Customs Duty Exemption Under DFIA: Non-Sensitive Inputs and Enforceability of Licence Conditions — CAAR Mumbai Ruling

Background and Overview

The Customs Authority for Advance Ruling (CAAR), Mumbai recently delivered a significant ruling in the matter of In re Unibourne Food Specialities (CAAR Mumbai), addressing critical questions around the availability of customs duty exemption on import of food ingredients under Transferable Duty-Free Import Authorisations (DFIAs). The applicant, M/s Unibourne Food Ingredients LLP, approached the CAAR seeking clarity on whether Notification No. 25/2023-Cus dated 01.04.2023 would extend exemption from Basic Customs Duty (BCD) on imports made against valid DFIAs issued in connection with exports of assorted confectionery products, biscuits, vegetable pickles, and namkeens/mixtures/savouries under the applicable Standard Input Output Norms (SIONs).

The ruling touches upon two distinct but interconnected legal issues — first, whether correlation of technical characteristics, quality, and specifications between imported inputs and exported goods is required for non-sensitive inputs; and second, whether value cap restrictions and actual user conditions embedded in DFIA licences are legally enforceable.

The Applicant and the Legal Framework Invoked

M/s Unibourne Food Ingredients LLP holds a valid Import Export Code (IEC) issued under Section 7 of the Foreign Trade (Development & Regulation) Act, 1992. The assessee sought an advance ruling under Section 28H of the Customs Act, 1962, which squarely covers matters relating to the applicability of notifications issued under sub-section (1) of Section 25 of the Customs Act, 1962 where such applicability has a bearing on the rate of duty.

The relevant DFIAs submitted by the assessee for the purpose of this ruling covered the following SIONs:

The exemption sought was from the whole of the customs duty leviable under the First Schedule to the Customs Tariff Act, 1975 (51 of 1975).

The Central Notification: Conditions Under Notification No. 25/2023-Cus

Notification No. 25/2023-Cus dated 01.04.2023, issued in exercise of powers under sub-section (1) of Section 25 of the Customs Act, 1962, grants exemption from Basic Customs Duty on materials imported against a valid DFIA issued by the Regional Authority under paragraphs 4.24 and 4.26 of the Foreign Trade Policy (FTP), 2023. However, this exemption is not unconditional. The notification prescribes the following key conditions:

1. Production of the DFIA before the proper officer of customs at the time of clearance for debit.
2. Endorsement of SION details — the SION number, description, quantity, and Free-on-Board (FOB) value of the resultant exported product, along with shipping bill number(s) and date(s), must be endorsed on the authorisation — provided that the said SION does not prescribe an actual user condition.
3. Conformity of imported goods — the description, specifications (wherever applicable), value, and quantity of imported materials must be mentioned in the authorisation and must remain within the specified limits.
4. The authorisation shall be transferable subject to applicable conditions.
5. Imports and exports must be undertaken through designated ports as listed under Notification No. 26/2023-Customs dated 1st April, 2023 or through a Special Economic Zone notified under Section 4 of the Special Economic Zones Act, 2005 (28 of 2005).
6. Export obligations as specified in the authorisation must be fulfilled within the period prescribed under paragraph 4.28 of the Foreign Trade Policy.
7. Evidence of fulfilment of export obligation must be produced to the satisfaction of the Deputy/Assistant Commissioner of Customs.
8. For authorisations issued to merchant exporters, the name and address of the supporting manufacturer must be declared in the shipping bills.

Important: Two significant provisos are attached to Condition (iii): the first proviso, applicable to inputs under paragraphs 4.12(i) and 4.12(ii) of the FTP, requires that the material permitted for import shall match the specific name/description or quantity of the material actually used in the export product. The second proviso mandates that for resultant products requiring inputs specified under paragraph 4.29 of the FTP, the imported materials must be of the same quality, technical characteristics, and specifications as those used in the exported product.

The DFIA Scheme: Key Policy Provisions

Paragraphs 4.24 and 4.26 of FTP 2023

Paragraph 4.24 of the FTP provides that the DFIA scheme allows duty-free import of inputs, including oil and catalysts consumed in the production process, and that the provisions of paragraphs 4.12, 4.18, 4.20, 4.21, and 4.23 of the FTP are equally applicable to the DFIA scheme.