UNION OF INDIA AND ORS. versus COSMO FILMS LIMITED on 28 April 2023

UNION OF INDIA AND ORS.

v.

COSMO FILMS LIMITED

(Civil Appeal No. 290 of 2023)

APRIL 28, 2023

[S. RAVINDRA BHAT AND DIPANKAR DATTA, JJ.]

Foreign Trade (Development & Regulation) Act, 1992 –Foreign Trade Policy of 2015-2020 (FTP) – Handbook of Procedures2015-2020 (HBP) – Notification No.18/2015-Customs exemptedpayment of basic customs duty, additional duty (countervailing duty,special additional duty), safeguard duty and anti-dumping duty oninputs imported against a valid Advance Authorization (AA) – GSTregime was introduced w.e.f 01.07.2017 – However, nocorresponding amendment was made to the aforesaid Notificationw.r.t IGST and compensation cess – Notification No.79/2017-Customs amended the aforesaid Notification by granting IGST andcompensation cess exemption, subject to the conditions that theexport obligation shall be fulfilled by physical exports only andshall also be subject to ‘pre-import condition’ – Notification No.33/2015-2020 was also issued, amending various provisions of theFTP, whereby this ‘pre-import condition’ was incorporated inparagraph 4.14 – High Court set aside the mandatory fulfilment ofthe ‘pre-import condition’ incorporated in the FTP and HBP by theaforesaid two Notifications – As per the High Court, such fulfilmentin order to claim exemption of IGST and GST compensation cess oninput imported into India for the production of export goods, onthe strength of an AA was arbitrary and unreasonable –Sustainability of – Held: Not sustainable – Exporters were madeaware of the changes brought about due to the introduction of GST,through a trade notice – However, this trade notice escaped theattention of the High Court – Further, the concept of ‘pre-importcondition’ was not alien – Appendix-4J (mentioned in paragraph4.13 (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

185

A

B

C

D

E

F

G

H

Aother than those specified in Appendix-4J, meant that the DGFTcould exercise it, in relation to any goods – High Court did notdiscuss this aspect and proceeded on the assumption that onlyspecified goods were subject to the pre-import condition – Anycategory of supply, other than actual exports to other country andsupply to SEZ cannot be considered as physical exports – In caseBthe entire exports were not physical exports, the AAs wereautomatically ineligible for exemption – The introduction of the GSTregime resulted in a substantial and fundamental overhaul of theindirect tax structure – There is no constitutional compulsion thatwhilst framing new law or policies, particularly when an entirelyCdifferent set of fiscal norms are created, overhauling the taxationstructure, concessions hitherto granted should necessarily becontinued in the same fashion as they were in the past – Inevitably,this process is bound to lead to some disruption – In this case, thedisruption is in the form of exporters needing to import inputs, paythe two duties, and claim refunds – Yet, this inconvenience isDinsufficient to trump the legislative choice of creating an altogethernew fiscal legislation, and insisting that a section of assessees ordertheir affairs, to be in accord with the new law – Therefore, theexclusion of benefit of imports in anticipation of AAs, and requiringpayment of duties, u/s.3 (7) and (9) of 1975 Act, with the ‘pre-importEcondition’, cannot be characterized as arbitrary or unreasonable– Impugned notifications cannot be faulted for arbitrariness orunder classification – Impugned judgment of the High Court setaside – Customs Tariff Act, 1975 – ss.3 (7), (9).

Conclusion

Foreign Trade (Development & Regulation) Act, 1992 – s.5 –FForeign Trade Policy of 2015-2020 (FTP) vis-à-vis Handbook ofProcedures 2015-2020 (HBP) – Held: FTPs are statutory and areframed 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.GTax/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 orinjustice of the law as Parliament and State Legislatures – Hardshipis not relevant in pronouncing on the constitutional validity of afiscal statute or economic law – When reform by way of newH

legislation is introduced, the doctrine of classification cannot beapplied strictly, and that some allowance for experimentation, toobserve the effect of the law, is available to the executive orlegislature – Doctrine of Classification.

Allowing the appeals, the Court

HELD: 1.1 Exporters were made aware of the changesbrought about due to the introduction of GST, through a tradenotice, (Trade Notice 11/2017, dated 30-06-2017). The publicnotice clearly forewarned that AAs and their utilisation wouldnot continue in the same manner as the AA scheme was operatinghitherto. This trade notice has escaped the attention of the HighCourt, since there is no advertence to it in the impugned order,or a discussion about it. Likewise, the HBP was amended, andparagraph 4.27 (d) was inserted, which stated that duty freeauthorisation for inputs subject to ‘pre-import condition’ couldnot be issued. By virtue of the trade notice, exporters were madeaware of the fact that under the GST regime, no exemption frompayment of IGST and compensation cess would be available forimports under AA. Importers had to pay IGST and take input taxcredit 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 importof 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 smoothenand facilitate export trade, ensuring that finished goods, meantfor 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) listedseveral articles, such as spices, penicillin and its salts, tea,coconut oil, silk, drugs from unregistered sources, preciousmetals, etc. as articles for which the ‘pre-import condition’ wasapplicable, prior to the GST regime. Furthermore, by paragraph4.13 of the FTP, the DGFT could impose ‘pre-import conditions’on articles other than those specified. The retention of the powerto impose ‘pre-import conditions’ on articles other than thosespecified in Appendix-4J, meant that the DGFT could exerciseit, in relation to any goods. The High Court has not discussed A

B

C

D

E

F

G

H

Athis aspect, and proceeded on the assumption that only specifiedgoods were subject to the ‘pre-import condition’. The existenceof 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, togetherwith the High Court’s failure to notice paragraph 4.27 (d) of theBHBP are serious infirmities in the impugned judgment. [Paras56, 57][217-G-H; 218-A-D]

1.3 ‘Physical export’ is defined in paragraph 4.05(c) andparagraph 9.20 of the FTP read with Section 2(e) of the FTDRA.Essentially, therefore, export involves taking goods out of India.CAAs can be issued either to a manufacturer exporter or merchantexporter tied to supporting manufacturer (as per paragraph 4.05).However, paragraph 4.05 of the FTP defines categories for whichAAs can be issued, somewhat expansively. The definition extendsin specific terms (under Chapter 4 of FTP) - supplies made toDSEZ are considered as ‘physical exports’ despite not being anevent in which goods are being taken out of India. The otherthree categories defined under (c) (ii), (iii) & (iv) are ineligibleas ‘physical exports’. Supplies of intermediate goods are coveredby letter of invalidation, whereas supplies covered under Chapter7 of the FTP are considered as ‘deemed exports’. These suppliesEare ineligible for being considered ‘physical exports’. Therefore,any category of supply, be it under letter of invalidation and/or toEOU and/or under International Competitive Bidding (ICB) and/or to Mega Power Projects, other than actual exports to othercountry and supply to SEZ, cannot be considered as ‘physical Fexports’. One of the objects behind the impugned notificationswas to ensure that the entire exports made under AAs towardsdischarge of export orders were physical exports. In case theentire exports were not physical exports, the AAs wereautomatically ineligible for exemption. [Para 59][218-F-H; 219- A-E]G

1.4 The introduction of the ‘pre-import condition’ may haveresulted in hardship to the exporters, because even whilst theyfulfilled the physical export criteria, they could not continue withtheir former business practices of importing inputs, after applyingfor AAs, to fulfil their overseas contractual obligations. The newH

dispensation required them to pay the two duties, and then claimrefunds, 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.[Para 62][220-D-F]

1.5 The respondents had alleged discrimination on twocounts: one, that for purposes of classification, all exporters whowere granted AAs were to be treated alike; and two, that insistingon the ‘pre-import condition’ in respect to exemption from twolevies only, while granting that benefit in respect of other AAs,was discriminatory. As far as the first aspect is concerned, theimpugned judgment is on a misreading of the FTP. As notedearlier, paragraph 4.13 (i) itself empowered the DGFT to includearticles, which are not specified in Appendix-4J. The existenceof this discretion means that there is flexibility in regard to thenature of policies to be adopted, having regard to the state ofexport trade, and concessions to be extended in the trade andtax regime. Thus, the indication of a few items by virtue ofparagraph 4.13 (ii) per se never meant that other articles couldnot 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 introduced tax regimes, sofar as two new levies are concerned. If one keeps in mind thatthere cannot be a blanket right to claim exemption, and that sucha relief is dependent on the assessment of the State and taxadministrators, as well as the state of the economy and above all,the mechanism for its administration, clearly the argument ofdiscriminatory treatment of the two levies on the one hand, andthe other taxes on the other, has to fail. The exemption from therequirement of pre import conditions continues in respect of theold levies, which are, even as on date, not part of the GST regime.That clearly sets them apart from the new levies, the payment ofwhich is insisted (after which refund can be sought) as a part of aunified system of levy, assessment, collection, payment, and refund.[Para 65][222-C-H]

AB

C

D

E

F

G

H

190SUPREME COURT REPORTS

[2023] 7 S.C.R.

