APRIL 18, 2020

By Nupur Maheshwari, Partner and Harshdeep Singh Khurana, Associate, Lakshmikumaran and Sridharan, Attorneys

THE Export Oriented Unit ('EOU') Scheme is one of the oldest export promotion schemes of Government of India. The EOU Scheme was introduced vide the Ministry of Commerce Resolution dated 31.12.1980 with a dual objective of boosting exports by creating additional production capacity and earning foreign exchange. In order to attain the aforesaid objectives, the EOUs are provided with certain fiscal benefits to equip them to meet the requirements of International market.

One of such benefits is the exemption from payment of duties namely, Basic Customs Duty ('BCD'), Integrated Goods and Service Tax ('IGST') and Compensation Cess granted to such units under Notification No. 52/2003-Customs dated 31.03.2003 on import of raw materials and capital goods. The duty exemption is provided to units operating under the EOU scheme with an aim to offer a competitive edge against exporters of other countries. However, it seems that with the imposition of Health Cess the Government has stripped away the competitive edge of EOUs engaged in the manufacture of medical devices.

Imposition of Health Cess on Medical Devices imported in EOUs

With a view to achieve twin objectives of supporting local manufacturers and generating funds to create health infrastructure, the Central Government introduced a new levy called "Health Cess" vide Finance Bill, 2020 on goods classified under tariff headings 9018 to 9022 which are imported in India from 02.02.2020. The Health Cess is chargeable at 5% on the value of imported goods and is in addition to any other duties of customs chargeable on such goods under the Customs Act or any other law for the time being in force.

Simultaneously, Notification No. 08/2020-Cus. dated 02.02.2020 has been issued by the Central Government which provides for exemption from payment of Health Cess to certain goods as specified under Column (2) to the Table to the said Notification. It is important to analyse the list of goods specified under Notification No. 08/2020-Cus. in order to determine the impact of levy of Health Cess on EOUs.

S. No. 1 of the Table to the said Notification specifically covers "all goods falling under heading 9022, other than those for medical, surgical, dental or veterinary uses". S. No. 2 of the said Table covers all goods on which exemption is claimed and allowed under various exemption Notifications issued under Free Trade Agreements entered by India, such as Notification No. 46/2011-Cus., Notification No. 152/2009-Cus ., etc. Further, S. No. 3 of the said Notification exempts all goods covered under various Sr. nos. of the Table (such as 216, 564, etc.) annexed to Notification No. 50/2017-Cus., dated 30.06.2017.

A quick glance at the serial numbers under Notification No. 08/2020-Cus. indicates that specific medical equipment imported from certain regions (i.e., Singapore, ASEAN countries, Korea, Japan, Malaysia), inputs/ parts used in the manufacture of medical devices, as well as few other medical devices have been exempted from the levy of health cess. The intention of the Central Government seems to be focused on providing Health Cess exemption to inputs and raw materials used in the manufacture of medical devices in India and to incentivise import of medical devices from regions which are covered under the Free Trade Agreements.

Exemption from Health Cess not extended to goods imported by EOU under Notification No. 52/2003-Cus

Since EOU units are intended to be on a better footing than units operating in the Domestic Tariff Area as the former would be engaged in export production and export promotion, it is only natural that goods of CTH 9018 to 9022 imported by an EOU also be exempted from Health Cess. Hence, no exemption from Health Cess seems to be against the objective of the EOU Scheme.

In addition, it is impractical to burden EOU units with an extra levy in the nature of Health Cess since majority of the goods manufactured by an EOU are exported out of India and hence, do not adversely affect any manufacturers operating in the domestic market. It only renders the medical devices manufactured by EOU units costlier and consequently makes them unfavorable in the export market.

Adverse impact on domestic clearances

It is pertinent to note that the clearances effected by an EOU to domestic market are not covered under the ambit of "import" as per the Customs Act, 1962. Consequently, such clearances will not be subjected to the levy of Health Cess which is applicable on imported goods falling under CTH 9018 to 9022. However, this does not mean that such clearances will not be affected by the levy of Health Cess.

