FEBRUARY 02, 2015

By Subhash Chand Jain, Advocate

1. CHAPTER 8 of the Foreign Trade Policy, 2009-14 (For short 'FTP') deals with 'deemed exports'. Paragraph 8.2 of the FTP specifies the various categories of supply of goods which are considered to be 'deemed exports'. Such categories includes the goods supplied to an Advance Authorisation Holder, EOU, EPCG Authorisation Holder, the projects funded by multilateral agency or mega power projects etc.

2. Paragraph 8.3 of the FTP deals with various benefits available to deemed exports. These benefits include Advance Authorisation, Deemed Export Drawback, and Refund/Exemption from Terminal Excise Duty etc. In the past the DGFT Office has tried to clarify the ambiguities relating to the deemed export benefits by way of Circulars or modifications in the FTP/Handbook of Procedures. However, unfortunately the said clarifications/notifications have resulted in complete anarchy and the various suppliers/recipients of goods as 'deemed exports' find themselves in a very messy situation when they try to get these benefits. This is for the reason that the various benefits enshrined in the FTP have not been properly synchronised with the Customs / Central Excise provisions. Even on vital issues the understanding of the DGFT Office itself is totally erratic and irrational and without any justification.

3. This is discussed and detailed in the succeeding paragraphs.

4. Paragraph 8.3 of the FTP specifies the benefits available to the deemed export supplies as under:

Deemed exports shall be eligible for any / all of following  benefits in respect of manufacture and supply of goods qualifying as deemed exports subject to terms and conditions as in HBP v1:-

(a) Advance Authorisation / Advance Authorisation for annual requirement / DFIA.

(b) Deemed Export Drawback.

(c) Refund of terminal excise duty will be given if exemption is not available. Exemption from TED is available to the following categories of supplies:

(i)    Supplies against ICB;

(ii)   Supplies of intermediate goods, against invalidation letter, made by an Advance Authorisation holder to another Advance Authorisation holder; and

(iii)   Supplies of goods by DTA unit to EOU / EHTP / STP / BTP unit

Thus such categories of supply which are exempt ab initio will not be eligible to receive refund of TED.

5. Now we will analyse whether a person who has manufactured the goods and supplied them as 'deemed exports' can really get these benefits or he would have to face problems and unnecessary correspondence in the hands of the Office of the DGFT or Customs or Excise. These benefits are discussed hereunder.

The benefit of advance authorisation/advance authorisation for annual requirements/DFIA:

6. A person who has supplied the goods as 'deemed export' can take any of these authorisations. In case he takes an advance authorisation then he can import the inputs without payment of customs duty and fulfil the export obligation by supplying the goods manufactured by him to the categories specified in paragraph 8.2 of the FTP. Notification No.112/2009-Cus dated 29.9.2009 governs the exemption to the materials imported for use in the manufacture of the goods supplied as 'deemed export' subject to the condition specified therein. The scope of the Notification No. 112/2009-Cus is confined only to advance authorization against deemed export'. However, if a 'deemed exporter' obtains an advance authorisation for annual requirement/DFIA as specified in the paragraph 8.3 (a) of the FTP, then there is no corresponding exemption notification under the Customs Law in this regard. Notification No. 99/2009-Cus dated 11.9.2009 issued under the Customs law provides exemption to the inputs imported under the advance authorisation for annual requirement subject to the condition specified therein. On perusal of the conditions specified therein it would be evident that the export obligation in respect of the goods supplied can be fulfilled only by exporting the goods outside India. There is no stipulation in the said notification that a person can fulfil the export obligation by supplying the goods manufactured by him as deemed exports. Therefore, if a person has taken the 'advance authorisation for annual requirement' and imported the inputs duty free against such authorisations then the Customs would demand duty on the ground that the export obligation has not been fulfilled in terms of the Notification by exporting the goods out of India. Rather the same has been fulfilled by supplying the goods within India as deemed exports. In such a situation the Customs Authority would issue a Show Cause Notice demanding duty, interest and penalty for not fulfilling the conditions specified in the Customs Notification.