A1.6 The introduction of the GST regime resulted in asubstantial and fundamental overhaul of the indirect tax structure,at the State and Central levels. There is no constitutionalcompulsion that whilst framing a new law, or policies under a newlegislation – particularly when an entirely different set of fiscalnorms are created, overhauling the taxation structure,Bconcessions hitherto granted or given should necessarily becontinued in the same fashion as they were in the past. When anew set of laws are enacted, the legislature’s effort is to on theone hand, assimilate- as far as practicable, the past regime. Onthe other hand, the object of the new law is creation of new rightsCand obligations, with new attendant conditions. Inevitably, thisprocess is bound to lead to some disruption. In this case, thedisruption is in the form of exporters needing to import inputs,pay the two duties, and claim refunds. Yet, this inconvenience isinsufficient to trump the legislative choice of creating analtogether new fiscal legislation, and insisting that a section ofDassessees order their affairs, to be in accord with the new law.Therefore, the exclusion of benefit of imports in anticipation ofAAs, 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,E67][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 ofMadhya Pradesh v Rakesh Kohli[2012] 6 SCR 661;State of Gujarat v Shri Ambica Mills1974 (3) SCR 760;FAjoy Kumar Banerjee & Ors. v. Union of India & Ors[1984] 3 SCR 252; Javed v. State of Haryana(2003) 8SCC 369 : [2003] 1 Suppl. SCR 947;State of MadhyaPradesh v Nandlal Jaiswal [1987] 1 SCR 01;AshirwadFilms v. Union of India(2007) 6 SCC 624 : [2007] 7SCR 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 ofthe HBP; that only few articles were enumerated when the FTPwas published, is no ground for the exporters to complain thatother articles could not be included for the purpose of ‘pre-importH

condition’; as held earlier, that is the import of paragraph 4.03(i). The numerous schemes in the FTP are to maintain anequilibrium between exporters’ claims, on the one hand and onthe other hand, to preserve the Revenue’s interests. Here, whatis involved is exemption and postponement of exemption of IGST,a new levy altogether, whose mechanism was being worked outand evolved, for the first time. The plea of impossibility to fulfil‘pre-import conditions’ under old AAs was made, suggesting thatthe notifications retrospectively mandated new conditions. Theexporter respondents’ argument that there is no rationale fordifferential treatment of BCD and IGST under AA scheme iswithout merit. BCD is a customs levy at the point of import. Atthat 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. Asa result, there is justification for a separate treatment of the twolevies. IGST is levied under the IGST Act, 2017 and is collected,for convenience, at the customs point through the machineryunder the Customs Act, 1962. The impugned notifications,therefore, cannot be faulted for arbitrariness or underclassification. [Para 69][226-H; 227-A-E]

1.8 The High Court was persuaded to hold that thesubsequent notification of 10.01.2019 withdrew the ‘pre-importcondition’ meant that the Union itself recognized its unworkableand unfeasible nature, and consequently the condition should notbe insisted upon for the period it existed, i.e., after 13.10.2017.The reasoning is faulty. It is now settled that the FTPRA containsno power to frame retrospective regulations. To giveretrospective effect, to the notification of 10.01.2019 throughinterpretation, would be to achieve what is impermissible in law.Therefore, the impugned judgment cannot be sustained on thisscore as well. [Paras 70, 71][227-E-F; 228-A-B]

1.9 The impugned judgment and orders of the Gujarat HighCourt are set aside. However, since the respondents wereenjoying interim orders, till the impugned judgments weredelivered, the Revenue is directed to permit them to claim refundor input credit (whichever applicable and/or wherever customsduty was paid). [Para 75][229-E]

AB

CD

E

F

G

H

ADirector General of Foreign Trade & Ors. v KanakExports & Ors[2015] 15 SCR 287;Union of India(UOI) & Ors. v VKC Footsteps India Pvt. Ltd[2021] 15SCR 169;R.K. Garg v Union of India[1981] 1 SCR947: Union of India v VKC Footsteps India (P) Ltd.2022 (2) SCC 603 – relied on.

BMRF Ltd., Kottayam v. Asst. Commissioner (Assessment)Sales Tax & Ors. [2006] Supp 6 SCR 417 – heldinapplicable.

Khandige Sham Bhat v Agricultural Income Tax OfficerC[1963] 3 SCR 809;Assistant Commissioner of UrbanLand Tax v Buckingham & Carnatic Co Ltd.[1970] 1SCR 268;Laxmi Khandsari vs. State of Uttar Pradesh[1981] 3 SCR 92;State of Haryana v Jai Singh2003(9) SCC 114; Welfare Association ARP v Ranjit P. Gohil[2003] 9 SCC 358;Union of India (UOI) and Ors. vs.DN.S. Rathnam & Sons[2015] 8 SCR 751;Vasu DevSingh v. Union of India[2006] Supp 9 SCR 565;P. J.Irani v. State of Madras[1962] 2 SCR 169;Union ofIndia v. Asian Food Industries,[2006] Supp 8 SCR 485;Hindustan Granites v Union of India[2007] 4 SCRE743;Bannari Amman Sugars Ltd. vs. Commercial TaxOfficer & Ors[2004] 6 Suppl. SCR 264 – referred to.

C

CIVIL APPELLATE JURISDICTION : Civil Appeal No.290 of2023.

From the Judgment and Order dated 04.02.2019 of the High Courtof Gujarat at Ahmedabad in SCA No.15186 of 2018.

D

With

Civil Appeal Nos.298, 303, 297, 296, 295, 294, 293, 292 of 2023And Transfer Petition (Civil) No.1526 of 2020.

R. Venkataramani, AG, N. Venkatraman, A.S.G., Mukesh KumarMaroria, Sharath Nambiar, Ankur Talwar, Ms. Chinmayee Chandra,Siddhant Kohli, B. Krishna Prasad, Abhishek A. Rastogi, Nikhil Jain,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. NupurPrasad, Amar Dave, P. S. Sudheer, Rishi Maheshwari, Ms. Anne Mathew,Bharat Sood, Ms. Shruti Jose, Ashok Basoya, Sudhanshu S. Choudhari,Advs. for the appearing parties.

E

F

The Judgment of the Court was delivered by

S. RAVINDRA BHAT, J.

G

1. These appeals are directed against a judgment and order of theGujarat High Court,[1] wherein mandatory fulfilment of a ‘pre-importcondition’[2] incorporated in the Foreign Trade Policy of 2015-2020 (“FTP”)

1M/s Shri Jagdamba Polymers Ltd. & Ors. v Union of India & Ors., Special CivilApplication No. 19324 of 2018.

2 Paragraph 4.13 of FTP, read with the HBP.

H

Aand Handbook of Procedures 2015-2020 (“HBP”) by Notification No.33 / 2015-20 and Notification No. 79 / 2015-Customs, both dated13.10.2017, was set aside. According to the High Court, such fulfilmentin order to claim exemption of Integrated Goods and Services Tax(“IGST”)[3] and GST compensation cess[4] on input imported into India forthe production of goods to be exported from India, on the strength of anBadvance authorization[5] (“AA”) was arbitrary and unreasonable.

I. Background

2. In terms of the Foreign Trade (Development & Regulation)Act, 1992 (“FTDRA”) the Central Government (“Union”) had beenCframing, from time to time, Export-Import Policies (or FTPs) for thedevelopment, regulation and control of imports and exports in the country.The Union announced duty exemption schemes as well. One amongthese was the AA. To regulate and guide the procedure to be followedfor implementing the provisions of the FTP and the rules framedthereunder, the Director General of Foreign Trade (“DGFT”) notifiedDthe HBP, chapter 4 of which prescribed the procedure for availing dutyexemption / remission schemes. By paragraph 4.27, exports in“anticipation of authorisation” were permitted, so as not to createhindrances and delays in execution of export orders. At the time,Notification No. 18 / 2015-Customs dated 1.04.2015 exempted paymentEof 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-CustomsFwith respect to IGST and compensation cess, resulting in the collectionof 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, subjectto the following two conditions:G

“Provided further that notwithstanding anything containedhereinabove for the said authorisations where the exemptionfrom 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.H5 Paragraph 4.03 of FTP.

5 Paragraph 4.03 of FTP.

compensation cess leviable thereon under sub-section (7) andsub-section (9) of section 3 of the said Customs Tariff Act,has been availed, the export obligation shall be fulfilled byphysical exports only.”[6]

***

“That the exemption from integrated tax and the goods andservices tax compensation cess leviable thereon under sub-section (7) and sub-section (9) of section 3 of the said Customs-”[7]Tariff Act shall be subject to preimport condition (emphasis supplied)

At the same time, Notification No. 33 / 2015-2020 was issued,amending various provisions of the FTP, whereby this ‘pre-importcondition’ was incorporated in paragraph 4.14 thereof with effect from13.10.2017. The writ petitioners before the High Court / respondentsherein claimed that they were unaware about this condition, and continuedexports in anticipation of grant of AA, and consequently expectedexemption from all custom duty levies, including IGST and compensationcess.

5. The Directorate of Revenue Intelligence (“DRI”) Kolkatanoticed the above amendments and thereupon, initiated investigation andissued summons to various manufacturers located across the countryimporting goods against AAs. The respondents were of the view thatthe scope of ‘pre-import condition’ was unclear, whereas the DRI officersconducting the inquiry and investigation, however, were of the view that‘pre-import condition’ meant that goods had to be imported first, andthen the final products manufactured with such imported goods were tobe exported. When it was established that goods imported against aparticular AA were used in relation to manufacture of finished goodsexported for fulfilment of export obligation of that particular authorisation,the ‘pre-import condition’ stood satisfied.

6. In view of this development, the exemption granted byNotification No. 18 / 2015-Customs was inadmissible wheremanufacturer-exporters, who undertook manufacturing and export ofgoods 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.

A

B

C

D

E

F

G

H

Aalso not admissible when goods manufactured were exported inanticipation of licence / authorisation, since they were exports madefirst, with duty-free import against the authorisation having beenundertaken later. Consequently, the manufacturer-exporters aggrievedby this interpretation approached the High Court.

BII. Arguments of the Revenue before the High Court

7. The Revenue contended that exemption from paying duty wasnot a matter of right, and was granted by the State keeping in mindgeneral public interest. The criterion for determination of legality of anynotification was always whether the authority acted within its jurisdictionCwhile issuing such notification or not, and not if the Union benefittedfrom the same. The Revenue contended that exporters were free toexport first and import at a later stage in terms of paragraphs 4.27 and4.28 of the HBP. Those provisions however did not offer absolutefreedom to the importers to regulate their imports and exports withoutcomplying with other conditions imposed in the policy and the relevantDcustoms notification. The provisions were an exception, to keep the optionopen for willing exporters, subject to the condition that it would be availedat their risk. Further, exercising the option was available only when eitherof the ‘pre-import conditions’ was not fixed in the SION[8], or exporterswere willing to first fulfil their export obligation. As the process of fixingEnorms was time consuming, the provisions granted an opportunity toimporters to export in advance, at the risk of not being considered towardsdischarge of export obligation.

