The Delhi High Court has quashed a Customs Department circular and show cause notices issued by the Central Board of Indirect Taxes and Customs (CBIC) revoking the permission for solar developers to warehouse imported solar modules to defer paying basic customs duty (BCD) on solar cells and modules effective from April 1, 2022.

The Manufacturing and Other Operations Warehousing Regulation (MOOWR) under the Customs Act 1962 allows developers to declare their solar projects as bonded warehouses, import solar modules free of duty, deposit them in the warehouse /project area, construct solar projects, and generate power. No duty was payable as long as the modules did not leave the bonded premises (project area).

This afforded a way of circumventing the 40% BCD on solar modules. However, CBIC issued a directive holding that MOOWR did not apply to solar projects and already issued warehouse licenses to be reviewed and canceled.

In July 2022, CBIC argued that manufacturing and operations in a bonded warehouse benefit from duty deferment, where both BCD and Integrated Goods and Service Tax (IGST) on imports are deferred. This deferment applies until the goods are released for domestic consumption and does not involve any time limit or interest on the deferred duty. However, it was noted that some solar projects, treating imported solar modules as capital goods, obtained permission under Section 65 of the Customs Act, 1962 for warehousing, which allowed them to defer duties.

The MOOWR Regulations 2019, governing these operations, require that final goods be removed from the warehouse with a one-time lock on the transport vehicle. Since the final goods in these cases are electricity, which cannot be physically locked during transport, these solar projects do not meet the requirements of MOOWR 2019.

The CBIC had pointed out that electricity was not exempted although there was a provision to exempt certain goods from these regulations. The permissions granted to these solar projects under Section 65 were not applicable under MOOWR 2019 regulations.

The petitioners– special purpose vehicles of Avaada and ACME– argued before the Delhi High Court that the CBIC’s directive compels customs authorities to cancel all licenses for solar generation units, which they claim goes against the discretionary power granted to these authorities under the Customs Act. They asserted that the directive went against Section 151A, which prohibits the CBIC from issuing directives that interfere with the discretionary powers of customs officers.

The petitioners argued that neither the Customs Act nor the MOOWR Regulations exclude solar power generation from their scope.

The Court acknowledged the CBIC’s authority to issue broad policy directives but found fault with specific directives regarding solar power generating units. The instruction went beyond clarification and directed the authorities to review and potentially cancel permissions granted to solar power-generating units.

The Court questioned whether the cancellation of licenses was justified, especially if the license holders did not contravene any provisions or conditions. It highlighted that the applicants transparently declared their intent to generate electrical energy when applying for licenses, indicating no concealment or violation.

The High Court noted that the instruction seemed to dictate that electricity generation falls outside the regulations, which exceeded the CBIC’s advisory role under Section 151A.

The Court also stated that circulars cannot impose conditions that restrict the scope of exemptions or notifications. Circulars should not foreclose the discretion of quasi-judicial authorities.

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