MARCH 19, 2015

By Nalin Bajaj

BUDGET 2015-16 has amended Rule 18 of Central Excise Rules, 2002 w.e.f. 01.03.2015 by specifically defining the term ‘export'. This amendment appears to have raised the question as to whether the manufacturers clearing goods from Domestic Tariff Area (‘DTA') to Special Economic Zone (‘SEZs') will be allowed rebate of duty paid or not.

In other words, post amendment w.e.f. 01.03.2015, the issue as to whether clearance of goods by a manufacturer in DTA to the SEZs qualifies as ‘export' or not for the purpose of claiming rebate has now become a subject matter of debate.

Rebate on clearances from DTA to SEZ under Central Excise provisions

Rule 18 of Central Excise Rules, 2002 provides that where any goods are exported, the Central Government, by way of notification, grant rebate of duty paid on such excisable goods or duty paid on materials used in the manufacture or processing of such goods. Similarly, Rule 19 of Central Excise Rules, 2002 provides that the goods can be exported without payment of duty subject to the conditions specified in the notifications issued for this purpose.

It is worth noting that the term ‘export' per se was not defined under the Central Excise Act, 1944 or the rules made thereunder or under the notifications issued under Central Excise provisions. Therefore, the common parlance meaning of the term ‘Export' would have to be adopted which means ‘physical export'.

Further, a perusal of the notifications issued under Rule 18 and Rule 19 above shows that the notifications covered ‘export' to countries other than Nepal and Bhutan or ‘export' to Nepal and Bhutan. In other words, the notifications only provide for rebate in respect of ‘Physical exports'.

Accordingly, a manufacturer clearing goods from DTA to an SEZ on payment of duty would not have been allowed rebate in terms of Rule 18 since there was no ‘physical export'.

Availability of rebate to manufacturers under SEZ provisions

However, the SEZ provisions enabled a manufacturer in DTA to claim rebate of duty paid on clearances from DTA to SEZ .Section 26 of the Special Economic Zone Act, 2005 provides exemption to the SEZ unit in the Special Economic Zone from payment of excise duty under Central Excise Act, 1944 on goods supplied to SEZ for authorized operation. Similarly, there is an exemption from payment of customs duties and service tax levied on goods/ services brought into the SEZ.

Rule 30(1) of Special Economic Zones Rules, 2006, inter alia, provides that the manufacturer located in DTA who supplies the goods to an SEZ Unit shall clear the goods, as in the case of exports , either under bond or as duty paid goods under claim of rebate on the cover of ARE-I in accordance with the provisions of Notification No. 42/2001-CE(NT) dated 26.6.2001 in quintuplicate bearing running serial number beginning from the first day of the financial year.

Thus, Rule 30(1) extended the benefit available to ‘physical exports' under Central Excise to the clearances made from DTA to SEZ. Rule 30(1) only required that the manufacturer clear the goods under the cover of ARE-1 in terms of Notification No. 42/2001-CE (NT).

Accordingly, the manufacturers clearing excisable goods to SEZ on payment of duty were granted rebate of duty paid in view of Rule 30 of SEZ Rules, 2006 read with Section 26 of the SEZ Act, 2005.

Implications of amendment in Rule 18

One need not read too much into the amendment in Rule 18 of Central Excise Rules, 2002. The amendment appears to reiterate what was already provided in the notificationsissued under Rule 18 and Rule 19. In other words, since the notifications contemplated ‘physical exports', the same is now being expressly provided for in the Rule itself.

Be that as it may, the above amendment has certainly created a doubt as to whether the benefit of rebate of duty paid on clearances from DTA to SEZ would be available or not w.e.f 01.03.2015.This question has arisen because the rebate granted on clearances from DTA to SEZ was considered to have been granted under Rule 18 of Central Excise Rules, 2002.

Conclusion

Even after the amendment to Rule 18 w.e.f. 01.03.2015, it can still be argued that there is no change in legal position and the manufacturers clearing goods from DTA to SEZ would be allowed rebate of duty paid in view of SEZ provisions discussed above.

However, it would be a welcome relief to all concerned if a suitable clarification in this regard is issued by the CBEC reiterating the position as stated in Circular No. 6/2010 -Cus., dated 19.03.2010 wherein it was expressly clarified that rebate would be admissible under SEZ provisions and the procedure under Central Excise Rules is to give effect to such SEZ provisions.

(The author is associated with Lakshmikumaran & Sridharan, Mumbai and the views expressed are personal.)