8. The Revenue submitted that before the introduction of the GSTregime, imports allowed under AAs were exempt from payment of manyFduties.[9] Thereafter, CVD and SAD were subsumed in IGST. UnderSection 3 of the Customs Tariff Act, 1975, IGST was made payable atspecified rates upon imports. However, a major change that was broughtinto the policy was to not allow exemption from payment of IGST directlyat the time of import under AA. Such exemption was allowed indirectlyby allowing refund of IGST paid at the time of imports under AA withinGa specified time. The importers, therefore, started paying IGST on goodsimported under AA with effect from 1.7.2017, and were getting outright 8 Standard Input Output Norms, which are standard norms which define the numberof input/inputs required to manufacture units of output for export purposes. They areapplicable differently for different products. H9Supra, para 2.

exemption from BCD, ADD, safeguard duty, etc., and IGST paid wasrefunded. The legislative intent was clear in imposing IGST on all importsmade under AAs, on or after 1.7.2017, without differentiating betweenthe status of such authorisations, whether or not it was issued prior to orafter introduction of GST. It was a policy decision, which could havebeen reversed or altered only by the GST Council. The Revenue alsopointed out that due to problems in Goods and Service Tax Network(GSTN)[10], the committed refund of IGST was getting delayed. Thisresulted in blocking of working capital for many business houses. Toobviate this problem, the GST Council allowed exemption from IGSTwhen imported under AAs. The Directorate General of Foreign Trade(“DGFT”) accordingly, issued Notification No. 33/2015-20 dated13.10.2017 which was backed by Customs Notification No. 79/2017dated 13.10.2017, issued by the Department of Revenue, amending theNotification No. 18 / 2015-Customs, dated 1.4.2015. The Revenue furtherurged that exemption from the IGST leviable under Section 3 (7) wasavailable and subject to two specific conditions. The conditions were (i)export obligation was to be fulfilled through physical exports only; and(ii) the exemption was subject to ‘pre-import condition’, which impliedthat only after the import of the goods commenced, were they requiredto be used for manufacture of export goods, which were ultimatelyexported.

9. According to the Revenue, a cut-off date could have beendeclared, and only AAs issued after 13.10.2017 could have been declaredeligible for such benefits, but the same was not done. It was kept open-ended to extend benefit to the importers, who followed those twoconditions, even in respect of the AAs issued to them earlier. A cut-offdate would have made exporters ineligible for the benefit. Therefore,policy makers, in their own wisdom, kept the door open for the eligibleimporters, to enjoy the benefit, irrespective of the date / period of issuanceof AA, subject to compliance with the conditions imposed.

10. The Revenue further stated that paragraph 4.13 of the FTPhad been in existence under different paragraphs in different policy periodsfor years. Since 2003, all drug companies had been importing their rawmaterials sourced from unregistered sources, under the ‘pre-import 10 Which provides shared IT infrastructure and service to both central and stategovernments including taxpayers and other stakeholders. The registration front endservices, returns, and payments to all taxpayers were provided by GSTN.

A

B

C

D

E

F

G

H

Acondition’. Silk in any form, raw sugars, natural rubbers, tea, spices andprecious metals etc., were allowed to be imported under ‘pre-importcondition’ only. The ‘pre-import condition’ was in-built within the AAscheme itself under paragraph 4.03 of the policy.

11. Additionally, the AA scheme was not a replenishment scheme.BWere it so, the DGFT would not have launched other schemes like ‘Duty-Free Incentive Scheme’, which allowed exports prior to import, andtransferable licences under the FTP. To prevent cash blockage ofexporters due to upfront payment of IGST and compensation cess onimports of inputs, the exemption from their payment was granted, subjectto ‘pre-import condition’. In case of replenishment imports after exports,Cthe issue of cash blockage did not arise. Since exports had already takenplace and GST legislation provided for complete zero-rating, extendingIGST exemption on replenishment imports would imply double benefit tothe authorisation holder. Therefore, the AA holders were not adverselyaffected and not prejudiced by the impugned notifications. The IGSTDpaid on replenishment material could be availed as input tax credit forpayment of GST.

III. Findings of the High Court

12. The High Court, after considering the notifications and takinginto account the exporters’ submissions, held that paragraph 4.27 of theFTP envisaged exports in anticipation of authorisation, in terms of theEcycle of import-manufacture-export carried out, including delivery timeof 3-4 months allowed normally by overseas buyers, within minimum sixmonths’ time for completion of the cycle. The court considered this tobe an unfeasible condition:“Considering the above interpretation of the condition ofFphysical export and pre-import put forth by the DRI, it is moreor less impossible to make any exports under an AdvanceAuthorisation without violating the condition of pre-import.In effect and substance, what is given by one hand is takenaway by the other. In other words, in the light of the conditionGof pre-import, the benefit of exemption from levy of integratedtax and GST compensation cess becomes more or lessillusory.”[11]13. It was noted that while the ‘pre-import condition’ was leviedon duties collected under Sections 3 (7) and (9) of the Customs Tariff

Act, 1975, in respect of the levies under Sections 3 (1), (3) and (5)no ‘pre-import condition’ was imposed. The result was that if theimporter wanted benefit of exemption from the levy of integrated taxand compensation cess, the fact that other levies were not subject to‘pre-import condition’ was immaterial because the same inputs weresubject to it. This resulted in inputs being subject to ‘pre-import condition’in respect of all the levies. The High Court then took note of the objectsof the FTDRA and the FTP, and the subsequent Notification No. 01/2019-Cus dated 10-01-2019, whereby condition (xii) was omitted. Thecourt held that the Union found it to be in public interest not to continuewith the ‘pre-import condition’, for availing exemption from IGST andcompensation cess leviable on material imported against an AA. This,according to the impugned judgment, vindicated the exporter/respondents’stand. It was held accordingly that:

“The condition of pre-import militates against the AdvanceAuthorisation Scheme and therefore, the impugned condition(xii) in Notification No. 18/2015-Cus dated 1st April, 2015introduced vide Notification No. 79/2017 : MANU/CUST/0095/2017 dated 13th October, 2017 as well as theamendment in paragraph 4.14 of the Foreign Trade Policymade 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 physicalexport for exemption from the whole of the integrated taxand GST compensation cess leviable under sub-section (7)and sub-section (9) respectively, of section 3 of the CustomsTariff Act, do not meet with the test of reasonableness andare also not in consonance with the scheme of AdvanceAuthorisation”.[12]

14. The court also concluded that though paragraph 4.27 of HBPclearly permitted exports in anticipation of authorisation by endorsingthe file number or authorisation number to establish co-relation of export/supplies with authorisation issued, the Revenue wished to treat suchpermissible imports made in anticipation of authorisation as replenishment.This was despite the fact that for the purpose of exemption from theother levies imposed under Sections 3(1), 3(3) and 3(5) of the CustomsTariff Act, 1975 for decades the procedure was permitted, and continued 12Supra note 1.

AB

C

DEF

G

H

Ato be permitted, (for the purpose of exemption from levy of IGST andcompensation 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 andparagraph 4.14 of the FTP, to the extent they were impugned did notmeet with the test of reasonableness and were held to be ultra vires theBscheme 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 wasCthat the exporters were expected to import duty-free materials first, anduse them for the purpose of manufacture of products to be exported outof India or be supplied under deemed export, if allowed by the FTP orthe customs notifications. This aspect of physical incorporation of inputmaterials in the export goods was covered under paragraph 4.03 of theFTP, which specifically demanded physical incorporation of importedDmaterials in export goods which was possible only if imports were madeprior to export. Therefore, such authorizations principally had an inbuilt‘pre-import condition’ which had to be followed. Paragraph 4.27 of theHBP for the relevant period allowed exports / supplies in anticipation ofan authorization. This was an exception, to meet requirement in case ofEexigencies. However, importers and exporters were availing the benefitof that provision without exception and the export goods were made outof domestically or otherwise procured materials and duty-free importedgoods were used for purposes other than for the manufacture of theexport goods. Paragraph 4.27 (d) of the HBP barred benefit of export inanticipation of authorization for the inputs with ‘pre-import condition’.FThe ASG contested the exporters’ argument that there was no changein paragraph 4.27 of HBP and that it merely imposed conditions in termsof paragraph 4.14 of the FTP by way of ‘pre-import condition’.

16. It was stated that under paragraph 4.27(d), exports / suppliesmade in anticipation of authorisation were not eligible for inputs withG‘pre-import condition’. That meant that the moment input materials weresubject to ‘pre-import condition’, they were ineligible for export inanticipation of authorization, by virtue of paragraph 4.27 (d). Therefore,the respondent pleaded based on wrong notion and understanding and knowledge of the relevant provisions, and the High Court erroneouslyrelied upon such an incorrect submission.

17. It was argued that paragraph 4.27 (a) & (b), i.e., export inanticipation of authorization and the ‘pre-import condition’ on the inputmaterials were mutually exclusive and could not go hand in hand. Theimpugned order did not take into consideration this aspect of paragraph4.27(d). Therefore, holding ‘pre-import condition’ as unreasonable asthe same was in contrast with paragraph 4.27 (a) and also that theGovernment did not take enough care to eradicate such apparent paradox,was based on the wrong set of facts, and was contrary to the provisionsof the law.

18. It was argued that the High Court erred in setting asideparagraph 4.14 of the FTP and the corresponding provisions of thecustoms notifications, that imposed ‘pre-import’ and ‘physical export’conditions, and held that the contention of physical incorporation of theduty-free materials under paragraph 4.03 of the FTP was contrary toparagraph 4.27 of the HBP which specifically allowed imports inanticipation of authorization. The observation of the court was withoutmerit. The court erroneously granted primacy to paragraph 4.27 of theHBP over paragraph 4.03 of the FTP, when infact the FTP had pre-eminence over the HBP for laying down the procedures to be followedby an exporter or importer in terms of paragraph 1.03 of the FTP.Therefore, provision of the HBP could not override the FTP in case of aconflict. It was argued that paragraph 4.27(d) limited and confined thescope of paragraph 4.27(a). The moment paragraph 4.27(d) came intopicture, paragraph 4.27(a) became inoperative.

