MARCH 10, 2015

By G Prabhakara Sastry

THE recent substitution of the explanation to Rule 18 of Central Excise Rules, 2002 in the Budget, 2015, defining "exports" read as follows:

"Explanation. – For the purposes of this rule, "export", with its grammatical variations and cognate expressions, means taking goods out of India to a place outside India and includes shipment of goods as provision or stores for use on board a ship proceeding to a foreign port or supplied to a foreign going aircraft."

The necessity for such modification is not fathomable to any ordinary tax payee or the officer dealing with the same and neither the Finance Minister in his Budget Speech nor the Board in its wisdom even talk about the necessity for such modification. The DO letter No. 334/5/2015-TRU dated 28th February 2015 of the J.S. (TRU-I)is also silent about the significance and its ramifications on the existing concessions enjoyed by any specific class of industry. Till now, not even a Circular or any instructions have been issued on the subject. But going by the plain reading of the amendment, it gives an impression that supplies made by DTA Units to SEZ units will not be entitled for rebate of duty under rule 18 of the Central Excise Rules, 2002 .

Assuming that the government was deliberate in bringing such a sweeping change in law relating to SEZ procurements, which would threaten the very existence and survival of SEZ units, the Government has the bounden duty to spell out their change in stand on SEZ concept. In any case is it right to bring such a major change without explaining the reasons for such amendment?Obviously,this may not be the intention of the Government as they are also equally keen in protecting and supporting the SEZ sector with the help and the products of DTA units. Going back to the history of the definition of the term 'export' under Customs Act, 1962, it is defined under Section 2(18) as follows:

'export', with its grammatical variations and cognate expressions, means taking goods out of India to a place outside India.

Same definition is now incorporated both in Rule 18 of Central Excise Rules, 2002 dealing with exports and rebates and also in Rule 5 of CENVAT Credit Rules, 2004 dealing with refund of accumulated CENVAT credit. The affected DTA Units by the above amendment of the Explanation by the plain reading are SEZ Units / 100% EOUs and deemed exporters supplying goods to the Mega Power units etc. Of these categories, everyone is contributing the ultimate export of the goods or services and this amendment is going to be a deathblow to their business.

Before the amendment brought in 2015 budget, Rule 18 ibid reads as follows:

RULE 18 of Central Excise Rules 2002:Rebate of duty - Where any goods are exported, the Central Government may, by notification, grant rebate of duty paid on such excisable goods or duty paid on materials used in the manufacture or processing of such goods and the rebate shall be subject to such conditions or limitations, if any, and fulfillment of such procedure, as may be specified in the notification.

Explanation: "Export" includes goods shipped as provision or stores for use on board a ship proceeding to a foreign port or supplied to a foreign going aircraft.

To this rule 18, Budget-2015 brings in a modified explanation as quoted in the beginning and it is made clear that the same would come into force from 01.03.2015 itself. This hurry in amendment also makes the position more panicky with no information on its scope and the categories likely to be affected. Why this sudden change became necessary is a moot question to be answered only by the persons who drafted it?

If we go back to the history of SEZ Units/Developers and the concessions, benefits and exemptions made available to them convey in clear terms the vision of the Government to develop the SEZ Sector.

Section 2(m) of Special Economic Zone Act, 2005 defines 'export' as follows:

"Export" means –

(i) taking goods, or providing services, out of India, from a Special Economic Zone, by land, sea or air or by any other mode, whether physical or otherwise; or

(ii) supplying goods, or providing services, from the Domestic Tariff Area to a Unit or Developer ; or

(iii) supplying goods, or providing services, from one Unit to another Unit or Developer, in the same or different Special Economic Zone;

Section 7 of SEZ Act, 2005 reads as follows:

Section 7: Exemption from taxes, duties or cess

Any goods or services exported out of, or imported into, or procured from the Domestic Tariff Area by,-

i. a Unit in a Special Economic Zone; or

ii. a Developer, shall, subject to such terms, conditions and limitations, as may be prescribed, be exempt from the payment of taxes, duties or cess under all enactments specified in the First Schedule.

Section 26 of SEZ Act, 2005 reads as follows:

Section 26: Exemptions, drawbacks and concessions to every Developer and entrepreneur

