Gujarat H.C : Foreign Trade Policy 2004-2009 does not limit benefit of CST reimbursement to EOU on purchases made only from a DTA unit

High Court Of Gujarat

Asahi Songwon Colors Ltd. vs. Union of Inda

Foreign Trade Policy 2004-2009

Akil Kureshi And Biren Vaishnav, JJ.

Special Civil Application No. 16301 Of 2016

July 6, 2017

JUDGMENT

Akil Kureshi, J. – The petitioner has challenged a portion of the Appendix 14-I-I of Hand Book Procedures of Foreign Trade Policy 2004- 2009. The petitioner has also challenged a circular dated 11.4.2014 as at Annexure-K to the petition as being ultra vires the Foreign Trade Policy 2004-2009. The petitioner has further challenged an order-in-original dated 22.8.2016 passed by the Development Commissioner, KASEZ, Gandhidham. The petition arises in the following background :

2. The petitioner is a company registered under the Companies Act and is engaged in manufacturing various chemicals for export. The manufacturing unit of the petitioner is situated in Kandla Special Economic Zone and is a 100% Export Oriented Unit (“EOU” for short) having necessary license.

3. For its manufacturing activity, the petitioner would purchase raw materials manufactured in India. Such manufacturers would be situated either in Domestic Tariff Area (“DTA” for short) or non Domestic Tariff Area such as EOU. As per the Foreign Trade Policy 2004-2009, during the period between between 2006 and 2008, the petitioner claimed Central Sales Tax reimbursement on such purchases made including from the manufacturing units situated in EOU. The respondent authorities also granted such claims and reimbursed the Central Sales Tax component on the petitioner’s purchases made during the said period between 2006 and 2008, total of which comes to Rs.55.75 lacs (rounded off). For many years thereafter, there was no further development in this respect. However, on 26/30.9.2013, the Accounts officer of KASEZ wrote to the petitioner and conveyed as under :

“This is to inform you that recent Audit conducted by the CRA, Ahmedabad have pointed out that Central Sales Tax amount as per attached annexure is granted incorrectly.

You are hereby therefore, directed to deposit the amount mentioned in annexure by Demand draft in favour of RPAO Mumbai payable at Gandhidham immediately or the amount will be recovered from subsequently/pending claims.

Your are hereby directed to inform your consent within 15 days of receipt of this letter.”

4. Along with this letter, he annexed the comments of the Audit officer, why on the purchases made by an EOU from another EOU, same would not qualify for Central Sales Tax reimbursement. According to this note, as per the Hand Book of Procedures, such reimbursement would be available only on purchases made from the DTA for production of goods and services as per EOU scheme. Since the definition of DTA in the Foreign Trade Policy excluded SEZ and EOU, according to this note, the sale from one EOU to another would not qualify for Central Sales Tax reimbursement.

5. The petitioner did not accept the request of the Accounts officer of KASEZ to return the benefits of the Central Sales Tax reimbursement. The Development Commissioner, KASEZ, issued a show cause notice dated 10.7.2015 in which it was pointed out that the petitioner had not refunded the amount of Rs.55.75 lacs which was erroneously paid to the company and, therefore, to show cause why action should not be taken against the petitioner in terms of Foreign Trade (Development & Regulation) Act, 1992.

6. The petitioner replied to the show cause notice under communication dated 4.8.2015 and denied that the benefits of Central Sales Tax reimbursement was erroneously granted since it was available in terms of prevailing Foreign Trade Policy. It was disputed that policy did not cover the sale of goods from one EOU to another.

7. It appears that on account of the audit objection in similar cases, the issue was taken up at the Ministry level and the Government of India, Ministry of Commerce and Industry, issued a general circular dated 11.4.2014 to the Development Commissioners of SEZ in which it was clarified as under :

“I am directed to refer to refer to the above mentioned subject and to say that it has been decided by the Department that Para 6.11 and para 9.21 of Foreign Trade Policy read with Appendix-14-I-I does not provide for reimbursement of CST paid on goods supplied from one EOU to another EOU.

In view of the above, it is requested to clarify if the prescribed procedure under Appendix-14-I-I was strictly followed in allowing reimbursement of CST in some cases, by your office and to take suitable action for recovery of the said reimbursement, if required.”