19. It was also urged that there was no conflict between paragraph4.03 of the FTP and that of 4.27(a) of the HBP. The scope and field ofoperation of individual paragraphs were completely different. Paragraph4.03(a) of the FTP provided that:

“(a) Advance Authorisation is issued to allow duty free importof input, which is physically incorporated in export product(making normal allowance for wastage). In addition, fuel,oil, catalyst which is consumed / utilized in the process ofproduction of export product, may also be allowed.”[14]

A

B

C

DE

F

G

A20. The object and spirit of the AA scheme to allow duty freeimport of input, which was to be physically incorporated in export product,was clear. The relevant customs notifications too, referred to paragraph4.03, which provided that the AA was issued in terms of its provision forextending exemption. The provision of physical incorporation of the inputsin the export goods, was necessary for the purpose of the scheme, forBtwo reasons. One, that input materials actually imported were to bephysically incorporated in the export goods and two, that the goodsphysically incorporated in the export goods only could be imported asinput. As far as the first situation was concerned, there was no questionof replenishment, because the inputs imported became part of the exports.CSuch goods were to be imported prior to the commencement of exportto enable the importer to manufacture finished goods from them.Therefore, for one had to follow the ‘pre-import condition’ and at thesame time they could not avail the benefit of export in anticipation ofauthorization. In the second situation however, the importer could usematerials procured otherwise, instead of duty-free materials toDmanufacture export goods, but the nature of materials (so procured) hadto be identical in all respects with the input materials to be imported. Inother words, materials which were to be used in export goods could onlybe allowed for import. In this case, there was no need to follow the ‘pre-import condition’ - the importer could avail the benefit of export inEanticipation of authorization. The Revenue contended that thereforeparagraph 4.03 of FTP was not in conflict with paragraph 4.27 of theHBP. In the absence of 4.27(d), these two provisions were consideredas complementary rather than in conflict. By inserting 4.27 (d), the intentwas clarified that the importer had to follow the provision of paragraph4.03 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 paragraph4.13 of the FTP, which was not so in the present case. The court’sinsistence that pre-import goods were to be specifically mentioned underparagraph 4.13 of the FTP, it was submitted, was misplaced. The RevenueGpointed out that paragraph 4.13 (1) itself left the issue of which inputswas to be subjected to ‘pre import condition’ open to the DGFT to notify:[15]

“DGFT may, by Notification, impose pre-import condition forinputs under this Chapter.”

15 Paragraph 4.13(1) of FTP.

H

The provision clearly left open, the scope of imposing ‘pre-importcondition’ on any goods which could have been covered by the saidChapter 4 of the Policy. Therefore, imposing, such condition across theboard for all goods imported under AA was well within the competenceand authority of the policy makers. It was argued that the High Courtfailed to notice that DGFT was duly empowered to issue NotificationNo.33/2015-20 dated 13.10.2017. This notification was general in natureand did not exclude any goods from its purview. The only condition wasthat wherever the importer wanted to avail the benefit of IGST andcompensation cess exemption, the ‘pre-import condition’ had to besatisfied. In absence of any negative list containing specific mention of aset of goods, which were not to be covered by the said provision, allgoods were covered by the said notification and subject to a uniformcondition. It was also urged that it was neither practicable nor possibleto specify each conceivable item for that purpose. In absence of anynegative list in the notification, such ‘pre-import condition’ was applicablefor all goods to be imported.

22. The ASG urged that the High Court erred in construing thepurpose of Appendix 4J- issued in tandem with paragraph 4.22 of theFTP during the material period (under paragraph 4.42 of the HBP), whichstated the export obligation period with respect to various goods thatwere allowed to be imported. Paragraph 4.22 was a general provision,specifying 18 months as the export obligation period in general. It alsoprovided that such a period was different for a set of goods mentioned inAppendix-4J. Therefore, Appendix-4J was a part of paragraph 4.22 andnot a part of paragraph 4.13. Further, Appendix-4J was a negative listfor the purpose of paragraph 4.22, which specified a set of goods forwhich export obligation period was different from the general provision.In addition, in respect of those items additionally the ‘pre-import condition’was applicable. The heading of Appendix-4J (“Export Obligation Periodfor Specified Inputs”) clearly referred to paragraph 4.22 of the FTP andparagraph 4.42 of the HBP. It was clear that its purpose was to defineexport obligation period of specified goods. It was submitted that merelybecause Appendix-4J provided for compliance of ‘pre-import condition’,that did not mean that it became the list meant for only goods on whichthe ‘pre-import condition’ was applicable.

23. It was argued that there was no conflict between paragraph4.14 of the HBP and paragraph 4.13 of the FTP because paragraph 4.14

A

B

C

D

E

F

G

H

Aimposed ‘pre-import condition’ even in case of inputs not falling withinthe ambit of paragraph 4.13. This conclusion was drawn based on anerroneous understanding that only limited items covered under Appendix-4J were covered by paragraph 4.13. All articles intended to be importedunder AA, availing exemption from payment of IGST, were covered bythe Notification No. 33 / 2015-20 dated 13.10.2017, issued in terms ofBparagraph 4.13 of the FTP. By virtue of the said notification, the momentany manufacturer decided to import any item under AA availing IGSTbenefit, the ‘pre-import’ requirement, as enumerated under paragraph4.14, was attracted. The notification acted as a bridge between paragraph4.13 and 4.14 of the FTP. They were in harmony with the spirit of theCFTP.

24. The learned ASG urged that the notifications interpreted bythe High Court amended the conditions for granting exemption from thelevy of certain taxes. The respondent exporters had not challenged thepower to impose the levies; their only argument was that the ‘pre-import’Dcondition, which was introduced for the first time in the notification, wasburdensome. They also contend that these conditions were contradictoryand made business cumbersome. The ASG submitted that once the powerto levy was undisputed, the conditions under which such levies wereimposed, and the manner in which they were collected, were within thedomain of the legislature or Parliament. Unless it was shown that theEstatute imposed a method of collection that was capricious, or arbitrary,the courts ought not to interfere with the levy. Similarly, a levy could failif there was no mechanism for assessment and collection. Reliance wasplaced on the decisions reported as Khandige Sham Bhat v AgriculturalIncome Tax Officer[16]; Assistant Commissioner of Urban Land Tax vFBuckingham & Carnatic Co Ltd.[17];R.K. Garg v Union of India[18];Union of India v VKC Footsteps India (P) Ltd[19]. It was submittedthat the courts ought to be circumspect while interpreting any fiscallegislation, and not hold either the provisions or terms of exemptions, orconditions imposed by the law, or through delegated legislation, as unreasonable, or arbitrary. The learned ASG urged that being a newGlegislation, 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.H19 2022 (2) SCC 603.

25. It was lastly urged that the introduction of Notification No.01/2019-Cus dated 10-01-2019 by the Union, whereby, condition (xii)requiring the ‘pre-import condition’, was omitted, could not be a groundto 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 ofjudicial reasoning, be given retrospective effect to, as even the substantiveprovisions of FTDRA did not permit subordinate retrospective legislation.

V. Contentions of the Respondent-Exporters

26. Ms. Meenakshi Arora, learned senior counsel, argued that anAA under the FTP could be issued either to a manufacturer-exporter ora merchant exporter tied with a supporting manufacturer with past exportperformance (in at least the preceding two financial years). Theentitlement 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 deemedexport in preceding financial year or ¹ 1 crore, whichever was higher. Onfulfilment of the conditions prescribed under paragraph 4.03 of the FTP,respondents were issued AA licenses.

27. Upon notification of the levy IGST, the benefits of upfrontexemption granted to exporters through AA in the erstwhile FTP regimewere rescinded through the amendment introduced in the scheme byNotification No. 26 / 2017-Customs dated 29 June 2017 (“AmendingGST Notification”).

28. It was submitted that the AA scheme was operatingwithout hitch or misuse, from its inception since 1986, without any ‘pre-import condition’. It had been successfully operating even from 10.01.2019onwards when the Central Government deleted the ‘pre-import condition’in public interest. Thus, there was no rationale or justification in imposingthe ‘pre-import condition’ only for a limited period from 13.10.2017 to09.01.2019 to a scheme operating successfully without any suchcondition.

29. It was urged that the ‘pre-import condition’ was madeapplicable for such limited period only for exemption from IGST andcompensation cess, whereas other import duties, namely, BCD, ADD,Safeguard Duty etc. were exempt even during this period of about 13months without the ‘pre-import condition’.