1. Subject to the provisions of sub-section (2), every Developer and the entrepreneur shall be entitled to the following exemptions, drawbacks and concessions, namely:-

a. exemption from any duty of customs, under the Customs Act, 1962 (52 of 1962) or the Customs Tariff Act, 1975 (51 of 1975) or any other law for the time being in force, on goods imported into, or services provided in, a Special Economic Zone or a Unit, to carry on the authorised operations by the Developer or entrepreneur;

b. exemption from any duty of customs, under the Customs Act, 1962 (52 of 1962) or the Customs Tariff Act, 1975 (51 of 1975) or any other law for the time being in force, on goods exported from, or services provided, from a Special Economic Zone or from a Unit, to any place outside India;

c. exemption from any duty of excise, under the Central Excise Act, 1944 (1 of 1944) or the Central Excise Tariff Act, 1985 (5 of 1986) or any other law for the time being in force, on goods brought from Domestic Tariff Area to a Special Economic Zone or Unit, to carry on the authorised operations by the Developer or entrepreneur;

d. drawback or such other benefits as may be admissible from time to time on goods brought or services provided from the Domestic Tariff Area into a Special Economic Zone or Unit or services provided in a Special Economic Zone or Unit by the service providers located outside India to carry on the authorised operations by the Developer or entrepreneur;

e. exemption from service tax under Chapter V of the Finance Act, 1994 (32 of 1944) on taxable services provided to a Developer or Unit to carry on the authorised operations in a Special Economic Zone;

f. exemption from the securities transaction tax leviable under Section 98 of the Finance (No. 2) Act, 2004 (23 of 2004) in case the taxable securities transactions are entered into by a non-resident through the International Financial Services Centre;

g. exemption from the levy of taxes on the sale or purchase of goods other than newspapers under the Central Sales Tax Act, 1956 (74 of 1956) if such goods are meant to carry on the authorised operations by the Developer or entrepreneur.

2. The Central Government may prescribe, the manner in which, and, the terms and conditions subject to which, the exemptions, concessions, draw back or other benefits shall be granted to the Developer or entrepreneur under sub-section (1).

Section 51 of the said Act provides that the said Act shall have effect in case of any inconsistency with the provisions contained in any other law for the time being in force, etc. The said Section 51 reads as follows:

The provisions of this Act shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force or in any instrument having effect by virtue of any law other than this Act.

Section 53 of the said Act provides that w.e.f 10.02.2006, a Special Economic Zone shall be deemed to be territory outside the customs territory of India for the purposes of undertaking the authorized operations.

Section 53 of SEZ Act reads as follows:

A Special Economic Zone shall, on and from the appointed day, be deemed to be a territory outside the customs territory of India for the purposes of undertaking the authorized operations.

(2) A Special Economic Zone shall, with effect from such date as Central Government may notify, be deemed to be a port, inland container depot, land station and land customs stations, as the case may be, under section 7 of the Customs Act, 1962 :

Provided that for the purposes of this section, the Central Government may notify different dates for different Special Economic Zones.

This being the statutory position, the CBEC has also considered this ambiguity and clarified in unambiguous terms in the Circular No. 06/2010 [F.NO. DGEP/SEZ/13/2009 dated 19 th March, 2010]&have set at rest the possible doubts. Para 3 and 4 which are relevant are reproduced below.

3. The matter has been examined. The circular No. 29/2006- Cus dated 27.12.2006 was issued after considering all the relevant points and it was clarified that rebate under Rule 18 is admissible when the supplies are made from DTA to SEZ. The Circular also lays down the procedure and the documentation for effecting supply of goods from DTA to SEZ, by modifying the procedure for normal export. Clearance of duty free material for authorised operation in the SEZ is admissible under Section 26 of the SEZ Act, 2005 and procedure under Rule 18 or Rule 19 of the Central Excise Rules is followed to give effect to this provision of the SEZ Act, as envisaged under Rule 30 of the SEZ Rules, 2006.

4. Therefore, it is viewed that the settled position that rebate under Rule 18 of the Central Excise Rules, 2002 is admissible for supplies made from DTA to SEZ does not warrant any change even if Rule 18 does not mention such supplies in clear terms. The field formations are required to follow the circular no. 29/2006 accordingly.

This history makes it clear that the SEZ Act prevails over the Central Excise and Customs Laws insofar as supply of goods and services to SEZ Units/Developers. Till the provisions of SEZ Act, 2005 were brought into force, there were specific exemption notifications for supply of goods and services to SEZ Units / Developers. They have been withdrawn after the SEZ Law has taken care of all such eventualities. Hence it is clear that supplies to SEZ Units / Developers are not affected by the new explanation to Rule 18 ibid in the Budget, 2015.

But, can anyone, with the present mindset of the officers, grant rebate to the DTA units who supply the goods to SEZ Units/Developers after the amendment of Rule 18 of CER, 2002 and Rule 5 of CCR, 2004. Already the officers are cautioning the industry that henceforth they will not be eligible for Rebate for such supplies. The fate of 100% EOUs and Deemed Exporters is still worse. They have no legal backing even to the extent as available for SEZ. This only results in delay of sanction in rebate/refund claims, reference to higher authorities and consequential disputes and so on.

Who is responsible for such created litigation? The Government is also going to lose money by way of interest for delayed sanction of such rebates/refunds. The industry has to spend sleepless nights till the issue is resolved.

Can we expect the Government to give immediate clarification and set at rest the unwanted disputes to nip them in bud?

(The author is Sr.Consultant-Indirect Taxes, G. R. Kumar& Co. LLP.)