In terms of Para 6.08(a) of the FTP and para 3 of Notification No. 52/2003-Cus., an EOU is required to proportionately surrender the exemption of BCD availed on inputs used in the manufacture of finished goods cleared into Domestic Tariff Area. Thus, in addition to surrender of BCD with respect to such domestic clearances, an EOU unit is also bearing the burden of Health Cess on imported inputs used in the manufacture of goods cleared domestically.

This will drive up the prices of medical devices cleared by an EOU in the domestic market and make these products costlier than similar goods manufactured in Domestic Tariff Area. Therefore, it is apparent that the levy of Health Cess comes as a double trouble for the EOU as the medical devices cleared by them for exports as well as in the domestic market will end up being costlier than the medial devices manufactured by units in the Domestic Tariff Area.

Clarification for applicability of Health Cess on EOUs

It seems that the Central Government has made an inadvertent error by leaving out goods imported under Notification No. 52/2003-Cus. out of the ambit of Notification No. 08/2020-Cus. Time and again, the Central Government has stated that its intent is to improve the effectiveness of EOU Scheme and to reduce the burden of taxes on units operating under the scheme. Hence, the non-inclusion of EOU units to exemption benefit under Notification No. 08/2020-Cus. is detrimental to the true intent of the EOU scheme and seems to be a lacuna by the draftsmen which is required to be cured.

Considering, the decision in the case of M/s. Gemini Edibles and Fats India Pvt. Ltd. - 2020-TIOL-26-HC-MAD-CUS and the duty calculation mechanism for Health Cess, it is apparent that BCD cannot be considered as a parental levy of Health Cess. Therefore, there is no room for arguing that Health Cess draws its colour from BCD and should not be levied in case BCD exemption is availed by EOU in terms of Notification No. 52/2003-Cus. Thus, in the absence of an exemption from Health Cess, it seems that the EOUs will have to bear the brunt of Health Cess .

The EOUs are requested to raise their concern immediately to Central Board of Indirect Taxes & Customs ("CBIC") and seek a clarification with respect to the applicability of Health Cess on import of medical devices under Notification No. 52/2003-Cus. Further, the EOUs should request CBIC to amend Notification No. 08/2020-Cus. to provide exemption from Health Cess to medical devices of CTH 9018 to 9022 imported under Notification No. 52/2003-Cus. We understand that there might be a significant period between filing the representation and receiving a relief in this regard from the Central Government, hence, the relief must be sought from the Central Government with a retrospective effect.

It is of utmost importance to the EOUs that the clarification or amendment in Notification No. 08/2020-Cus. is carried out with retrospective effect. In case such clarification or amendment is passed prospectively, then the Customs Department relying on the decision of Dilip Kumar and Company & Ors. - 2018-TIOL-302-SC-CUS-CB may strictly interpret Notification No. 08/2020-Cus. to recover Health Cess for the goods imported prior to the issuance of the aforesaid clarification or amendment.

In absence of a clarification by the Central Government, the issue will be subject to litigation. There are decisions by various courts which provide that a duty exemption cannot be claimed on the basis of objective laid down in a policy issued by Central Government. The Delhi bench of CESTAT while dealing with levy of Tea Cess, had categorically held that a specific notification issued by a competent authority was required for availing exemption and that such exemption cannot be claimed by an assessee merely on the basis of a policy document ¹. Therefore, even though extending Health Cess exemption to EOUs is logical to give full play to the EOU scheme, it might be difficult to challenge such levy in the absence of a specific notification granting such exemption. Further, since the EOUs are no longer required to obtain a license as a warehouse under Section 58 of Customs Act and are effectively not considered as a warehouse for the purpose of Custom Act, the argument that no duty liability arises for imported goods used for in-bond manufacturing in warehouse ² will also not be available in the present case. Thus, seeking a clarification is a more appropriate course of action for the Industry.

[The views expressed are strictly personal.]

¹Hindustan Lever Ltd. - 2009 (9) TMI 402

²Paras Fab International - 2010-TIOL-963-CESTAT-DEL-LB