30. It was submitted that no reason or justification was providedfor subjecting IGST and compensation cess to this ‘pre-import condition’, A

B

C

D

E

F

G

H

Aand not applying this condition for other types of import duties. If ‘pre-import condition’ was applicable for AA, then the whole scheme wouldbe nullified because it was impossible for any manufacturer-importer tosatisfy the ‘pre-import condition’ when the export orders were to beexecuted by supplying the final products within a short period of 4 weeksto 8 weeks after receiving the purchase orders from overseas customers.BIn a typical case, the manufacturer-exporter could export goods onlyafter more than six months from receiving the purchase orders, if the‘pre-import condition’ was to be satisfied. Consequently, the deliveryschedule of about 4 to 8 weeks from receiving purchase orders couldnot have been fulfilled. It was additionally argued that all imports underCan authorization were subject to “actual user condition”. Therefore,manufacturer exporters were not allowed to sell or dispose of input rawmaterials imported free of duties against any authorization. Regularexporters conducted their business in a cycle, i.e., by importing input-raw materials free of duties against several authorizations granted tothem, and utilizing such goods for manufacturing final products for exportDwith reference to those several authorizations. Consequently, there couldbe no ‘one to one’ correlation between import of a consignment of inputsagainst one particular authorization and utilization of such inputs formanufacturing final products for export against those particularauthorizations only – such a scenario was not possible forEregular manufacturer-exporters. On realizing that the ‘pre-importcondition’ did not serve any purpose, the Union deleted the condition on10.01.2019, which vindicated the exporters’ stand that the conditionwas irrelevant to the scheme, and that condition had no nexus withthe objectives of the AA scheme. F31. It was submitted that the ‘pre-import condition’ violated Article14, which permitted reasonable classification to achieve specific ends.The respondents relied on Laxmi Khandsari vs. State of UttarPradesh[20]; State of Haryana v Jai Singh[21]; Welfare Association ARPv Ranjit P. Gohil[22]; and urged that for classification to be reasonable, itshould fulfil the two tests. One, it should not be arbitrary, artificial orGevasive, and should be based on intelligible differentia, some real andsubstantial distinction, which distinguished persons or thingsgrouped together in the class from others left out of it. Two, the differentia20 1981(3) SCR 92.21 2003 (9) SCC 114.H22 2003 (9) SCC 358.

adopted as the basis of classification must have a rationale or reasonablenexus with the object sought to be achieved by the statute in question.

32. Counsel argued that the High Court concluded, correctly, thatthe introduction of the ‘pre-import condition’ was an instance of classlegislation. The Union meted out differential treatment to the same classof license holders by enabling only certain class of license holders toavail the IGST benefit. This was because those who fulfilled theexport obligation before importing the goods were denied the opportunityto avail the benefit of IGST exemption.

33. The imposition of ‘pre-import condition’ on AAs issued priorto 13.10.2017 placed the exporter-respondents in the shoes of anyimporter who did not hold any license. The respondents had importedthe goods after fulfilling the corresponding export obligation. Itwas impossible to fulfil the ‘pre-import condition’ mandated for old AAsthrough a retrospective application of an amendment in theimpugned notifications, even though the respondents could demonstratethat all imported goods were subsequently used for manufacturing exportproducts.

34. Learned counsel for the respondents highlighted that therewas no reason for differential treatment of BCD and IGST under theAA scheme. When the levy of IGST on imported goods was treated likethe levy of BCD, there was no reason why the unconditional exemptionof BCD granted to license holders under the scheme could not beextended to the IGST exemption available for goods imported under thesame scheme. This differential treatment meted out to the IGST benefitwhen compared to the BCD exemption under the original NotificationNo. 18 / 2015-Customs was not justified and failed the test ofreasonable classification under Article 14 of the Constitution. Therewas no intelligible differentia between the two in denying the benefit forIGST while granting exemption for BCD. There was also no rationalebehind the classification IGST and BCD for exemption, at par with theobjectives under the scheme.

35. Learned counsel for the respondents relied on Union of India(UOI) and Ors. vs. N.S. Rathnam & Sons[23] which held that grant ofdifferent exemption based on unintelligible differentia between two categoriesof assesses for payment of customs duty was discriminatory and 23 2015 (8) SCR 751.

A

B

CD

EF

G

H

Aunreasonable. Learned counsel also cited MRF Ltd., Kottayam v. Asst.Commissioner (Assessment) Sales Tax & Ors.[24]to submit that imposingthe ‘pre-import’ stipulation in respect of two levies was arbitrary andunreasonable.

36. Reliance was also placed upon the decision of this court in theBcase of Vasu Dev Singh v. Union of India[25], for the proposition thatthe 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 thestatutory authority while exercising its statutory power must show thatthe same had not only been done within the four corners thereof butCotherwise fulfilled the criteria laid down by this court in P. J. Irani v.State of Madras[26]. The court held that if by a notification, the Act waseffaced, it was liable to be struck down.

37. It was submitted that the entire AA scheme was effaced byvirtue of the ‘pre-import condition’ and therefore, such condition wasDrequired to be struck down. Reliance was placed uponLaxmi Khandsari (supra), where the court held that in imposingrestrictions, the State ought to adopt an objective standard amountingto social control by restricting the rights of the citizens ·wherethe necessities of the situation demand. When the validity of a law placingErestrictions upon the exercise of fundamental rights in Article 19(1)(g) ischallenged, the onus of proving to the satisfaction of the court that therestriction is reasonable lies upon the State. It was submitted that this isnot a case of first-time exemption. As the Union sought to placerestrictions, it had to show that the conditions were remedial and necessary.It was hence contended that as there was no rationale behindFintroducing the ‘pre-import condition’ (which had no nexus with the objectsought to be achieved by the AA scheme), it violated Article 19(1) (g) ofthe Constitution, and was accordingly set aside.

VI. Analysis and Findings

G38. The AA scheme is a duty exemption scheme introduced bythe Union, under the FTP. Under the scheme, exemption from the paymentof 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 169H

manufacture of export products i.e., one can import raw materials orinputs at zero customs duty for production of export products. Thepurpose of this scheme is to ensure competitiveness of India’s productsin the global market. When duties paid on raw materials are saved, itreduces the cost of the final export product. In terms of the scheme, theexporter can import raw materials duty-free.[27] These inputs either canbe in a raw / natural / unrefined / unmanufactured or manufacturedstate. Advance Licenses are issued to allow duty-free import of inputs,which are then physically incorporated in export goods (after makingnormal allowance for wastage). In addition to this, fuel, oil, the catalystwhich is consumed / utilized in the process of production of export product,may also be allowed. Imports under an AA were exempted from thepayment 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‘pre-import condition’ in paragraph 4.14 of FTP inserted by NotificationNo. 33/2015-2020 dated 13.10.2017 and the ‘pre-import condition’introduced by clause (xii) in Notification No. 18/2015-Cus dated01.04.2015 by Notification 79/2017-Customs dated 13.10.2017.

40. Chapter IV of the FTP provides for “Duty Exemption/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 importof input, which is physically incorporated in export product(making normal allowance for wastage). In addition, fuel,oil, catalyst which is consumed/utilized in the process ofproduction of export product, may also be allowed.

(b) Advance Authorisation is issued for inputs in relation toresultant product, on the following basis:

(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 formanufacturing of goods.

A

B

C

D

E

F

G

H

AOR

(ii) On the basis of self declaration as per paragraph 4.07 ofHandbook of Procedures.”[28]

41. The other relevant provisions of the FTP for purposes of thiscase, are paragraphs 4.13, 4.14 and 4.16, which, as they stood at therelevant time when FTP 2015-2020 was introduced, read as follows:

B

“4.13 “pre-import condition” in certain cases

(i) DGFT may, by Notification, impose “pre-import condition”for inputs under this Chapter.

(ii) Import items subject to “pre-import condition” are listedin Appendix 4-J or will be as indicated in Standard InputOutput Norms (SION).

C

(iii) Import of drugs from unregistered sources shall have pre-import condition.”

4.14 Details of Duties exempted

D

Imports under Advance Authorisation are exempted frompayment 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 underparagraph 7.02 (c), (d) and (g) of FTP will not be exemptedfrom payment of applicable Anti-dumping Duty,Countervailing Duty, Safeguard Duty and Transition ProductSpecific Safeguard Duty, if any.

E

**************

F

4.16 Actual User Condition for Advance Authorisation

(i) Advance Authorisation and/or material imported underAdvance Authorisation shall be subject to ‘Actual User’condition. The same shall not be transferable even aftercompletion of export obligation. However, Authorisationholder will have option to dispose of product manufacturedout of duty free input once export obligation is completed.

G

(ii) In case where CENVAT/input tax credit facility on inputhas been availed for the exported goods, even after completion H

of export obligation, the goods imported against such AdvanceAuthorisation shall be utilized only in the manufacture ofdutiable goods whether within the same factory or outside(by a supporting manufacturer). For this, the Authorisationholder shall produce a certificate from either the jurisdictionalCustoms Authority or Chartered Accountant, at the option ofthe exporter, at the time of filing application for ExportObligation Discharge Certificate to Regional Authorityconcerned.

(iii) Waste/Scrap arising out of manufacturing process, asallowed, can be disposed off on payment of applicable dutyeven before fulfillment of export obligation.”

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 ofAuthorisation” which is extracted below:

“4.27 Exports in Anticipation of Authorisation Exports/supplies made from the date of EDI generated filenumber for an Advance Authorisation, may be acceptedtowards discharge of EO. Shipping/Supply document(s)should be endorsed with File Number or Authorisation Numberto establish co-relation of exports/supplies with Authorisationissued.

(b) If application is approved, authorisation shall be issuedbased on input / output norms in force on the date of receiptof application by Regional Authority. If in the interveningperiod (i.e from date of filing of application and date of issueof authorisation) the norms get changed, the authorizationwill be issued in proportion to provisional exports / suppliesalready made till any amendment in norms is notified. Forremaining exports, Policy / Procedures in force on date ofissue of authorisation shall be applicable.

(c) The export of SCOMET items shall not be permitted againstan Authorisation until and unless the requisite SCOMETAuthorisation is obtained by the applicant.”

43. The provision permitted exports in anticipation of authorisationand permits exports towards discharge of export obligation on the basis A

B

C

D

E

F

G

H

Aof the file number even prior to the grant of AAs. The High Court heldthat this condition had not been modified and export in anticipation ofauthorisation was permitted.