8. It may be noted that in this letter reference is made to Appendix 14-I-I which lays down the procedure for reimbursement of Central Sales Tax on supplies made to Export Oriented Units and units in Electronic Hardware Technology Park (EHTP) and Software Technology Park (STP). Para.2 of this procedure provides inter-alia that EOUs and units in Electronic Hardware Technology Park and Software Technology Park will be entitled to full reimbursement of CST paid by them on purchases made from the DTA for production of goods and services as per EOU scheme, subject to fulfillment of terms and conditions as provided therein. According to the petitioner, this restriction provided in the Appendix contained procedure for reimbursement of CST. Limiting the benefit of reimbursement on sales made from DTA area, to the exclusion of EOU, is ultra vires and contrary to the Export Foreign Trade Policy 2004-2009 and in particular, para. 6.11 thereof.

9. Relying on the Appendix 14-I-I and the circular issued by the Government of India dated 11.4.2014, the Development Commissioner passed his order-in-original dated 22.8.2016 and demanded refund of the CST reimbursement of Rs.55.75 lacs and also imposed penalty of Rs.25 lacs for delayed returning of the said amount. In this background, the petitioner has challenged the said order-in-original along with the Government circular dated 11.4.2014 and the procedure for claiming CST reimbursement.

10. Before recording the contentions of the learned advocates for the parties, it would be necessary to take note of further materials on record. The Foreign Trade (Development and Regulation) Act, 1992, (“the Act” for short) was enacted to provide for the development and regulation of foreign trade by facilitating imports into, and augmenting exports from, India and for matters connected therewith or incidental thereto. Section 3 of the Act pertains to powers to make provisions relating to imports and exports and inter-alia enables the Central Government to make provision for the development and regulation of foreign trade by facilitating imports and increasing exports. Under section 5 of the Act, the Central Government may from time to time, formulate and announce by notification published in the Official Gazette, the Foreign Trade Policy and may also, in the similar manner, amend the same. Section 6 of the Act pertains to appointment of Director General and his functions. Sub-section (1) of section 6 would enable the Central Government to appoint any person to be the Director General of Foreign Trade for the purposes of the Act. As per sub-section (2) of section 6, the Director General would advise the Central Government in formulating the Foreign Trade Policy and would be responsible for carrying out such policy. Under sub-section (3) of section 6, the Central Government may by order publish in the Official Gazette and delegate any of the powers exercisable under the Act other than those under sections 3, 5, 15, 16 and 19, subject to such conditions as may be prescribed by the Director General or officer subordinate to him.

11. In terms of such statutory provisions, the Central Government had framed Foreign Trade Policy 2004-2009. Chapter 6 of such policy pertained to EOUS, EHTPS STPs and Bio-Technology Parks (BTPs). Para 6.5 would require such an eligible unit to have positive Net Foreign Exchange Earnings to be calculated cumulatively in block of five years, starting from commencement of production. As per para. 6.9, certain kinds of sales made by an EOU to a DTA will count for fulfillment of positive Net Foreign Earnings. Para. 6.11 carries the title “Entitlement for supplies from the DTA” and reads as under :

“6.11 Entitlement for supplies from the DTA

Supplies from DTA to EOU/EHTP/STP/BTP units will be regarded as “deemed exports” and the DTA supplier shall be eligible for relevant entitlements under chapter 8 of FTP besides discharge of export obligation, if any, on the supplier. Notwithstanding the above, EOU/ EHTP/ STP/BTP units shall, on production of a suitable disclaimer from the DTA supplier, be eligible for obtaining entitlements specified in chapter 8 of FTP. For claiming deemed export duty drawback, they shall get Brand Rates fixed by the Development Commissioner wherever All Industry Rates of Drawback are not available.

(b) Suppliers of precious and semi-precious stones, synthetic stones and processed pearls from DTA to EOU shall be eligible for grant of Replenishment authorisations at rates and for items mentioned in HBP v1.

(c) In addition, EOU/EHTP/STP/BTP units shall be entitled to the following:—

(i) Reimbursement of Central Sales Tax (CST) on goods manufactured in India.

Interest on delay in refund of CST would be paid, as notified

(ii) Exemption from payment of Central Excise Duty on goods procured from DTA on goods manufactured in India.

(iii) Deleted

(iv) Reimbursement of Duty paid on fuels procured from domestic oil companies as per Drawback rate notified by the DGFT from time to time.

(v) Cenvat Credit on service tax paid.”

