ITAT Mumbai quashes IGST demand on Advance Authorisation imports where export obligations were fully discharged

Background and core controversy

The Income Tax Appellate Tribunal, Mumbai Bench, in GTN Engineering (India) Limited Vs Pr. Commissioner of Customs (Adjudication) examined whether IGST, interest, redemption fine and penalty could be demanded on imports made under the Advance Authorisation scheme for the period 13.10.2017 to 09.01.2019, on the allegation of breach of the “pre-import condition” introduced by Notification No. 79/2017-Customs dated 13.10.2017.

The assessee, M/s GTN Engineering (India) Limited, Hyderabad, is engaged in manufacturing “industrial valves and its components” for export to jurisdictions including Singapore, USA, Canada and Gulf countries. For this purpose, it imported various raw materials such as forged bodies, springs, bearings, pad studs and similar components against 19 Advance Authorisations issued by DGFT under paragraph 4.03 of the Foreign Trade Policy 2015-2020 (FTP). These imports, made through 175 Bills of Entry between 24.10.2017 and 24.09.2018, were cleared duty free under Notification No. 18/2015-Customs dated 01.04.2015 (as amended), including exemption from IGST, upon production of valid Advance Authorisations at the time of clearance.

Post clearances, the assessee fulfilled export obligations under all 19 Advance Authorisations. Export Obligation Discharge Certificates (EODCs) / Redemption Letters were subsequently issued by the DGFT and the jurisdictional customs formations cancelled the bonds executed in terms of the exemption notification. In two authorisations where there was marginal shortfall, the assessee discharged the applicable duty.

The dispute arose after an investigation by the Directorate of Revenue Intelligence (DRI), Hyderabad Zonal Unit, which scrutinised import and export transactions between 13.10.2017 and 09.01.2019. DRI alleged that:

exports, in some cases, preceded the imports of corresponding inputs; and
there was no one-to-one quantitative or size-wise correlation between imported components and exported valves.

On this basis, DRI concluded that the assessee had violated the “pre-import condition” inserted in condition (xii) of Notification No. 18/2015-Customs by Notification No. 79/2017-Customs dated 13.10.2017, which subjected IGST exemption to a pre-import requirement.

A Show Cause Notice (SCN) dated 24.10.2019 was issued proposing:

recovery of differential duty of ₹5,45,78,477/- under Section 28(1) of the Customs Act, 1962,
confiscation of imported goods under Section 111(o), and
imposition of penalty under Section 112(a).

The Principal Commissioner of Customs (Adjudication), Mumbai, through Order-in-Original No. 29/SJ(29)/PCC(ADJN.)/MUMBAI/2023-24 dated 20.12.2023, confirmed IGST demand of ₹5,44,52,019/- (after giving credit of ₹1,26,458/- already paid), imposed redemption fine of ₹1,30,00,000/- under Section 125 and penalty of ₹50,00,000/- under Section 112(a).

The assessee challenged this order before the Tribunal.

Arguments advanced by the assessee

Factual compliance with Advance Authorisation conditions

Counsel for the assessee contended that:

All imports under the 19 Advance Authorisations were exclusively utilised for manufacturing industrial valves and their components meant for export.
Neither the duty-free inputs nor the finished products were diverted or cleared in the Domestic Tariff Area (DTA); there is no allegation of diversion in the SCN or the impugned order.
Export obligations under all 19 Advance Authorisations were fulfilled. In two authorisations, where there was a small shortfall, the assessee voluntarily paid the applicable duty.
EODCs / Redemption Letters have been issued by DGFT authorities for 18 out of 19 Advance Authorisations, and duties for shortfalls have been discharged in the remaining one.
Based on such EODCs, jurisdictional customs authorities cancelled the bonds executed at the time of duty-free import under Notification No. 18/2015-Customs.

Copies of EODCs, Redemption Letters and customs bond cancellation letters were produced as part of the appeal record.

Revenue neutrality and absence of machinery provisions

The assessee further submitted:

Even assuming IGST was payable, the demand is revenue neutral: if IGST had been paid at import, the assessee would have been entitled to full input tax credit under GST.
Section 3(7) of the Customs Tariff Act, 1975 (levy of IGST on imports) did not, during the relevant period, incorporate provisions of the Customs Act, 1962 relating to interest, redemption fine or penalty. Such borrowing of machinery provisions, including “interest” and “penalty”, was introduced into Section 3(12) only with effect from 16.08.2024 by the Finance (No. 2) Act, 2024.
In the absence of explicit statutory authority, no interest, redemption fine or penalty could be validly levied on IGST for the period 13.10.2017 to 09.01.2019.
Once EODCs have been issued and bonds cancelled, authorities are deemed to have accepted that all conditions under the Advance Authorisation scheme and Notification No. 18/2015-Customs were satisfied, including any pre-import requirement to the extent applicable.

Reliance was placed on, inter alia:

Sakkar Industries Private Limited Vs. Commissioner of Customs, Ahmedabad – 2024 (10) TMI 1141 – CESTAT Ahmedabad,
Mahindra and Mahindra Vs. Union of India – 2022 (10) TMI 212 – BOMBAY High Court, upheld by the Supreme Court,
Suryadev Alloys and Power (P) Ltd. Vs. Principal Commissioner of Customs (Audit), Chennai – 2025 (8) TMI 1356 – CESTAT Chennai, and
A.R Sulphonates Private Limited Vs. Union of India & Ors. – 2025 (4) TMI 578 – Bombay High Court.

Accordingly, it was argued that the entire demand, including IGST, interest, fine and penalty, was unsustainable.

Stand of the Revenue

The Departmental Representative supported the DRI findings and the impugned order, reiterating that:

the assessee had not complied with the pre-import condition attached to IGST exemption under the amended Notification No. 18/2015-Customs;
exports made prior to certain imports and lack of one-to-one correlation between inputs and outputs indicated breach of the pre-import requirement.

Retrospective application of pre-import condition under Advance Authorisation invalid where export obligation is fulfilled and EODC issued: ITAT Mumbai in GTN Engineering (India) Limited Vs Pr. Commissioner of Customs (Adjudication)