CESTAT Ahmedabad Nullifies IGST Demand, Fine and Penalty in Sakar Industries Advance Authorisation Dispute

Background of the Dispute

The Ahmedabad Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has set aside an adjudication order that had fastened substantial Integrated Goods and Services Tax (IGST) liability, interest, redemption fine and penalty on Sakar Industries Pvt. Ltd. in connection with duty-free imports under the Advance Authorisation scheme.

The matter revolved around imports made between October 2017 and November 2018 under Advance Authorisations (AAs) issued by DGFT. The assessee imported inputs without payment of customs duty by claiming exemption under Notification No. 18/2015-Cus dated 01.04.2015, as amended by Notification No. 79/2017-Cus dated 13.10.2017, which extended exemption to IGST subject to a pre-import condition and physical export requirement.

Revenue alleged that Sakar Industries did not adhere to the pre-import condition while availing IGST exemption on 122 Bills of Entry against five different Advance Authorisations, resulting in alleged non-payment of IGST of Rs. 9,77,71,269/-. The Principal Commissioner of Customs, Ahmedabad, by Order-In-Original No. AHM-CUSTM-000-PR.COMMR.-10-2024-25 dated 18.04.2024, confirmed the IGST demand with interest, ordered confiscation of goods, imposed redemption fine under Section 125 of the Customs Act, 1962 and levied penalty under Section 114A along with interest under Section 28AA.

On appeal, CESTAT Ahmedabad examined whether there was, in fact, any breach of the pre-import condition and whether the consequential IGST demand, confiscation, redemption fine, interest and penalty were legally sustainable.

Advance Authorisation and Relevant Notifications

Under the Advance Authorisation scheme, inputs required for manufacture of export products can be imported duty-free, subject to fulfilment of export obligation and other conditions under the Foreign Trade Policy (FTP) 2015-20 and the corresponding customs exemption notifications.

Post-GST, Notification No. 18/2015-Cus was amended:

  • Initially, exemption was limited to Basic Customs Duty (BCD) (via Notification No. 26/2017-Cus dated 29.06.2017).
  • Subsequently, Notification No. 79/2017-Cus dated 13.10.2017 extended the exemption to IGST and Compensation Cess, but only where:
    • The export obligation was discharged through physical exports, and
    • The imports complied with a “pre-import condition”.

The pre-import condition, read with para 4.14 and para 4.13 of the FTP 2015-20 (as amended by DGFT Notification No. 33/2015-20 dated 13.10.2017), essentially required that inputs be imported before export so that those specific inputs are used in manufacture of the export product.

Later, Notification No. 01/2019-Cus dated 10.01.2019 removed the pre-import condition for IGST exemption and instead inserted conditions (vi)(a) and (vi)(b) requiring, inter alia:

  • Non-exempted export inputs, when ITC is availed, to be used only in taxable supplies and not in exempt or nil-rated supplies.
  • Execution of bonds and submission of Chartered Accountant’s certificates regarding use of such inputs.

Impact of Union of India Vs. Cosmo Films Ltd.

In Union of India Vs. Cosmo Films Ltd. – 2023 (5) TMI 42 (Supreme Court), the Apex Court:

  • Upheld the validity of the pre-import condition for IGST exemption under the AA scheme.
  • Clarified that where the pre-import condition is not satisfied, the importer is liable to pay IGST.
  • Directed that a suitable mechanism be provided for ITC or refund of such IGST paid.

Pursuant to this, CBIC issued Circular No. 16/2023-Cus dated 07.06.2023 and DGFT issued Trade Notice No. 07/2023-24 dated 08.06.2023, prescribing the regularisation procedure for imports under Advance Authorisation during the period 13.10.2017 to 09.01.2019 where the pre-import condition was not met.

Against this jurisprudential backdrop, the controversy in Sakar Industries turned on whether, factually, the pre-import condition stood complied with, and if not, what the consequences should be.

Assessee’s Core Contentions

1. Jurisdictional Objection

The assessee argued that the Commissioner of Customs, Ahmedabad did not have jurisdiction to adjudicate imports effected through Mundra Port and Nhava Sheva Port, as these fell under other customs formations. On this basis alone, it was submitted that the IGST demand for those ports was unsustainable.

2. Interpretation of Pre-Import Condition

The assessee contended that:

  • The pre-import requirement must be assessed with reference to the inputs themselves, i.e., whether duty-free imports were actually used in the manufacture of goods which were subsequently exported, and not merely by matching dates of Bills of Entry and Shipping Bills.
  • It had duly fulfilled the export obligation under each concerned Advance Authorisation and had, in fact, used the imported materials in the exported goods.
  • Under the FTP and exemption notification framework, the crucial test is actual utilisation of imported inputs in exported products, not a rigid chronological sequencing of documents.

3. Effect of Notification No. 01/2019-Cus

The assessee submitted that Notification No. 01/2019-Cus dated 10.01.2019, which:

  • removed the pre-import condition, and
  • introduced the bond/CA certificate regime via conditions (vi)(a) and (vi)(b),