44. By the Notification No. 18/2015-Cus dated 01.04.2015, issuedin exercise of powers under Section 25 (1) of the Customs Act, 1962,Bgoods imported into India against valid AAs were exempted from thewhole of the duty of customs leviable thereon which was specified inthe First Schedule to the Customs Tariff Act, 1975 and from the wholeof the additional duty, safeguard duty, transitional product specificsafeguard duty and anti-dumping duty leviable thereon, respectively, underSections 3, 8B, 8C and 9A of the Act. The GST regime came into forceCwith effect from 01-07-2017. However, no corresponding amendmentwas carried out to this notification but Section 3 of the Customs TariffAct, 1975 was amended by substituting Sections 3 (7) and (9), wherebylevy of integrated tax [under Section 5 of the Integrated Goods andServices Tax Act, 2017 and levy of Goods and Service Tax compensationDcess 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% asis leviable under section 5 of the Integrated Goods andEServices 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,Fbe liable to the Goods and Services Tax compensation cess atsuch rate, as is leviable under section 8 of the Goods andServices Tax (Compensation to States) Cess Act, 2017 on alike article on its supply in India, on the value of the importedarticle as determined under sub-section (10).”

G45. Section 3 of the Customs Tariff Act, 1975 as amended afterthe coming into force of the GST regime, provided for levy of the followingadditional duties:

(1) levy of a duty (referred to as additional duty) equal to theexcise duty for the time being leviable on a like article if producedHor manufactured in India [Section 3 (1) CTA];

(2) levy of such additional duty as would counter-balance the exciseduty leviable on any raw materials, components, and ingredientsof the same nature as, or similar to those, used in the productionor 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 beingleviable on a like article on its sale, purchase or transportation inIndia [SAD, under Section 3 (5) CTA];

(4) levy of integrated tax as leviable under section 5 of theIntegrated Goods and Services Tax Act, 2017; [under Section 3(7) CTA] and;

(5) levy of GST compensation cess at such rate as is leviableunder section 8 of the Goods and Services Tax (Compensation toStates) Cess Act, 2017 [SAD, under Section 3 (9) CTA].

46. As there was no corresponding notification exempting theadditional duties leviable under Sections 3 (7) and (9) CTA, exportershad to pay IGST and compensation cess and seek input tax credit asapplicable under the GST Rules. Import under AA, however, continuedto be exempt from payment of basic customs duty and additional customsduty specified in subsections (1), (3) and (5) of section 3 of the CTA,education cess, anti-dumping duty, safeguard duty and transition productspecific safeguard duty, wherever applicable.

47. Since IGST and compensation cess was levied against AAs,they were apparently challenged before the Delhi High Court in severalpetitions, wherein interim relief was granted. Because of the initialproblems relating to GST, the committed refund of IGST got delayed,resulting in blocking of working capital for many businesses. The Unionthen issued an amending notification dated 13-10-2017 in exercise ofpowers under Section 25 (1) of the Customs Act, 1962 (Notification 79/2017 - dated 13.10.2017) inter alia amending the opening paragraph ofNotification 18 / 2015 (dated 1.4.2015) whereby goods imported intoIndia were exempted from the whole of the duty of customs leviablethereon, specified in the First Schedule to the Customs Tariff Act, 1975and 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 incondition (viii), after the proviso which reads thus:

A

B

C

D

E

F

G

H

A

“Provided further that notwithstanding anything containedhereinabove for the said authorisations where the exemptionfrom integrated tax and the goods and services taxcompensation cess leviable thereon under sub-section (7) andsub-section (9) of section 3 of the Customs Tariff Act, hasbeen availed, the export obligation shall be fulfilled byphysical exports only.”

B

The said notification also inserted condition (xii) which reads thus:

“(xii) that the exemption from integrated tax and the goodsand services tax compensation cess leviable thereon undersub-section (7) and sub-section (9) of section 3 of the CustomsTariff Act shall be subject to pre-import condition.”

C

48. Thus, exemption from levy of IGST under Section 3 (7) andcompensation cess leviable under Section 3 (9) of Customs Tariff Act,1975 were subject to the conditions that the export obligation shall beDfulfilled by physical exports only and shall also be subject to ‘pre-importcondition’. Together with the amendment of the exemption notification,by Notification No. 33/2015-2020 (dated 13-10-2017), paragraph 4.14of the FTP was also amended to read as follows:

“4.14: Details of Duties exempted.

E

Imports under Advance Authorisation are exempted frompayment 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 underparagraph 7.02 (c), (d) and (g) of FTP will not be exemptedfrom payment of applicable Anti-dumping Duty,Countervailing Duty, Safeguard Duty and Transition ProductSpecific Safeguard Duty, if any. However, imports underAdvance Authorisation for physical exports are also exemptfrom whole of the integrated tax and Compensation Cessleviable under sub-section (7) and sub-section (9) respectively,of section 3 of the Customs Tariff Act, 1975 (51 of 1975), asmay be provided in the notification issued by Department ofRevenue, and such imports shall be subject to pre-importcondition.”

F

G

H

49. It is important to notice, at this stage, that exporters weremade aware of the changes brought about due to the introduction ofGST, 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 theimplementation of the GST regime applicable w.e.f 01.07.2017

Under the GST regime, no exemption from payment ofintegrated GST and Compensation Cess would be availablefor imports under Advance Authorisation.

The chapter wise provisions of the FTP 2015-20:

General Provision:

************

*************

Chapter 4

Under the GST regime, no exemption from payment ofintegrated GST and Compensation Cess would be availablefor imports under Advance Authorisation.

Importers would need to pay IGST and take input tax creditas applicable under GST rules.

However, imports under Advance Authorisation wouldcontinue 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 ProductSpecific Safeguard Duty, wherever applicable.

Applicable GST would need to be paid white making localprocurement, using an invalidation letter of AdvanceAuthorisation IDFIA. Recipient of goods can take Input TaxCredit CITC) of the GST paid on such local procurement.

This Input Tax Credit can be utilized as per GST rules.

Advance Release Order facility shall not be available forprocurement of inputs 11nder Advance Authorization schemeexcept for inputs listed in Schedule 4 of Central Excise Act,1944 read with The Taxation Laws (Amendment) Act 2017 No A

B

C

D

E

F

G

H

A18 of 2017, with effect from July l, 2017. RAs are directed notto issue ARO except for Schedulc-4 items as stated above.

Imports/exports under the replenishment schemes for the Gemsand Jewellery sector covered under chapter 4 of FTP andHBP shall be subject to Customs Notification issued/ to beBissued in this regard.”

50. The public notice clearly forewarned that AAs and theirutilisation would not continue in the same manner as the AA schemewas operating hitherto. This trade notice has escaped the attention ofthe High Court, since there is no advertence to it in the impugned order,Cor a discussion about it. Likewise, the HBP was amended, and paragraph4.27 (d) was inserted, which stated that duty free authorisation for inputssubject to ‘pre-import condition’ could not be issued. The said clause isas follows:

“(iv) No Duty Free Import Authorisation shall be issued forDan input which is subjected to pre-import condition.”

51. By virtue of the trade notice, exporters were made aware ofthe fact that under the GSTregime, no exemption from payment ofIGST and compensation cess would be available for imports underAA. Importers had to pay IGST and take input tax credit as applicableunder GST rules.E

52. It is a matter of law that FTPs are statutory and are framedby the Union, exercising its powers under Section 5 of the FTRA [29]. Onthe other hand, the HBP does not have the status of rules or regulations.It merely contains guidelines. In Hindustan Granites v Union of India[30]this court observed that:F

“Handbook of Procedure merely implements the policy. It doesnot 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 TariffGArea (“DTA”) sales by units, “other than gems and jewellery units”,up to 50% of FOB value of exports subject to fulfilment of positive NetForeign Exchange Earnings (“NFE”) on payment of concessional duties.Paragraph 6.8 (h) stated that:

29Union of India v. Asian Food Industries, (2006) Supp (8) SCR 485.30 2007 (4) SCR 743.

H

“(h) EOU/EHTP/STP/BTP units may sell finished products,which are freely importable under the Policy in the DTA underintimation to the Development Commissioner against paymentof full duties provided they have achieved the positive NFE.”

54. By a notification paragraph 6.8(a) and paragraph 6.8(h) ofthe said FTP were amended, preventing EOUs from making DTA salesof the finished marble made from imported rough marble, with immediateeffect. The change was made a few months after renewal of letter ofpermission to the unit, authorizing it to manufacture and export marbletiles for 5 years, subject to a specified monetary limit. The contentionthat the FTP could not have been amended, was negatived, by this court.

55. The impugned judgment, in the present case, is premisedbroadly on the reasoning that the amendment by Notification 79/2017dated 13.10.2017 to the extent it required payment of duty, and, in thecase of advance authorizations, the fulfilment of ‘pre-import conditions’was unreasonable and arbitrary. It was concluded that the amendmentis contrary to the objective of the FTP. Further, it has been held that‘pre-import conditions’ are in respect of specific goods and, thenotifications impugned, inasmuch as they apply ‘pre-import condition’ toall goods, is contrary to the provision. Further, the absence of ‘pre-importconditions’ in respect of basic customs duty, and other levies, where inanticipation of AAs, duty free imports can be made, in contradistinctionwith the need to follow such ‘pre-import conditions’ in respect of IGSTand compensation cess, rendered the AAs worthless. Lastly, it was heldthat exporters, who have to import inputs, would face impossibility infulfilling the ‘pre-import condition’, because the normal cycle of importof inputs and export of finished products would be for a period of sixmonths, whereas the period, which the regime permits, would work outto 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). Nodoubt, the rationale or object behind this was to smoothen and facilitateexport trade, ensuring that finished goods, meant for export, did not suffera competitive price disadvantage. However, the concept of ‘pre-importcondition’ was not alien – Appendix-4J (mentioned in paragraph 4.13 (ii)of the FTP) listed several articles, such as spices, penicillin and its salts, A

B

C

D

EF

G

H

Atea, coconut oil, silk, drugs from unregistered sources, precious metals,etc. as articles for which the ‘pre-import condition’ was applicable, priorto the GST regime. Furthermore, by paragraph 4.13 of the FTP, theDGFT could impose ‘pre-import conditions’ on articles other than thosespecified:

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 theDGFT could exercise it, in relation to any goods. The High Court has notCdiscussed this aspect, and proceeded on the assumption that only specifiedgoods were subject to the ‘pre-import condition’. The existence ofparagraph 4.13 (i) reserving the power to insist upon the ‘pre-importcondition’, meant that the policy was capable of change, depending onthe exigencies of the time. This omission, together with the High Court’sfailure to notice paragraph 4.27 (d) of the HBP are serious infirmities inDthe 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 exerciseof Section 5 of the FTDRA read with Para 1.02 of the FTP) theexemption from payment of IGST at the time of import of input materialsEunder AA was granted. The exemption was, however, not absolute. Theconditions incorporated in the Notification (No. 79/2017), were one, thatthe exemption could only be extended so long as exports made under theAAs were physical exports in nature and the other that to avail suchbenefit, one was to follow the ‘pre-import condition’.

