MAY 14, 2020

By Saurabh Bhise (Associate) and Anjali Hirawat (Joint Partner), Lakshmikumaran & Sridharan

"Deemed Export" refers to those transactions in which the goods supplied do not leave the country and payment for such supplies is received either in Indian rupees or in free foreign exchange.

Legislative context.

After introduction of GST, there are two categories of deemed export. Supplies of goods as specified in Para 7.02 of the Foreign Trade Policy (FTP) is regarded as deemed export for the purposes of FTP and supplies notified under Section 147 of the Central Goods & Services Tax Act, 2017 (CGST) qualify as deemed export under GST.

Section 147 of the CGST Act provides that the Government may, on the recommendations of GST Council, notify certain supplies of goods as deemed exports, where goods supplied do not leave India and payment for such supplies is received either in Indian rupees or in convertible foreign exchange, if such goods are manufactured in India.

Notification No. 48/2017-CT dated 18.10.2017 has been issued under Section 147 to notify the following supplies of goods as deemed export:

1. Supply of goods by a registered person against Advance Authorisation;

2. Supply of capital goods by a registered person against Export Promotion Capital Goods Authorisation;

3. Supply of goods by a registered person to Export Oriented Unit (EOU); and

4. Supply of gold by a bank or Public Sector Undertaking specified in Notification No. 50/2017-Cus. dated 30.6.2017, as amended against Advance Authorisation.

EOU for the purposes of the notification means an EOU or EHTP or STP or BTP which has been approved in accordance with the provisions of FTP. Further, Notification No. 48/2017-CT has been amended vide Notification No. 1/2019-CT dated 15.1.2019 to stipulate that where Advance Authorisation holder has already exported finished goods after availing input tax credit on inputs used in the manufacture of such exports, goods supplied against Advance Authorisation shall be used in manufacture and supply of taxable goods only and a Chartered Accountant certificate to that effect shall be submitted to the jurisdictional Commissioner of GST within 6 months of such supply.

It is pertinent to note that certain supplies of goods which are regarded as deemed export under FTP are not considered as deemed export under GST. Unlike physical exports, deemed exports are not treated as zero-rated supplies under GST. Hence, such supplies notified as deemed export shall be subject to levy of GST, which would subsequently be available as refund in terms of Section 54 of the CGST Act.

Supplies made to EOU & related procedures .

Notification No. 47/2017-CT dated 18.10.2017 has been issued amending Rule 89(1) of the CGST Rules, which deals with refund, to permit the filing of refund application in case of deemed export supplies by the supplier or the recipient of such deemed export supplies.

Rule 89(2)(g) of the CGST Rules provides that in a case where refund is on account of deemed export supplies, the refund application shall be accompanied by a statement containing the number and date of invoices along with such other evidence as may be notified in this regard. Notification No. 49/2017-CT dated 18.10.2017 has been issued under Rule 89(2)(g) to prescribe that in cases where refund is claimed by the supplier, he shall submit an undertaking from the recipient EOU to the effect that input tax credit has not been availed on such supplies and refund will not be claimed on such supplies .

CBIC has issued Circular No. 14/14/2017-GST dated 6.11.2017 to prescribe the procedure and safeguards in relation to supply of goods from DTA to EOU. The said Circular requires the recipient EOU to give prior intimation in "Form A" specifying the details of goods to be procured as well as supplier of such goods before such deemed export supplies are made. Form A mandates the recipient EOU to undertake to use such supplies in manufacturing of goods or rendering of services.

In terms of Para 6(a) of FTP, trading units are not covered under the EOU scheme. Hence, the recipient EOU is mandatorily required to use the deemed export supplies in manufacturing of goods or rendering of services.

Emergent issues & complications.

The aforesaid condition of 'use of supplies in manufacture of goods' has been inserted in the tail end of the Form appended to the Circular, which otherwise only lays down the procedure. It is pertinent to note that such a condition has not been provided for in Notification No. 48/2017-CT or Notification No. 47/2017-CT or Notification No. 49/2017-CT all dated 18.10.2017, in respect of goods supplied to EOU.

In fact, a similar condition has been introduced vide Notification No. 1/2019-CT dated 15.1.2019 amending Notification No. 48/2017-CT in respect of supplies made against Advance Authorisation only. However, no such condition has been introduced in the said Notification insofar as supplies made to EOU are concerned.

Hence, it appears that the said Circular attempts to legislate by imposing a condition which goes beyond the relevant Notifications. It may also be possible to contend that the said condition travels beyond the scope of Section 147 itself and hence, is invalid. It also raises the question as to whether a Circular can be used as a tool for legislation, which is otherwise the prerogative of the statute and the notifications issued thereunder.

Even if the said condition is considered as proper and valid for a moment, various issues that may emerge are discussed below.

Meaning of the term 'manufacture' & related issues.

The condition necessitates the recipient EOU to use the deemed export supplies in manufacturing of goods. Now, a question arises as to how one should interpret "manufacture". Section 2(72) of the CGST Act which defines manufacture is extracted below:

(72) "manufacture" means processing of raw material or inputs in any manner that results in emergence of a new product having a distinct name, character and use and the term "manufacturer" shall be construed accordingly;

Para 9.31 of the FTP which also defines manufacture is reproduced below:

9.31 "Manufacture" means to make, produce, fabricate, assemble, process or bring into existence, by hand or by machine, a new product having a distinctive name, character or use and shall include processes such as refrigeration, re-packing, polishing, labeling, Re-conditioning repair, remaking, refurbishing, testing, calibration, re-engineering.

Manufacture, for the purpose of FTP, shall also include agriculture, aquaculture, animal husbandry, floriculture, horticulture, pisciculture, poultry, sericulture, viticulture and mining.

A comparison of the aforesaid definitions clearly highlights the point that the definition of manufacture given under FTP is far wider than that under GST. It is, therefore, quite possible that an activity may qualify as manufacture in terms of FTP but not under GST. In such a scenario, would it qualify as adequate satisfaction of the condition or would it lead to denial of deemed export benefit on the ground of non-fulfillment of the stipulated condition?

The follow-up question which may arise is whether 'use in manufacture' is to be construed as consumed in the manufacturing process or would also include office equipment such as laptops, furniture, etc. which are equally necessary for undertaking the manufacturing activity by the recipient EOU. Consequently, whether the deemed export benefit would be extended to all supplies procured by the recipient EOU for use in relation to manufacture or not?

What happens in case of goods job worked by DTA?

Para 6.14(a) of FTP permits EOU to sub-contract production process to DTA unit on job work basis. Let us take a case where the EOU enters into an arrangement with a DTA unit to undertake the activity of re-conditioning on job work basis and thereafter, the job worked goods may be directly exported by the DTA unit or returned to the EOU for export. The activity undertaken by the DTA unit/ job worker amounts to manufacture in terms of FTP but may not qualify as manufacture under GST.

In such a scenario, since the job work has been undertaken by a DTA unit, the definition of manufacture given under GST alone should apply. However, it would be important to keep in mind that the goods are job worked on behalf of EOU for export by EOU and hence, the definition of manufacture under FTP is equally relevant.

Conclusion.

The above issues, amongst others, highlight the potential disputes that may arise due to imposition of the condition of use of deemed export supplies in manufacture of goods through Circular dated 6.11.2017. Alternatively, it would be beneficial as well as fitting to make the definition of manufacture given under FTP applicable for the limited purpose of deemed export supplies. This may help in resolving conflicting views.

[The views expressed are strictly personal.]