12. To implement the policy contained in the said Foreign Trade Policy, the Director General of Forein Trade issued a Hand Book of Procedures. Appendix-14-I-I, as noted, pertains to the procedures to be followed for reimbursement of CST on supplies made to EOUs and units in EHTP and STP. This Appendix made a special mention to para. 6.11 (c)

(i) of Chapter 6 of the Exim policy. Relevant portion of the said document reads as under :

“1. The procedure given hereunder shall be applicable for reimbursement of Central Sales Tax.

2. The Export Oriented Units (EOUs) and units in Electronic Hardware Technology Park (EHTP) and Software Technology Park (STP) will be entitled to full reimbursement of Central Sales Tax (CST) paid by them on purchases made from the Domestic Tariff Area (DTA), for production of goods and services as per EOU Scheme on the following terms and conditions ……. “

13. We may also record that in the subsequent Foreign Trade Policy 2015-2020 also, para. 6.11 remained virtually the same. In particular, sub-clause (i) of clause (c) of para.6.11 retained the benefit of CST reimbursement on goods manufactured in India to a EOU, EHTP, STP and BTP. The Hand Book of Procedures Appendix-6H issued by the Director General of Foreign Trade for the purpose of claiming such reimbursement however, made a departure as compared to the original procedure. In the current procedure, it was provided as under :

“1. The procedure given hereunder shall be applicable for reimbursement of Central Sales Tax.

2. The Export Oriented Units (EOUs) and units in Electronic Hardware Technology Park (EHTP) and Software Technology Park (STP) will be entitled to full reimbursement of Central Sales Tax (CST) paid by them on purchases made from the Domestic Tariff Area (DTA), or Export Oriented Unit (EOU) or Special Economic Zone (SEZ) or EHTP or STP or BTP, for production of goods and services as per EOU Scheme on the following terms and conditions ……. “

14. Thus in terms of the above procedure EOU would be entitled to CST reimbursement on purchases made from another EOU as well.

15. In context of such provisions, counsel for the petitioner submitted that the policy of the Government to deny the benefits of CST reimbursement to an EOU such as the present petitioner on its purchases from another EOU is wholly illegal and impermissible. He would contend that as per the Foreign Trade Policy 2004-2009 prevailing at the relevant time, there was no such restriction and permitted CST reimbursement on any purchases of goods manufactured in India. The expression “goods manufactured in India” would include manufacturing units situated in EOU also. The Procedure of Hand Book could not have limited this benefit by qualifying that such reimbursement would be available only when the purchases are made from a unit situated in DTA. Counsel further submitted that even otherwise any such interpretation would render the very policy discriminatory. The principal purpose of granting CST reimbursement is to make exports more viable in the international market and not to load the manufacturer with local taxes. That being the position, there would be no distinction between a purchase by EOU from a DTA unit or from an EOU unit, since in either case, the Central Sales Tax would be leviable. It was contended that in any case, demand was raised after long delay and the same would not be permissible. Counsel relied on certain decisions to which we would make a reference at an appropriate stage.

16. On the other hand, learned counsel Shri Raval for the department contended that the policy at the relevant time did not envisage granting of CST reimbursement on purchases made from an EOU. Such benefit was expanded in the later policy. The authorities therefore, correctly interpreted and demanded refund of the erroneously granted reimbursement.

17. As noted, the Foreign Trade Policy was formulated by the Government of India in exercise of powers under section 5 of the Act. Para. 6.11 of the said policy carries the title “Entitlement for supplies from the DTA”. Though this title would prima facie suggest that para. 6.11 concerns the entitlement of an EOU when the goods are supplied from a DTA, however, as is well settled, a title to a statutory provision or for that matter any other document would not necessarily govern the plain language used therein and can, at best, be used for guidance. In this context, we may note that clause(a) of para 6.11 provided inter-alia that supplies from DTA to EOU/EHTP/STP/BTP units will be regarded as “deemed exports” and the DTA supplier would be eligible for relevant entitlements under chapter 8 of the Foreign Trade Policy, besides discharge of export obligation on the supplier. Clause (b) of para. 6.11 provides that suppliers of precious and semi-precious stones, synthetic stones and processed pearls from DTA to EOU would be eligible for grant of replenishment authorisations at rates and for specified items. Thus these two clauses (a) and (b) specifically dealt with the supplies made by a DTA to an EOU or other similar units such as EHTP, STP, etc. In contrast clause (c) did not use any expression that the same would be confined to a sale by a DTA unit. Clause (c) starts with the expression “In addition, EOU/EHTP/STP/BTP units shall be entitled to the following”. Sub-cause (i) of clause (c) provides for reimbursement of Central Sales Tax (CST) on goods manufactured in India. Sub-clause (ii) provides for exemption from payment of Central Excise Duty on goods procured from DTA on goods manufactured in India.

