Supreme Court Upholds Pre-Import Condition for IGST Exemption in Foreign Trade Policy

The case of Union of India & Ors. vs. Cosmo Films Limited and related appeals dealt with the challenge against the imposition of the ‘pre-import condition’ for exemption from Integrated Goods and Services Tax (IGST) and GST compensation cess on inputs imported under the Advance Authorization (AA) scheme. The Supreme Court overturned the Gujarat High Court’s decision, holding that the pre-import condition was neither arbitrary nor unreasonable.

Background of the Case

The dispute arose due to amendments made on 13 October 2017 to the Foreign Trade Policy (FTP) 2015-2020 and the Handbook of Procedures (HBP). These amendments introduced a ‘pre-import condition’ requiring that imports under the AA scheme must precede exports to qualify for exemption from IGST and compensation cess.

Before the introduction of the Goods and Services Tax (GST) regime on 1 July 2017, inputs imported under AA were exempt from multiple duties, including customs duty and countervailing duty (CVD). After GST was implemented, importers had to pay IGST and then seek a refund under the input tax credit (ITC) system, causing significant working capital issues. To address this, an exemption was reintroduced but was subject to the pre-import condition.

The Gujarat High Court struck down this condition as arbitrary and contrary to the FTP scheme, prompting the Union of India to appeal to the Supreme Court.

Legal Issues Before the Court

Whether the ‘pre-import condition’ was arbitrary and inconsistent with the FTP.
Whether the condition violated Article 14 of the Constitution by treating exporters unequally.
Whether the retrospective removal of the condition on 10 January 2019 indicated its initial unreasonableness.
Whether the Gujarat High Court erred in interfering with policy decisions related to tax exemptions.

Arguments by the Petitioner (Union of India)

The Union of India contended:

“The pre-import condition ensures that only genuine exporters benefit from the IGST exemption.”
“The AA scheme is meant for duty-free import of inputs for physical incorporation into exported goods. Allowing replenishment imports would result in revenue leakage.”
“Exporters were aware of the pre-import condition through trade notices and public notifications.”
“The exemption was a policy decision aimed at preventing misuse and was within the government’s discretion.”

Arguments by the Respondent (Cosmo Films Limited & Others)

The exporters argued:

“The pre-import condition created an unnecessary burden and was unworkable, disrupting business cycles.”
“The condition discriminated against IGST exemption while allowing exemption from other duties.”
“The retrospective removal of the condition in 2019 showed that it was unreasonable from the beginning.”
“The Gujarat High Court rightly held that the condition was inconsistent with FTP’s objective of facilitating exports.”

Supreme Court’s Analysis and Judgment

The Supreme Court overturned the Gujarat High Court’s ruling and upheld the pre-import condition, making the following key observations:

“The government has the right to impose conditions on tax exemptions, and courts should not interfere unless the condition is manifestly arbitrary.”
“The pre-import condition was designed to ensure that imported inputs were actually used for exports, preventing potential misuse.”
“Exporters had fair notice of the pre-import condition, and there was no retrospective application.”
“The later removal of the condition does not mean it was unconstitutional at the time of its existence.”

The Court ruled:

“The appeals succeed. The High Court’s order striking down the pre-import condition is set aside. However, since exporters had interim relief, they may claim refunds or ITC as per the applicable rules.”

Key Takeaways from the Judgment

Tax exemptions are policy matters and can have reasonable conditions attached.
The pre-import condition was a valid regulatory measure to prevent misuse of the AA scheme.
Future policy changes do not automatically make past policies unconstitutional.
Exporters can claim ITC or refunds but must comply with procedural requirements.

Impact of the Judgment

This ruling clarifies the government’s power to impose conditions on tax exemptions and emphasizes judicial restraint in economic policy matters. While it upholds the pre-import condition, it also ensures that exporters who had relied on interim relief can claim refunds or ITC where applicable.

For businesses, the ruling reinforces the need to carefully comply with policy changes and understand the conditions attached to tax exemptions.

Petitioner Name: Union of India & Ors..
Respondent Name: Cosmo Films Limited.
Judgment By: Justice S. Ravindra Bhat, Justice Dipankar Datta.
Place Of Incident: Gujarat.
Judgment Date: 28-04-2023.

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