paying the two levies and claiming refunds could not override the legislative choice. BCD and IGST may be treated differently because IGST is a credit-based multi-point levy collected at customs only for convenience (paras 65–69).

No retrospective effect for the 2019 withdrawal: The High Court treated the 10.01.2019 notification as proof that the condition was unworkable. Relying on Kanak Exports, the Supreme Court held this reasoning faulty, because reading the later notification back to 13.10.2017 would impart retrospectivity that the statute does not allow (paras 70–71). Relying on VKC Footsteps and Bannari Amman Sugars, it added that exemptions, like refunds, are matters of statute and policy, and that the transition to GST could not be painless (paras 72–74).

Final Outcome / Directions (paras 75–76)

• The Revenue succeeded, and the impugned judgment and orders of the Gujarat High Court were set aside (para 75).
• Since the exporters had been enjoying interim orders until the impugned judgments, the Revenue was directed to permit them to claim refund or input credit, whichever is applicable and wherever customs duty was paid (para 75).
• The exporters must approach the jurisdictional commissioner with documentary evidence within six weeks of the judgment; claims are to be examined on merits, case by case (para 75).
• The Revenue was to prescribe the procedure, conveniently through a circular (para 75).
• The Revenue's appeals were allowed, subject to these terms (para 76).

Legal Principle

A condition attached to a tax exemption, such as the pre-import condition for the IGST and compensation cess exemption on Advance Authorisation imports, will not be struck down as arbitrary merely because it causes hardship or departs from earlier practice. This is especially so when it accompanies a fundamental change in the tax regime such as the introduction of GST. Exemptions, like refunds, are creatures of statute and policy. The State may treat a credit-based GST levy differently from a one-point customs levy, and a later withdrawal of the condition cannot be applied retrospectively by judicial interpretation where the parent statute confers no power of retrospective regulation.

Precedents Relied Upon

• Hindustan Granites v. Union of India, 2007 (4) SCR 743 – Relied upon · Discussed at para 52: the Handbook of Procedure merely implements the policy and does not prevent the Government from changing it.
• Rohitash Kumar v. Om Prakash Sharma, (2013) 11 SCC 451 – Relied upon · Discussed at para 62: inconvenience or hardship is no ground to interpret a statute differently.
• MRF Ltd., Kottayam v. Asst. Commissioner (Assessment) Sales Tax, 2006 Supp (6) SCR 417 – Distinguished · Discussed at para 64: there the withdrawal of exemption was retrospective; here the change was prospective.
• State of Gujarat v. Shri Ambica Mills, 1974 (3) SCR 760 – Relied upon · Discussed at para 66: classification is not applied strictly to reform legislation, and economic laws receive greater deference.
• State of Madhya Pradesh v. Nandlal Jaiswal, 1987 (1) SCR 01 – Relied upon · Discussed at para 68: the executive has "play in the joints" in complex economic matters.
• Director General of Foreign Trade v. Kanak Exports, 2015 (15) SCR 287 – Relied upon · Discussed at para 70: Section 5 of the FTDRA confers no power to amend the policy retrospectively.
• Union of India v. VKC Footsteps India Pvt. Ltd., 2021 (15) SCR 169 – Relied upon · Discussed at paras 72–73: there is no constitutional entitlement to a refund; the same applies to exemptions.
• Bannari Amman Sugars Ltd. v. Commercial Tax Officer, 2004 (6) Suppl. SCR 264 – Relied upon · Discussed at para 73: a tax concession can be withdrawn at any time.

Important Paragraphs of the Judgment

Para 62: "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."

Para 67: "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."

Para 69: "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."

Para 70: "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."

Para 73: "In this court’s opinion, what applies to refunds, (the right to which can be curtailed legitimately) applies equally to exemptions."

What the Ruling Means: Practical Impact

• Condition valid for 13.10.2017 to 09.01.2019: For AA imports in this window, the IGST and compensation cess exemption depended on meeting the pre-import condition. Imports made in anticipation of authorisation cannot claim the exemption on the ground that the condition was invalid (paras 28, 67, 70–71).
• Refund / ITC route for exporters: Exporters who enjoyed interim protection were given a window to claim refund or input credit before the jurisdictional commissioner, with documentary evidence, within six weeks of the judgment, on a case-by-case basis (para 75).
• Exemption conditions are hard to strike down: The ruling confirms that courts give wide latitude to fiscal and economic policy. Hardship, business disruption or later withdrawal of a condition will rarely make an exemption condition arbitrary (paras 62, 66–68, 74).
• IGST is different from customs duty: Because IGST on imports is a credit-based GST levy collected at customs for convenience, exemption conditions may lawfully differ from those for BCD (para 69).

Frequently Asked Questions

What is the "pre-import condition" upheld in Cosmo Films?

It was a condition in Notification No. 79/2017-Customs and amended FTP para 4.14 (both dated 13.10.2017). Under it, the exemption from IGST and compensation cess on AA imports was available only if the inputs were imported before they were used to make the export goods. Exports made first, with replenishment imports later, did not qualify (paras 4–6, 47–48).

Why did the Supreme Court reverse the Gujarat High Court?

The High Court overlooked the DGFT's power under FTP para 4.13(i), HBP para 4.27(d) and Trade Notice 11/2017. It also treated hardship as arbitrariness and effectively gave the 2019 withdrawal retrospective effect. The Supreme Court held that each of these was an error (paras 50, 57, 62, 70–71).

Is it discriminatory to exempt BCD unconditionally but IGST only with a pre-import condition?

No. The Court held that BCD is a single-point customs levy with no credit, while IGST is a multi-point levy within the GST credit chain. This difference justifies separate treatment (paras 65, 69).

Does the withdrawal of the condition on 10.01.2019 help exporters for earlier imports?

No. Reading the 10.01.2019 notification as effective from 13.10.2017 would impart retrospectivity that the FTDRA does not permit (paras 70–71).

What relief did exporters get despite losing?

Since they had been protected by interim orders, the Revenue was directed to allow them to claim refund or input credit by approaching the jurisdictional commissioner with documents within six weeks. The claims are to be examined case by case under a procedure prescribed by circular (para 75).

Judgment Copy

Judgment PDF: 2023 INSC 463 – Union of India v. Cosmo Films Limited (official copy, sci.gov.in)

Read more: Supreme Court Reportable GST Judgments · High Court GST Judgments · GST Legal News