18. A minute scrutiny of these provisions contained in para. 6.11 would reveal that the language used in clauses (a), (b) and (c), in general, was not made limited to the supplies from a DTA unit. As noted, clauses (a) and (b) both confined their application to the supplies made by the DTA unit. Clause(c) itself contained two situations. In sub- clause (i) what was envisaged was reimbursement of CST on goods manufactured in India. Sub-clause (ii) envisaged exemption from payment of CST on goods purchased from DTA on goods manufactured in India. Thus the policy wherever intended to limit the benefit of an EOU on procurement made from a DTA unit, it was so specifically provided. When therefore, sub-clause (i) of clause (c) of para 6.11 did not make any such reference to the procurement from a DTA unit but used the expression “goods manufactured in India”, it must be understood that this clause would govern the goods purchased by EOU unit from any unit as long as the condition of goods being manufactured in India is satisfied. In plain terms, therefore, the Foreign Trade Policy 2004-2009 did not limit the benefit of CST reimbursement to a EOU on purchases made only from a DTA unit.

19. If this be the conclusion, the immediate question that would arise is, could the authorities have restricted the benefit only in case of procurement from a DTA unit through the procedure laid down for implementation of Foreign Trade Policy? We have noticed that the Director General of Foreign Trade in terms of section 6 of the Act has certain delegated powers which would include powers to frame such procedures. Sub-section(3) of section 6 however, excludes the delegation of such powers to those contained under sections 3, 5, 15, 16 and 19 of the Act. In exercise of powers under section 6, the Director General of Foreign Trade could not have framed or altered the Foreign Trade Policy. We may refer to the Division Bench judgment of this Court in case of Alstom India Ltd. v. Union of India 2014 (301) E.L.T. 446 (Guj.), in which it was observed as under:

’28. We find that the Respondent No.2, namely, DGFT, through Para 8.3.6 of the HOP has incorporated by reference the provisions of Duty Drawback Rules mutatis mutandis to the FTP and HOP. We find substance in the contention of Mr Ghosh that the HOP is nothing but an administrative guideline as would appear from a combined reading of Para 2.4 of the FTP and Section 6 of the FTDR Act. We have already pointed out that Section 3 of the FTDR Act grants power to the Respondent No.1 to make provisions relating to imports and exports and the Respondent No.1 under Section 5 of the FTDR Act can formulate and announce the foreign trade policy. It further appears from Section 6(3) of the FTDR Act that of the powers conferred upon the Respondent No.1 under the FTDR Act, except those provided in Sections 3,5,15,16 and 19, all others can be delegated to the Respondent No.2 by order published in the Official Gazette. We find that the Respondent No.2 through Para 8.3.6 of the HOP has sought to incorporate the provisions of Duty Drawback Rules to deemed exports mutatis mutandis which is not permissible in view of the fact that no power has been granted to the DGFT under the FTDR Act to legislate either directly or by way of incorporation by reference. It is now a settled law that the separation of power between the legislature and executive forms part of the basic structure of the Constitution of India and any attempts by the executives to legislate without appropriate authority under the law would amount to violation of the basic structure of the Constitution of India. The power to legislate is incorporated under Article 246 of the Constitution of India and such power has been conferred on the Parliament and the State Legislature. Moreover, the power to frame Duty Draw Back Rules under the FTDR Act can be legislated by the Central Government only in exercise of power conferred under Section 19 in the manner prescribed under the FTDR Act and the same cannot be delegated to the Respondent no. 2 as expressly prohibited by Section 6(3) of the above Act.

