Pre-import in Advance Authorisation and IGST – Supreme Court to Rule – DRI Complicates Export Promotion

Advance Authorisation (AA), (hereinafter referred to as the ‘FTP’) which allows the manufacturer exporter or merchant exporter to import inputs without payment of customs duties in terms of chapter 4 of FTP read with Notification No.18/2015-Cus dated 01.04.2015. The AA holder has to fulfill prescribed export obligation (EO) corresponding to the duty free imports made. Export of goods well before the first import made against the advance authorization using the existing stock. Thus there is no overt nexus or one to one correlation of the imports vis-à-vis corresponding export orders. The AA also allows this by way of “replenishment” of stock by imports.

In fact, the advance authorization scheme itself provides for the export in anticipation of benefits under this scheme.

Prior to introduction of the GST, the exemption was available for all types of customs duties including CVD (Additional customs duty popularly known as countervailing duty) and SAD (Special Additional duty or countervailing duty for sales tax).

With the introduction of GST (w.e.f. 01.07.2017), the levies of the CVD & SAD are subsumed and IGST is being levied on imports. However, the earlier exemption of CVD & SAD against the advance authorization was not extended to IGST in the initial days of GST. Exporters had to pay IGST at the time of import and claim refund thereafter.

Later, Government has issued Notification No.79/2017-Cus., dated 13.10.2017 restoring the earlier position i.e. exempting the IGST against the advance authorization. The said exemption was inter alia subjected to the ‘Pre-import’ condition. The meaning of the said phrase was neither defined in the FTP policy nor in the notification. There was no mention of replenishment as such in the exemption.

The exporters continued their earlier practice of making exports using old stock and importing the duty-free goods later. The customs officers also did not overtly object to this.

The Government vide Notification No. 01/2019-Cus dated 10.01.2019 omitted the ‘pre-import condition’ thus rhyming the customs with the DGFT. But there was no clarification for the intermediate period on what the existence of the condition when notification was silent. It is not clear from this notification, whether this amendment is prospective or retrospective thereby retaining the ambiguity of the effect of ‘pre-import’ condition for IGST exemption during the intervening period i.e. 13.10.2017 to 09.01.2019.

It is learnt that DRI officers have denied the IGST exemption during the intervening period i.e. 13.10.2017 to 09.01.2019 for the goods imported subsequent to the exports.

Petitions were filed before various High courts challenging the ‘pre-import’ condition and the interpretation adopted by the DRI. While the Madras HC in the case of Vedanta Limited v. UOI 2018 (19) G.S.T.L. 637 (Mad.) upheld the condition and department’s stand, Gujarat held in case of Maxim Tubes Company Pvt Ltd. v. UOI 2019 (2) TMI 1445 has struck down the ‘pre-import’ condition. The revenue department appealed to Supreme court which has stayed the above decision and final decision is pending as of now. The issue is in limbo.

The customs department has speeded up their investigation and has raised the demands after denying the IGST exemption in the intermediate period.

In view of the above, the available courses of action are as follows:

· Contest the demands raised, if any, without payment of any IGST now. If the matter is decided in favour of the trade, cases would be closed without any cost. If the matter gets decided against the trade, the IGST along with interest may have to be paid.

· Pay IGST under protest (using TR-6 Challan) and contest the matter before the appellate forums/courts to its logical end. The amount paid using Tr-6 challan would not be available as ITC as TR-6 challan would not be a proper document for availment of ITC as per Rule 36 of the CGST Rules, 2017. If the matter is decided in favour of the trade the amount paid would be refunded. Otherwise, the interest @15% shall be paid from the import date till the payment of IGST. Under this option, the interest meter would stop once the IGST is paid.

· Pay IGST along with interest (through re-assessment order from port authorities) and take ITC of IGST paid immediately and contest the matter till its logical end. If the matter is decided in favour of the trade the interest paid would be refunded. Otherwise, it becomes the cost. Under this option, even if the case is lost, interest paid would only be a cost as IGST paid is available as ITC.