Project Imports Regulations, 1986: A Jurisprudential and Policy Analysis

Project Imports Regulations, 1986: A Jurisprudential and Policy Analysis

Introduction

The Project Imports Regulations, 1986 (“PIR 1986”) constitute a specialised customs regime that allows capital goods required for the initial setting-up or substantial expansion of specified projects to be assessed at a concessional basic customs duty under Heading 98.01 of the First Schedule to the Customs Tariff Act, 1975 (“CTA”).[1] While the rate-relief objective of Heading 98.01 is straightforward, its practical application has generated complex litigation regarding eligibility, registration formalities, and post-import compliance. Drawing on leading Indian case-law and statutory provisions, this article critically examines the doctrinal evolution of PIR 1986 and identifies emerging policy questions, particularly in light of the 2022 amendment that withdrew solar power projects from the concessional fold.

Legislative Genesis and Statutory Architecture

Heading 84.66 of the erstwhile Indian Tariff Act, 1934 provided the first concessional window for project imports. Following tariff restructuring in 1986, Heading 98.01 was introduced in the CTA and Chapter Note 2 authorised the Central Government to frame regulations governing contract registration.[2] Exercising this power under s.157 of the Customs Act, 1962 (“CA 1962”), the Government issued PIR 1986 with effect from 3 April 1986, simultaneously superseding the Project Imports (Registration of Contracts) Regulations, 1965.[3]

Salient Statutory Provisions

  • Section 12, CA 1962 – levy of customs duty;
  • Section 25, CA 1962 – power to grant exemption;
  • Section 157, CA 1962 – rule-making power, under which PIR 1986 is issued;
  • Heading 98.01, CTA – concessional assessment for specified projects subject to PIR;
  • PIR 1986:
    • Reg. 3 – definitions (notably “industrial plant”);
    • Reg. 4 – eligibility linked to registered contracts;
    • Reg. 5 – procedure for registration with the proper officer;
    • Reg. 7 – finalisation of contracts and audit of end-use.

Eligibility: The Concept of “Industrial Plant” and the Service Exclusion

Regulation 3(a) defines “industrial plant” as an industrial system employed “directly in the performance of any process … for manufacture, production or extraction of a commodity” but explicitly excludes service establishments such as hotels and photographic laboratories. The Supreme Court, in Subhash Photographics v. Union of India[4], upheld the constitutionality of this exclusion, rejecting the argument that long-standing trade understanding of Heading 84.66 prohibited a narrower definition. High Courts have applied the ratio consistently, for instance in Chitra Colour Lab[5] and Suresh Colour Labs[6], reiterating that service facilities—even those involving sophisticated equipment—do not qualify as “industrial plants”.

Conversely, manufacturing-oriented facilities receive liberal interpretation. In Gramophone Co. of India Ltd., the Court held that duplication of music cassettes constituted a manufacturing process, thereby bringing the plant within Heading 98.01 despite superficial similarity to a “service”.[7]

Registration of Contracts: Timing and Procedural Rigour

Temporal Requirement

Regulation 4(i) mandates that registration must precede “any order … permitting clearance of the goods for home consumption”. In Mihir Textiles Ltd. v. Collector of Customs, the Supreme Court interpreted the predecessor regulations and emphasised three cumulative conditions: (i) import against a specific contract; (ii) registration in the prescribed manner; and (iii) registration before grant of home-consumption clearance.[8] Although the facts of Mihir Textiles involved a complete lack of registration, later decisions have confined its impact to substantive non-compliance rather than minor procedural delay. The CESTAT in ESSAR Projects India Ltd. distinguished Mihir Textiles, holding that registration effected before ex-bond clearance suffices,[9] an approach endorsed in ESSAR Power Gujarat Ltd.[10]

Sponsoring Authority Clearance

For certain project categories, Regulation 5(2) requires a recommendation (“sponsorship”) from a line Ministry. CESTAT has clarified that such clearance, though compulsory, is procedural; absence at the time of registration does not ipso facto disentitle the importer if obtained prior to final assessment.[11]

Scope of Goods and One-to-One Correlation

Eligibility under Heading 98.01 extends to “all items of machinery including prime movers … and components … or raw materials for the manufacture of the aforesaid items”. Nevertheless, the jurisprudence insists upon a one-to-one nexus between imported goods and the registered project:

  • Weston Components ruled that diversion of goods to a different unit renders the concession unavailable and invites confiscation under s.111(o), CA 1962.[12]
  • NRB Bearings (affirmed by the Supreme Court) and Jackson Thevara likewise penalised utilisation contrary to declared project parameters.[13]

At the same time, functional integration—not ownership—determines inclusion. In Toyo Engineering India Ltd. the Supreme Court upheld concessional treatment for construction equipment hired by the contractor because the machinery was integral to initial plant set-up, notwithstanding that ownership never vested in the project authority.[14]

Scheme-Specificity and Non-Transferability of Benefits

The concessions under PIR 1986 coexist with other incentive schemes (e.g., DEEC, EPCG, DEPB). The Supreme Court in Commissioner of Customs v. Indian Rayon & Industries Ltd. articulated the doctrine that an assessee, having opted for a particular notification, cannot subsequently claim benefits under another absent explicit statutory authority.[15] Though the case concerned Notification 158/95-Cus. versus 94/96-Cus., its rationale limits tactical switching between PIR 1986 and parallel schemes, thereby promoting administrative certainty.