F59. ‘Physical export’ is defined in paragraph 4.05(c) and paragraph9.20 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.GAAs can be issued either to a manufacturer exporter or merchantexporter tied to supporting manufacturer (as per paragraph 4.05).However, paragraph 4.05 of the FTP defines categories for which AAscan be issued, somewhat expansively and prescribes that –

“(c) Advance Authorization shall be issued for:

H

(i) Physical export (including export to SEZ);

(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 /aircraft, subject to condition that there is specific StandardInput 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 notbeing an event in which goods are being taken out of India. The otherthree categories defined under (c) (ii), (iii) & (iv) are ineligible as ‘physicalexports’. Supplies of intermediate goods are covered by letter ofinvalidation, whereas supplies covered under Chapter 7 of the FTP areconsidered as ‘deemed exports’. These supplies are ineligible for beingconsidered ‘physical exports’. Therefore, any category of supply, be itunder letter of invalidation and/or to EOU and/or under InternationalCompetitive Bidding (ICB) and/or to Mega Power Projects, other thanactual exports to other country and supply to SEZ, cannot beconsidered as ‘physical exports’. One of the objects behind theimpugned notifications was to ensure that the entire exports made underAAs towards discharge of export orders were physical exports. In casethe entire exports were not physical exports, the AAs were automaticallyineligible for exemption.

60. The introduction of the GST regime resulted in a substantialand fundamental overhaul of the indirect tax structure, at the State andCentral levels. The GST regime is based on the idea of removingcascading effect of the taxes. The cascading effect of taxes mean levyof tax on tax. The GST is levied on the net value added portion andnot on the entire transaction value as the taxpayer would enjoy input taxcredit. Barring few indirect taxes, all the major indirect taxes levied bythe Central and State governments are subsumed into the GST.Consequently, taxpayers and suppliers are untroubled about payingmultiple indirect taxes under different laws. In the GST framework, simplerules have been prescribed to utilize the cross-sectional credit of inputtaxes. A trader who could not claim credit of tax paid on services, canseek and get credit on goods as well as services. This framework ofseamless credit was introduced to safeguard that taxes on supplies are A

B

C

D

E

F

G

H

Apaid to the extent of value additions and net liability- and to avoid doubletaxation.

61. The introduction of GST meant considerable legislative exercisein the form of repeal of several enactments (in the wake of the 101[st]Amendment to the Constitution, introducing Articles 246A, 269A, 279A,Bamendment to Articles 286 and 366, besides amending List I, II and IIIof the Seventh Schedule) and enactment of an entirely new set of laws.In this scheme, the new levies were IGST and compensation cess. Thesewere not part of the original Notification No. 18/2015, and necessitatedits amendment. Since the entire GST universe, so to say, is dependent ona comprehensive input credit and refund system, the policy makers (whichCin this case, were tax administrators and the DGFT) were of the opinionthat 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 governimport of duty free articles, as inputs, should continue, but that for theDnew levies, the system of input credit, and refunds should prevail.

62. In this court’s opinion, the introduction of the ‘pre-importcondition’ may have resulted in hardship to the exporters, because evenwhilst they fulfilled the physical export criteria, they could not continuewith their former business practices of importing inputs, after applyingEfor AAs, to fulfil their overseas contractual obligations. The newdispensation 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 businessescaused inconvenience to them. Yet, that cannot be a ground to hold thatthe insertion of the ‘pre-import condition’, was arbitrary, as the HighFCourt concluded. It was held, in Rohitash Kumar & Ors. v Om PrakashSharma & Ors[31] that inconvenience or hardship is not a ground for thecourt to interpret the plain language of the statute differently, to giverelief.

“In Mysore SEB v. Bangalore Woolen Cotton & Silk MillsGLtd. AIR 1963 SC 1128 a Constitution Bench of this Courtheld that, “inconvenience is not” a decisive factor to beconsidered 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

dealing with the same issue observed as under: (AIR p. 535,para 14)

“14. . A result flowing from a statutory provision is never anevil. A Court has no power to ignore that provision to relievewhat is considers a distress resulting from its operation. Astatute must of course be given effect to whether a court likesthe result or not.”

26. Therefore, it is evident that the hardship caused to anindividual, cannot be a ground for not giving effective andgrammatical meaning to every word of the provision, if thelanguage used therein is unequivocal.”

Again, in State of Madhya Pradesh v Rakesh Kohli[32]it wasobserved that the court is not concerned with the wisdom or unwisdom,the justice or injustice of the law as Parliament and State Legislaturesand that “hardship is not relevant in pronouncing on the constitutionalvalidity of a fiscal statute or economic law.”

63. The respondents had relied on some decisions, notably LaxmiKhandsari (supra)which dealt with the general theory of reasonableness;the court observed that imposition of reasonable restrictions and its extentwould depend upon the object which the law or policy seeks to serve. Itwas held that it was difficult to lay down any hard and fast rule ofuniversal application but in imposing such restrictions the State mustadopt 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 aclassification which may be scientifically perfect or logicallycomplete or which may satisfy the expectations of allconcerned, still the court would respect the classificationdictated by the wisdom of Legislature and shall interfere onlyon being convinced that the classification would result inpronounced inequality or palpable arbitrariness on thetouchstone of Article 14.”

64. The decision reported in MRF Ltd., Kottayam (supra) wasrelied upon to say that withdrawal of exemptions or tax benefits cannotbe resorted to. Facially, this court’s observations with respect to 32 2012 (6) SCR 661.

A

B

C

D

E

F

G

Awithdrawal of tax exemption appear to be favourable to the respondents.Yet, what weighed with this court was that the power of withdrawal ofexemption was not retrospective:

“Thus while Sub-section (1) authorizes the grant of anexemption or reduction in rate with retrospective effect inBrespect of any tax payable under the Act, Sub-section (3) doesnot provide for any cancellation or variation retrospectively.”

In the circumstances, this decision has no application to the factsof 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 grantedAAs were to be treated alike; and two, that insisting on the ‘pre-importcondition’ in respect to exemption from two levies only, while grantingthat benefit in respect of other AAs, was discriminatory. As far as theDfirst 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) itselfempowered the DGFT to include articles, which are not specified inAppendix-4J. The existence of this discretion means that there is flexibilityin regard to the nature of policies to be adopted, having regard to thestate of export trade, and concessions to be extended in the trade andEtax regime. Thus, the indication of a few items by virtue of paragraph4.13 (ii) per se never meant that other articles could not be subjected to‘pre import conditions’. Clearly, therefore, all AA holders were nevertreated alike. On the second aspect, what hurt the respondents was notclassification of AAs per se, but their differentiation in the newlyFintroduced tax regimes, so far as two new levies are concerned. Ifone 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 andtax administrators, as well as the state of the economy and above all, themechanism for its administration, clearly the argument of discriminatorytreatment of the two levies on the one hand, and the other taxes on theGother, has to fail. The exemption from the requirement of pre importconditions continues in respect of the old levies, which are, even as ondate, not part of the GST regime. That clearly sets them apart from thenew levies, the payment of which is insisted (after which refund can besought) as a part of a unified system of levy, assessment, collection,Hpayment, and refund.

66. This court has held, on previous occasions, that when reformby way of new legislation is introduced, the doctrine of classificationcannot 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 Mills[33]

“55. A classification is under-inclusive when all who areincluded in the class are tainted with the mischief but thereare others also tainted whom the classification does notinclude. In other words, a classification is bad as under-inclusive when a State benefits or burdens persons in a mannerthat furthers a legitimate purpose but does not confer thesame benefit or place the same burden on others who aresimilarly situated. A classification is over-inclusive when itincludes not only those who are similarly situated with respectto the purpose but others who are not so situated as well. Inother words, this type of classification imposes a burden upona wider range of individuals than are included in the class ofthose attended with mischief at which the law aims. Herodordering the death of all male children born on a particularday because one of them would some day bring about hisdownfall employed such a classification.

56. The first question, therefore, is, whether the exclusion ofestablishments carrying on business or trade and employingless 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 purposeof the law is to get in unpaid accumulations for the welfare ofthe labour. Since the classification does not include all whoare similarly situated with respect to the purpose of the law,the classification might appear, at first blush, to beunreasonable. But the Court has recognised the very realdifficulties under which legislatures operate - difficultiesarising out of both the nature of the legislative process andof the society which legislation attempts perennially to reshape- and it has refused to strike down indiscriminately alllegislation embodying classificatory inequality here underconsideration. Mr. Justice Holmes, in urging tolerance of 33 1974 (3) SCR 760.

A

BC

D

E

F

G

H

A

B

C

D

E

F

G

H

under-inclusive classifications, stated that such legislationshould not be disturbed by the Court unless it can clearly seethat there is no fair reason for the law which would not requirewith equal force its extension to those whom it leavesuntouched.

***************

*********

64. Laws regulating economic activity would be vieweddifferently from laws which touch and concern freedom ofspeech and religion, voting, procreation, rights with respectto criminal procedure, etc. The prominence given to the equalprotection Clause in many modern opinions and decisions inAmerica all show that the Court feels less constrained to givejudicial deference to legislative judgment in the field of humanand civil rights than in that of economic Regulation and thatit is making a vigorous use of the equal protection Clause tostrike down legislative action in the area of fundamentalhuman rights. [See “Developments Equal Protection”, 32Harv, Law Rev 1065, 1127]

65. The question whether, Under Article 14, a classificationis reasonable or unreasonable must, in the ultimate analysisdepend upon the judicial approach to the problem. The greatdivide in this area lies in the difference between emphasisingthe actualities or the abstractions of legislation. The morecomplicated society becomes, the greater the diversity of itsproblems and the more does legislation direct itself to thediversities.