7. Likewise Notification No. 98/2009-Cus dated 11.9.2009 deals with the inputs imported under the DFIA. The said Notification provides the exemption from customs duty subject to the fulfilment of the conditions specified therein. There is no provision in the said notification stipulating that a DFIA holder can fulfil the export obligation by supplying the goods as deemed export. Therefore,even in this situation, the Customs Authority would ask him to pay the customs duty along with the interest and penalty as he has failed to fulfil the export obligation specified therein.

8. In other words, there is no corresponding customs notification to provide the exemption from customs duty to the inputs imported under the 'advance authorisation for annual requirement' or DFIA which are used in the manufacture of goods supplied as 'deemed exports'.

Deemed Export Drawback

9. A person instead of taking the benefit of advance authorisation may opt to get deemed export drawback against the goods supplied as deemed export. Paragraph 8.3.6 of the Handbook of procedures provides that the Drawback Rules,1995specified by the Ministry of Finance mutatis mutandis will apply to the deemed export drawback.

10. Under the Duty Drawback Rules, 1995specified by the Ministry of Finance, an exporter is eligible to get either the brand rate of duty drawback or 'All industry rate of duty drawback'. In case he chooses to get the brand rate of duty drawback then he has to make the application to the Jurisdictional Excise Authority with documentary evidence of the duty suffered on the export goods. But in case where an exporter chooses to claim all industry rate of duty drawback either on the higher side (Where no cenvat credit is availed) or lower side/custom portion(where the cenvat credit has been availed) he is not required to prove the actual duty incidence suffered on the goods exported. This is for the reason that All Industry rate of drawback is fixed on the concept of 'average duties suffered'. The duty drawback is automatically given to an exporter based on the rate of duty drawback prescribed under the schedule of 'All industry rate of duty drawback'.

11. Since the provisions of the Drawback Rules are mutatis mutandis applicable to the 'deemed export drawback' the deemed exporter should also be eligible to get the same in the same manner to get the deemed export duty drawback as they are given to an exporter in the case of physical export of goods.

12. In the case of deemed exports, if a person has supplied the goods as deemed exports and has not availed the cenvat credit on the inputs or input services then the Licensing Authority working under the aegis of the Office of the DGFT grants a deemed export drawback at all industry rate of duty drawback without asking any proof of customs duty on such supplies. However, when a deemed exporter claims a lower amount of duty drawback (also called the custom portion) on the ground that he has taken the cenvat credit then the said benefit is being denied to him on the ground that he has to prove the payment of customs duty on the imported inputs.

13. In fact paragraph 8.5 of the FTP clearly provides that the customs portion of the duty drawback shall be admissible to such supplier in case he has availed the cenvat credit. The DGFT Office has issued a Circular No. 9(RE-2013)/2009-14 dated 30.10.2013 in which it has been clarified that the customs portion of the duty drawback by way of brand rate will be allowed only if a supplier has actually paid the customs duty on the imported inputs/components. The said understanding of the DGFT is incorrect, illogical and contrary to paragraph 8.3.6 of the handbook of procedures and Duty Drawback Rules enshrined by the Ministry of Finance.The issue is why the brand rate alone will be allowed and why not custom portion of 'AIR' will not be allowed when all provisions of duty drawback are applicable to 'deemed export drawback'.

14. The entire idea behind the deemed export drawback is that it has to be assumed as if the goods have been exported outside India and accordingly the drawback has to be given to such supplier. When in case of physical exports customs portion of the AIR duty drawback is given by the customs department without insisting on brand rate (any collateral evidence with regard to the actual payment of customs duty), there is no reason as to why the DGFT Office should ask for the evidence of payment of customs duty in the case of imported inputs.