“29. We, thus, find that any attempt by the executives to legislate without the authority of law should be branded as a colourable device and therefore, the same is in violation of Article 246 of the Constitution of India. If we accept the contention of Mr Raval that the Respondent No.2 is authorized to incorporate the duty drawback Rules by reference, it would amount to acceptance of the proposition that the Respondent No.2 is authorized to deal with under the FTDR Act, the similar matters relating to duty and tax refunds as provided under Section 75 of the Customs Act, Section 37 of the Central Excise Act and Section 93A read with Section 94 of the Finance Act, 1994 although not authorized under the FTDR Act. We are in agreement with Mr Ghosh, the learned advocate for the petitioner, that the conferment of such power to the Respondent No.2 to adopt the duty drawback rules without any power to legislate either expressly or otherwise would amount to permitting the levy or collection of tax without authority of law in violation of Article 265 of the Constitution of India.’

20. Our attention was also drawn to the decision of learned Single Judge of Madras High Court in case of Hospira Health Care India (P.) Ltd. v. Development Commissioner, MEPZ Special Economic Zone & Heous [2016] 69 taxmann.com 18, in which similar issue had come up for consideration and it was held that the demand for refund of the reimbursement benefits were in conflict with para. 6.11 of the Foreign Trade Policy.

21. Even otherwise, the Hand Book of Procedures and in particular Appendix-14-I-I contained therein nowhere aims to lay down any policy but prescribes the procedure to be followed for reimbursement of CST. It is undoubtedly true that para.2 of this Appendix restricts the CST reimbursement on purchases made by an EOU from a DTA unit. However, this restriction in our opinion would run counter to the terms of FTP itself and ultra vires the powers of the Director General of Foreign Trade. The title of the Appendix itself provides that it is a procedure to be followed for reimbursement of Central Sales Tax. Para.1 further clarifies that the procedure given in the said annexure shall be applicable for reimbursement of CST. There is little doubt therefore, that Appendix 14-I-I aimed to lay down the procedure for claiming the benefit. In any case, such procedure could not have restricted the benefit by excluding the purchases from certain source which exclusion did not flow from the Foreign Trade policy itself.

22. Perhaps a contention could have been raised by the respondents that the Foreign Trade Policy itself envisaged such a restriction since only when the goods are manufactured in a DTA area, it may be stated that same are manufactured in India and by a deeming fiction any manufacturing activity taking place in an EOU should be excluded from such expression. The respondents would draw our attention to sub-section(1) of section 3 of the Central Excise Act, 1944, which besides others, envisages levy of excise duty on manufacture by a hundred per cent export unit undertaking which goods are brought to any other place in India. In other words, on the goods manufactured in an EOU, excise duty would be leviable, only when such goods are brought to any other place in India. We would have certainly considered this angle further, but for the fact that in the later year, the Government of India itself has recognised the benefit of CST reimbursement on the purchases made by the EOU from another EOU. It was for this purpose that we had referred to and noted relevant portion of the Foreign Trade Policy 2015-2020 and the procedure for claiming the CST reimbursement. We may recall that insofar as base policy is concerned for grant of such CST reimbursement, no change has been brought about in the Foreign Trade Policy 2015-2020 as compared to the Foreign Trade Policy 2004- 2009. Despite this, base policy being the same, the procedure for claiming reimbursement of CST on supplies made to EOU under the current policy now envisages such reimbursement on any sales made to a EOU not only from DTA but also from EOU, SEZ, etc.

23. Once again the contention of the Union of India was that the policy itself does not envisage grant of such reimbursement on procurement from an EOU, the question would immediately arise is whether such benefits could have been recognized through a procedure framed for claiming such a benefit? This further development would effectively prevent the respondents from contending that the original Foreign Trade Policy 2004-2009 did not envisage CST reimbursement by an EOU upon procurement of goods manufactured in another EOU.

24. There is yet another angle why we would not permit the respondents to make recoveries. As noted, the claim pertained to period between 2006 and 2008. They were made at the relevant time and granted by the respondents without any dispute. Such reimbursements are now sought to be recovered for which show cause notice came to be issued on 10.7.2015. It is not the case of the respondents that the petitioner was responsible for any misrepresentation or misstatement of facts which resulted into such erroneous reimbursement being granted and which came to the notice later on. That being the position, it was not possible for the respondents to make recoveries after unduly long period of time which in the present case happens to be more than seven years, that too, without any explanation for such delayed action.

25. In the result, the petition is allowed. The impugned order-in-original dated 22.8.2016 is set aside. We further hold that the circular of Government of India dated 11.4.2014 does not lay down the correct legal position and same is also quashed. In view of this declaration, it is not necessary to independently strike down the prevalent procedure for claiming the reimbursement of CST. Petition is disposed of.