Pre-import condition in Advance Authorisation scheme held unconstitutional
Since the advent of GST, the Advance Authorisation scheme has been mired with controversies which are yet to settle.
The Advance Authorisation Notification (referred in trailing mail) was amended on October 13, 2017 to exempt IGST and compensation cess, subject to pre-import condition. In our earlier updates, we referred to the Directorate of Revenue Intelligence’s investigations against many exporters demanding IGST where the goods were imported under Advance Authorisation in a post-export scenario on account of violation of pre-import condition. Correspondingly, several taxpayers challenged the validity of pre-import condition in writ petitions (as discussed in our update dated August 10, 2018). The Government subsequently amended the Notification in January 2019 to remedy the situation. However, as discussed in our update dated January 30, 2019, the amendments were prospective and failed to address the issue for exporter community for the previous period.
In continuation to the above developments, we wish to highlight that in the case of Maxim Tubes Company Private Limited v. UOI, 2019-TIOL-459-HC-AHM-CUS, the Gujarat High Court has struck down the pre-import condition in context of Advance Authorisation scheme as ultra vires the FTP. The High Court adopted following reasons to come to this conclusion:
- The Advance Authorisation scheme is contained in Chapter IV of FTP. Notification 2015 issued thereunder, exempted all the customs duties on imported inputs. With the introduction of GST, the Customs Tariff Act, 1975 was amended to provide for levy of IGST and compensation cess. The Central Government issued Notification No. 79/2017-Cus dated October 13, 2017 continuing IGST and compensation cess exemption on imported inputs subject to fulfilment of pre-import condition.
- A scheme formulated by the Government needs to work as a whole. With the advent of GST, the Advance Authorisation scheme successfully operating for last several years without any pre-import condition, suddenly became defunct. It also created a piquant situation as the very same inputs became subject to pre-import condition only for seeking exemption from IGST and compensation cess and not for other duties of customs.
- The Government brought Advance Authorisation scheme to neutralise the effect of taxes on export goods and incentivise exports. At the same breadth and at all points of time in the past, the scheme permitted both pre-import as well as post-export mechanisms. Both these options were equally preferred by exporters. The amendment restricting IGST exemption under Advance Authorisation scheme to pre-import cases is adversarial to the interest of exporters’ community at large as it leads to blockage of their working capital.
- Lastly, the Government has realised the anomaly caused by pre-import condition and hence removed the same in January 2019.
Basis the above, the High Court held that pre-import condition in Advance Authorisation scheme was unconstitutional and struck down the same.
It is pertinent to point out that the Madras High Court in the case of Vedanta Limited, had already upheld the validity of pre-import condition in Advance Authorisation scheme.
This judgment brings a respite to the exporters’ community for the past period whilst declaring the pre-import condition as ultra-vires. In another case (Macro Polymers Private Limited), the Gujarat High Court relied upon this decision and again held the pre-import condition in Advance Authorisation scheme as ultra vires.
Though these High Court judgments refer to the decision of Madras High Court in the case of Vedanta Limited (cited supra) but fails to distinguish the same. It is expected that the tax authorities will not rest here and challenge these judgments before the Supreme Court. It will be interesting to watch as to how the Supreme Court eventually settles the dust on this issue.