Supreme Court Clarifies TED Refund Entitlements under Foreign Trade Policy: Sandoz (P) Ltd. v. Union Of India

Introduction

The case of Sandoz (P) Ltd. v. Union Of India (2022 INSC 8) adjudicated by the Supreme Court of India addresses the intricacies surrounding the eligibility of Export Oriented Units (EOUs) and Domestic Tariff Area (DTA) units for refunds of Terminal Excise Duty (TED) under the Foreign Trade Policy (FTP). The appellant, Sandoz Private Limited, a hundred percent EOU engaged in manufacturing goods under Chapter 30 of the Central Excise Tariff Act, sought refund of TED on excisable goods procured from its DTA unit. The crux of the dispute lay in the interpretation and applicability of policy circulars issued by the Directorate General of Foreign Trade (DGFT) and their alignment with the FTP provisions.

Summary of the Judgment

The Supreme Court analyzed multiple appeals challenging the refusals of TED refunds by various High Courts—Bombay, Delhi, and Karnataka. The Court scrutinized the provisions of the Foreign Trade Policy, particularly focusing on Chapter 6 and Chapter 8 concerning EOUs and deemed exports. It reaffirmed that while EOUs are entitled to an ab initio exemption from paying Central Excise Duty on goods procured from DTA units under specific FTP clauses, they are not independently entitled to TED refunds. Such refunds are contingent upon availing the entitlements of DTA suppliers as delineated in Chapter 8 of the FTP, provided certain conditions, including non-utilization of CENVAT credit, are met. The Court also addressed the validity of policy circular No.16 (RE-2012/2009-14) dated March 15, 2013, ultimately determining that changes introduced by the circular should be prospective and not retroactively affect existing entitlements under the FTP.

Analysis

Precedents Cited

The judgment extensively referred to several High Court decisions that shaped the understanding of TED refunds under the FTP:

IFGL Refractories Limited v. Joint Director General of Foreign Trade: Established that refund claims under the FTP could not be denied based on provisions of the Central Excise Act.
Kandoi Metal Powders Manufacturing Company Private Limited v. Union of India: Affirmed that DTA suppliers are entitled to TED refunds under the FTP, overriding conflicting interpretations under the Central Excise rules.
Sandoz Private Limited v. Union Of India: The preceding judgment which is now being reviewed by the Supreme Court.
Additional decisions from the High Courts of Delhi, Karnataka, Gujarat, and Madras were cited to reinforce the FTP's precedence over the Central Excise Act in matters of TED refunds.

Legal Reasoning

The Court's reasoning hinged on the hierarchical supremacy of the Foreign Trade Policy, formulated under the Foreign Trade (Development and Regulation) Act, 1992, over the Central Excise Act, 1944. It underscored that the FTP was designed to promote exports and facilitate foreign exchange earnings, thereby necessitating exclusive provisions that could supersede existing tax statutes to achieve its objectives.

Key provisions analyzed included:

Chapter 6 of FTP: Specifies the eligibility and entitlements of EOUs, including the ab initio exemption from excise duties on goods procured from DTA units.
Chapter 8 of FTP: Deals with deemed exports and outlines the conditions under which TED refunds can be availed by DTA suppliers.
Policy Circular No.16 (RE-2012/2009-14): Aimed to clarify that certain supply categories were exempt from TED refunds, which the Court found to be a prospective amendment not affecting retrospective claims.

The Court held that while EOUs benefit from duty exemptions, TED refunds are strictly tied to the entitlements of DTA suppliers under the FTP, contingent upon compliance with specified conditions, including non-utilization of CENVAT credits.

Impact

The judgment has significant implications for EOUs and DTA suppliers:

Clarification of Entitlements: EOUs are reaffirmed to only benefit from duty exemptions and must rely on DTA suppliers for TED refunds, ensuring a clear demarcation of roles and entitlements.
Policy Hierarchy: Reinforces the supremacy of the Foreign Trade Policy over the Central Excise Act in matters related to export incentives, ensuring that export promotion objectives are not hindered by entrenched tax provisions.
Guidance for Refund Processes: Establishes that refunds should be processed in accordance with FTP procedures, including conditions related to CENVAT credit usage, thereby streamlining the refund mechanism.
Prospective Effect of Amendments: Emphasizes that policy circulars introducing new interpretations or restrictions should have prospective effect, protecting existing and future claims under the original policy terms.

Future cases involving export incentives, duty exemptions, and refund claims will likely reference this judgment to navigate the complex interplay between FTP and the Central Excise Act.

Complex Concepts Simplified

Export Oriented Unit (EOU)

An EOU is a special category of industrial units established with the objective of exporting their entire production or a significant portion thereof. EOUs enjoy certain fiscal incentives, including exemptions from specific taxes like Central Excise Duty (CED) on imported inputs.

Domestic Tariff Area (DTA) Unit

A DTA unit refers to a manufacturing unit located within the domestic tariff area of a country, responsible for supplying goods to other units such as EOUs. These units are integral in the supply chain, providing necessary inputs to export-driven operations.

Terminal Excise Duty (TED)

TED is an additional excise duty levied on certain goods at the terminal point of manufacturing or before export, aimed at promoting exports by keeping domestic prices competitive.

Foreign Trade Policy (FTP)

The FTP is a government policy framework that governs the regulation and promotion of foreign trade. It outlines various schemes, incentives, and regulations to boost exports, regulate imports, and manage trade relations.

Deemed Exports

Deemed exports refer to transactions where goods supplied do not physically leave the country, but are treated as exports under specific conditions outlined in the FTP, thereby qualifying for export incentives.

CENVAT Credit

CENVAT Credit is a mechanism allowing manufacturers to claim credit for the excise duty paid on inputs, partially offsetting the duty on final products and reducing the overall tax burden.

Conclusion

The Supreme Court's judgment in Sandoz (P) Ltd. v. Union Of India decisively clarifies the entitlements of EOUs and DTA suppliers concerning TED refunds under the Foreign Trade Policy. By delineating the specific conditions and dependencies for availing such refunds, the Court ensures a structured and policy-aligned approach to export incentives. This decision not only reinforces the authority of the FTP in export-related fiscal matters but also provides clear guidelines for EOUs and DTA suppliers to navigate their refund claims effectively. Consequently, this judgment serves as a pivotal reference point for future cases, promoting transparency and consistency in the application of export promotion policies.