JUNE 10,2020

By Rajat Dosi, Partner, RSA Legal Solutions

1) EXPORT Oriented Units ("EOUs") enjoy exemption from payment of all types of applicable customs duties (BCD, IGST, SWS, Cess, etc) on import of inter alia raw materials/inputs into India. This exemption has been bestowed on the EOUs under the provisions of the Foreign Trade Policy, 2015-20 ("FTP"), Hand-Book of Procedures, 2015-20 ("HBP") and customs notification no. 52/2003-Cus dated 31.03.2003 ("customs notification").

2) There is a common misconception among such EOUs in terms of accounting of such imported duty-free inputs. They have entertained a view that there are no legal wastage parameters/limits for EOUs, and wastage of inputs(for manufacture of finished product) upto any level is permissible. This article seeks to clear this misconception by highlighting the actual legal position in this regard and the duty liability which may arise in case such wastage parameters are not followed.

Wastage parameters/limits for EOUs

3) Para 6.06(e) of the HBP and Para 3(I) of the customs notification provides the following wastage parameters/limits:

a) Wherein inputs are meant for use in manufacture of items in respect of which Standard Input Output Norms ("SION norms") are already fixed – wastage will be allowed as per the said SION norms; or

b) Wherein inputs are meant for use in manufacture of items in respect of which SION norms are not fixed – wastage will be allowed upto 2% of the imported input quantity;

4) The above quoted provisions further provide that in case an EOU intends to import an additional item/input (which is not covered in the SION) or where the wastage is more than 2% (in cases wherein no SION is fixed), the EOU is required to get its norms fixed by making an application to the Norms Committee in the DGFT office. Similarly, wherein SION are fixed but the actual wastage is beyond the limit specified in such SION norms, an application can be made to the Norms Committee for fixation of higher limit of wastage. In such application, reasons for high wastage can be explained to the norms committee. In these cases, the wastage permissible will be such as may be allowed by the said Norms Committee.

5) During the period for which the application for fixation of norms is pending before the Norms Committee, the following procedure is required to be followed:

a) EOUs should submit the self-declared norms (actual input and wastage ratio) to the jurisdictional Development Commissioner ("DC");

b) Basis such self-declared norms, the DC will fix Ad-hoc norms within three months;

c) Once the norms are issued by the Norms Committee, the inputs imported as per the above self-declared/ad-hoc norms are required to be adjusted as per the norms fixed by the norms committee.

6) We understand that a lot many EOUs are neither aware nor are following the above wastage parameters. Wastage beyond the above permissible limit of 2% (for product wherein no SION is fixed) is being done, and no application for fixation of norms is ever made. In respect of products for which SION is fixed, the wastage limits provided therein are not followed and wastage beyond the permissible limit is being done.

7) In this background, we suggest that all EOUs should do an audit of their units to check the following:

a) Whether SION for their finished product is fixed? If yes, whether the wastage of input is within the permissible limit or not?

b) If no SION is fixed, whether the wastage is within the permissible 2% limit?

c) If the same is beyond the permissible 2% limit or actual wastage is more than the SION norms or in case of requirement of an additional input (not provided in the SION norms), whether application has been made to the Norms Committee for fixation of norms?

Implications of wastage beyond/in excess of the above parameters

8) In case of wastage beyond the above specified limits, the importing EOU will be required to surrender the customs duty benefit availed at the time of import on such wastage (which is beyond or in excess of the permissible limit/parameter), along with applicable interest. In other words, the customs duty saved (at the time of import) on inputs wasted beyond the above permissible limit will have to be surrender back along with applicable interest .

9) Similarly, if an additional product/input (which is not provided in the SION norms) is imported by the EOU, the customs duty saved at the time of import of such input will have to be surrender back along with applicable interest.

10) Thus, all EOUs should ensure that their wastage of inputs is within the above discussed parameters or limits. Any excess wastage can lead to additional duty burden on the importing EOUs. Conversely, the EOU can make an application to the norms committee for fixation of the norms, in which higher wastage can be fixed by explaining the requirement for higher wastage.

[The views expressed are strictly personal.]