Misdeclaration, Confiscation and Penalties

Reliance on project-import benefits entails stringent truth-obligations under s.111(m) and 111(o), CA 1962. In Reliance Gas Transportation Infrastructure Ltd. the CESTAT set aside confiscation where the Department failed to prove mens rea and the importer offered genuine re-export,[16] reinforcing that penal consequences require substantive evidence of intent, especially when declarations are erroneous but non-fraudulent.

Additional Duty, Manufacturing Criterion and PIR

Although PIR 1986 deals with basic customs duty, imported project goods are also subject to additional duty (counter-vailing duty) under s.3(1), CTA. The Supreme Court in Hyderabad Industries Ltd. v. Union of India clarified that such duty arises only if the corresponding domestic product would attract excise levy, thereby exempting unmanufactured minerals.[17] The decision indirectly affects project importers of raw materials, for instance in steel or mineral-based power projects, because the landed cost calculus changes if additional duty is excluded.

The 2022 Amendment and the “Change in Law” Controversy

By Notification No. 53/2022-Cus. (3 Oct 2022) the Central Government excised “solar power projects” from PIR 1986. In Solar Energy Corporation of India Ltd. proceedings before the CERC, developers argued that the amendment constitutes a compensable “Change in Law” under power-purchase agreements, citing the principles of business efficacy and unforeseeability articulated in Nabha Power Ltd.[18] SECI, however, maintains that the base customs duty (40% on modules; 25% on cells) remains unchanged; only the concessional pathway has closed. The dispute highlights PIR 1986’s macro-economic sensitivity: policy adjustments aimed at domestic manufacturing (under “Atmanirbhar Bharat”) can reallocate fiscal burdens and contractual risk.

Doctrinal Synthesis

  1. Substantive v. Procedural Compliance. Courts distinguish curable procedural lapses (e.g., delayed sponsorship) from fatal substantive breaches (e.g., non-registration before clearance, diversion of goods).
  2. Functional Integration Test. Eligibility turns on whether the goods are functionally indispensable for the project’s manufacturing process, not on ownership or temporary utility (Toyo Engineering).
  3. Purpose-Specificity. Benefits are non-transferable across schemes or projects, ensuring fiscal discipline (Indian Rayon, Weston Components).
  4. Nexus with Excise Regime. Additional duty liability depends on domestic manufacturing comparability (Hyderabad Industries).
  5. Policy Fluidity. Amendments (2022) can upset settled business models, inviting contractual and constitutional challenges under Article 14.

Policy Recommendations

  • Codify explicit timelines for sponsorship and registration to reduce litigation on procedural non-compliance.
  • Introduce an electronic project-import portal integrating DGFT, line ministries and Customs, echoing the Bombay High Court’s critique of administrative inefficiency in Larsen & Toubro Ltd.[19]
  • Issue a consolidated circular clarifying the inter-relationship between PIR 1986 and schemes like EPCG to forestall forum shopping.
  • Provide grandfathering or phased withdrawal when deleting sectors (e.g., solar) to honour legitimate investment expectations and reduce change-in-law disputes.

Conclusion

PIR 1986 remains a cornerstone of India’s tariff policy for capital formation, but its efficacy depends on predictable administration and doctrinal coherence. Judicial precedents have largely struck a pragmatic balance—insisting on substantial compliance while preventing revenue leakage—yet new challenges, especially around climate-related projects, demand responsive regulation. Harmonising procedural discipline with developmental objectives will determine whether the project-import route continues to serve as a catalyst for India’s industrial growth.

Footnotes

  1. Heading 98.01, First Schedule, Customs Tariff Act 1975.
  2. Customs Tariff (Amendment) Act 1985; Chapter Note 2, Chapter 98, CTA.
  3. Notification 230/86-Cus., 3 Apr 1986.
  4. Subhash Photographics & Ors. v. Union of India, (1993) 66 ELT 3 (SC).
  5. Chitra Colour Lab v. Union of India, (1993) SCC Online Mad 490.
  6. Suresh Colour Labs v. Union of India, (1993) SCC Online Mad 576.
  7. Gramophone Co. of India Ltd. v. Collector of Customs, (2000) 1 SCC 549.
  8. Mihir Textiles Ltd. v. Collector of Customs, (1997) 92 ELT 9 (SC).
  9. ESSAR Projects India Ltd. v. Commissioner of Customs, 2015 SCC Online CESTAT 1568.
  10. ESSAR Power Gujarat Ltd. v. CC (Prev.), Jamnagar, 2022 SCC Online CESTAT 91.
  11. ESSAR Power Gujarat Ltd., supra.
  12. Weston Components v. Commissioner, 2012 SCC Online CESTAT 1504.
  13. NRB Bearings Ltd., affirmed 2006 (197) ELT A157 (SC); Jackson Thevara, (1992) Supp (1) SCC [relevant pages].
  14. Commissioner of Customs, Mumbai v. Toyo Engineering India Ltd., (2006) 7 SCC 592.
  15. Commissioner of Customs v. Indian Rayon & Industries Ltd., (2008) 14 SCC 228.
  16. Reliance Gas Transportation Infrastructure Ltd. v. CC (Import), 2018 SCC Online CESTAT 5663.
  17. Hyderabad Industries Ltd. v. Union of India, (1999) 5 SCC 15.
  18. Solar Energy Corporation of India Ltd., CERC Order 2023.
  19. Larsen & Toubro Ltd. v. Union of India, 2013 SCC Online Bom 184.