66. That the legislation is directed to practical problems, thatthe economic mechanism is highly sensitive and complex, thatmany problems are singular and contingent that laws are notabstract propositions and do not relate to abstract units andare not to be measured by abstract symmetry, that exact wisdomand nice adaption of remedies cannot be required, thatjudgment is largely a prophecy based on meagre anduninterpreted experience, should stand as reminder that inthis area the Court does not take the equal protectionrequirement in a pedagogic manner [See “General theory oflaw and state”

The same idea was echoed in Ajoy Kumar Banerjee & Ors. v.Union of India & Ors[34]

“...Article 14 does not prevent legislature from introducing areform i.e. by applying the legislation to some institutions orobjects or areas only according to the exigency of the situationand further classification of selection can be sustained onhistorical reasons or reasons of administrative exigency orpiecemeal method of introducing reforms. The law need notapply to all the persons in the sense of having a universalapplication to all persons. A law can be sustained if it dealsequally with the people of well-defined class-employees ofinsurance companies as such and such a law is not open tothe charge of denial of equal protection on the ground that ithad no application to other persons.”

Likewise, Javed v. State of Haryana[35]observed that there is noconstitutional compulsion that a law or policy should be implemented allat once:

“16. A uniform policy may be devised by the Centre or by aState. However, there is no constitutional requirement that anysuch policy must be implemented at one go. Policies arecapable of being implemented in a phased manner. More so,when the policies have far-reaching implications and aredynamic in nature, their implementation in a phased manneris welcome for it receives gradual willing acceptance andinvites lesser resistance.”

67. Therefore, there is no constitutional compulsion that whilstframing a new law, or policies under a new legislation – particularlywhen an entirely different set of fiscal norms are created, overhaulingthe taxation structure, concessions hitherto granted or given shouldnecessarily 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 theone hand, assimilate- as far as practicable, the past regime. On the otherhand, the object of the new law is creation of new rights and obligations,with new attendant conditions. Inevitably, this process is bound to leadto some disruption. In this case, the disruption is in the form of exporters 34 1984 (3) SCR 252.

35 (2003) 8 SCC 369.

A

B

C

D

E

F

G

H

Aneeding to import inputs, pay the two duties, and claim refunds. Yet, thisinconvenience is insufficient to trump the legislative choice of creatingan altogether new fiscal legislation, and insisting that a section ofassessees order their affairs, to be in accord with the new law. Therefore,the exclusion of benefit of imports in anticipation of AAs, and requiringpayment of duties, under Sections 3 (7) and (9) of Customs Tariff Act,B1975, with the ‘pre-import condition’, cannot be characterized as arbitraryor unreasonable.

68. This court had also observed in State of Madhya Pradesh vNandlal Jaiswal[36]that “in complex economic matters every decisionis necessarily empiric, and it is based on experimentation” and thatCthe court, while considering the validity of executive action relating toeconomic matters grant a certain measure of freedom or ‘play inthe joints’ to the executive.” The Court crucially emphasized that:

“The Court cannot strike down a policy decision taken bythe State Government merely because it feels that anotherDpolicy decision would have been fairer or wiser or morescientific or logical. The Court can interfere only if the policydecision is patently arbitrary, discriminatory or mala fide.”

In R.K. Garg (supra) this court similarly spelt out the circumscribedrole that the court has, in considering the validity or constitutionality ofEfiscal laws, or economic measures, stating that “the court should feelmore inclined to give judicial deference to legislative judgment inthe field of economic Regulation than in other areas wherefundamental human rights are involved.” Likewise, in Ashirwad Filmsv. Union of India[37]this court observed:F“The power of the Legislature to classify is of wide rangeand flexibility so that it can adjust its system of taxation in allproper and reasonable ways. Even so, large latitude isallowed to the State for classification upon a reasonable basisand what is reasonable is a question of practical details andGa variety of factors which the Court will be reluctant andperhaps ill- equipped to investigate….”69. The object behind imposing the ‘pre-import condition’ isdiscernible from paragraph 4.03 of FTP and Annexure-4J of the HBP; 36 1987 (1) SCR 01.H37 (2007) 6 SCC 624, that only few articles were enumerated when the FTP was published, isno ground for the exporters to complain that other articles could not beincluded for the purpose of ‘pre-import condition’; as held earlier, that isthe import of paragraph 4.03 (i). The numerous schemes in the FTP areto maintain an equilibrium between exporters’ claims, on the one handand on the other hand, to preserve the Revenue’s interests. Here, whatis involved is exemption and postponement of exemption of IGST, a newlevy 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 retrospectivelymandated new conditions. The exporter respondents’ argument that thereis no rationale for differential treatment of BCD and IGST under AAscheme 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 islevied at multiple points (including at the stage of import) and input creditgets into the stream, till the point of end user. As a result, there isjustification for a separate treatment of the two levies. IGST is leviedunder the IGST Act, 2017 and is collected, for convenience, at the customspoint through the machinery under the Customs Act, 1962. The impugnednotifications, therefore, cannot be faulted for arbitrariness or underclassification.

70. The High Court was persuaded to hold that the subsequentnotification of 10.01.2019 withdrew the ‘pre-import condition’ meantthat the Union itself recognized its unworkable and unfeasible nature,and consequently the condition should not be insisted upon for the periodit existed, i.e., after 13.10.2017. This court is of the opinion that thereasoning is faulty. It is now settled that the FTPRA contains no powerto frame retrospective regulations. Construing the later notification of10.01.2019 as being effective from 13.10.2017 would be giving effect toit from a date prior to the date of its existence; in other words the courtwould impart retrospectivity. In Director General of Foreign Trade &Ors. v Kanak Exports & Ors[38]this court held that:

“Section 5 of the Act does not give any such power specificallyto the Central Government to make rules retrospective. Nodoubt, this Section confer powers upon the CentralGovernment to ‘amend’ the policy which has been framedunder the aforesaid provisions. However, that by itself would A

B

CD

E

F

G

H

Anot mean that such a provision empowers the Government todo so retrospective.”

71. To give retrospective effect, to the notification of 10.01.2019through interpretation, would be to achieve what is impermissible in law.Therefore, the impugned judgment cannot be sustained on this score asBwell.

72. This court recollects its recent decision, on the question ofentitlement to refund, under the old tax regime, which was subsumedand resulted in some businesses being affected. Negativing the challengeto constitutionality of the provisions of GST, it was held, in Union ofCIndia (UOI) & Ors. v VKC Footsteps India Pvt. Ltd[39]. that:

“A claim to refund is governed by statute. There is noconstitutional entitlement to seek a refund. Parliament has inClause (i) of the first proviso allowed a refund of the unutilizedITC in the case of zero-rated supplies made without paymentDof tax. Under Clause (ii) of the first proviso, Parliament hasenvisaged a refund of unutilized ITC, where the credit hasaccumulated on account of the rate of tax on inputs beinghigher than the rate of tax on output supplies. When there isneither a constitutional guarantee nor a statutory entitlementto refund, the submission that goods and services mustEnecessarily be treated at par on a matter of a refund ofunutilized ITC cannot be accepted. Such an interpretation, ifcarried to its logical conclusion would involve unforeseenconsequences, circumscribing the legislative discretion ofParliament to fashion the rate of tax, concessions andFexemptions. If the judiciary were to do so, it would run therisk of encroaching upon legislative choices, and on policydecisions which are the prerogative of the executive.”

D

73. In this court’s opinion, what applies to refunds, (the right towhich can be curtailed legitimately) applies equally to exemptions. It hasGbeen held in Bannari Amman Sugars Ltd. vs. Commercial Tax Officer& Ors[40] that if there is any tax concession, it “can be withdrawn atany time and no time limit should be insisted upon before it waswithdrawn”.

39 2021 (15) SCR 169.H40 2004 (6) Suppl. SCR 264.

74. Commentators and economists have spoken about howintroduction of GST was one of the most significant tax reformsundertaken by India. It was preceded by a series of meetings andnegotiations, whereby concerns of the states, and various other agencieswere accommodated. It has ushered a unified market driven by a singletax, converting different markets in states, with different tariffs andgoverning principles. It has smoothened movement of goods betweendifferent states. Before the advent of GST, the Union taxed productionof goods and supply of services; and the states taxed sale of goods. WithGST, both the Union and the states are entitled to share the taxes of thefull value chain of goods and services. Such a transformation cannot bepainless; disruptions – especially in the beginning will be felt. Yet, that inthe process of unification, if a certain section of the business isinconvenienced, and would have to pay taxes (which exist as levies,newly introduced) and conditions are imposed upon their ability to freelyimport inputs (for the purpose of export), this alone cannot lead the courtto conclude that such a change is unreasonable or arbitrary.

75. For the foregoing reasons, this court holds that the Revenuehas to succeed. The impugned judgment and orders of the Gujarat HighCourt are hereby set aside. However, since the respondents were enjoyinginterim orders, till the impugned judgments were delivered, the Revenueis directed to permit them to claim refund or input credit (whicheverappliable and/or wherever customs duty was paid). For doing so, therespondents shall approach the jurisdictional commissioner, and applywith documentary evidence within six weeks from the date of thisjudgment. The claim for refund/credit, shall be examined on their merits,on a case-by-case basis. For the sake of convenience, the revenue shalldirect the appropriate procedure to be followed, conveniently, through acircular, in this regard.

76. The Revenue’s appeals are allowed, subject to the above terms.

Divya Pandey(Assisted by : Shevali Monga, LCRA)

Appeals allowed.

A

B

C

D

E

F

G

H