15. As a result of the aforesaid circular, all persons who supplied their goods as deemed export are not able to get the deemed exports drawback of the customs portion and are running pillar to post to get their just entitlement.

Refund of Terminal Excise Duty / Exemption from Excise Duty

16. The understanding of the Office of the DGFT is that the categories mentioned in paragraph 8.3(c) are exempted from Excise duty ab initio and hence the supplier is mandatorily required to avail that exemption and the refund of the TED will not be given. Such understanding of the Office of the DGFT is again totally incorrect and without analysing the provisions under the Excise Law.

17. It has been specified that the supplies from the ICB are exempt from the excise duty. In this regard it is pertinent to note that the goods supplied to the projects funded by Japan International Cooperative Agency (JICA) (earlier called JICB) are supplied against ICB but there is no corresponding excise exemption in this regard in the Excise Law. As a matter of fact a number of persons who have supplied goods without payment of excise duty under ICB to the projects funded by JICA are facing huge litigation because of the anomalous provisions.

18. It has been further provided that the supply of intermediary goods against invalidation letter by an advance authorisation holder to another advance authorisation holder is exempt from excise duty. This is incorrect . Notification No.44/2001–CE (NT) dated 26.06.2001 provides for the removal of excisable goods without payment of excise duty by an intermediary licensing holder to the exporter exporting the goods under an advance license.

19. The said notification does not take into consideration those occasions where the ultimate advance license holder does not fulfil the export obligation by exporting the goods out of India rather he fulfils export obligation by supplying to an EOU or any other category of deemed export. Notification No.44/2001–CE (NT) dated 26.06.2001 clearly stipulates that the resultant product should be exported out of India. The intermediary supplier,of course, can supply the goods without payment of excise duty only under Notification No. 44/2001–CE (NT) dated 26.06.2001 as there is no other corresponding exemption notification.

20. As a matter of fact a number of persons are facing uncalled for litigation for this reason as they have fulfilled their export obligation by supplying the goods to an EOU or by supplying the goods to other categories as deemed exports.

21. It has been further provided that the supplies of goods by a DTA unit to EOU, EHTP, and STP are exempt from excise duty. It is true that Notification No.22/2003-CE dated 31.03.2003 enables an EOU/EHTP/STP unit to procure the goods required for its authorised operations without payment of excise duty subject to the conditions specified therein. One such requirement is that the said EOU/STP/EHTP unit would provide a CT-3 certificate issued by the Jurisdictional Excise Authority to the concerned DTA unit to enable it to clear the goods without payment of excise duty. Sometimes due to urgent requirement of goods it is not possible for the EOU to get the CT-3 Certificate from the Excise and then send it to the DTA supplier. In such a situation DTA unit is compelled to supply the goods on payment of applicable excise duty as the same are urgently needed by an EOU. Obviously the goods which have been supplied by the DTA on payment of excise duty cannot be claimed as refund of the excise duty by virtue of the embargo placed by paragraph 8.3(c) (iii) of the FTP.

22. Furthermore,to say that the goods supplied to EOU by DTA unit is ab initio exempted is also not correct. The expression ab initio means unconditional whereas the Notification 22/2003-CE is subject to fulfilment of a large number of conditions. It is well settled legal position that where the goods are exempted from excise duty subject to fulfilment of various conditions then it is not obligatory on the part of the manufacturer to avail the exemption. In other words, the paragraph 8.3(c)(iii ) is contrary to the well settled legal position in this regard.

In nutshell

23. The benefits specified under Paragraph 8.3(c) eligible to 'deemed export supplies' are full of ambiguity and contradictions and thereby have resulted in a complete mess. As a result various suppliers or recipient of the goods have to run from pillar to post to get these benefits and have to litigate before the DGFT, High Courts, with the Excise and Customs Authorities. The same needs to be made rational in line with the spirit and the objective behind such benefits at the earliest possible so that the unnecessary ambiguity, correspondence and litigation can be avoided.