OCTOBER 28, 2024

By Ratan Jain, Executive Partner, Srinidhi Ganeshan, Partner, Shobhit Jain, Principal Associate & Rangarajan, Senior Associate, Lakshmikumaran & Sridharan, Attorneys

THE Ministry of Commerce and Industry has issued Instruction No. 117 dated 24.09.2024 providing guidelines for the operational framework of FTWZs.

- A key point of the said Instruction is that it requires the approval of the UAC as a pre-condition for transfer of goods from one Free Trade Warehousing Zones ("FTWZ") to another FTWZ.

- Further, a minimum area must be defined for the warehousing unit so as to enable clients to store goods for longer and clear them as and when needed. It seems to indicate that this is the purpose for which FTWZs was envisaged as opposed to using the same for inter-FTWZ transactions as a matter of routine, introducing scope for abusing FTWZ facilities.

- It is a moot point as to whether transfer of goods between FTWZs is to be allowed as a matter of routine. The following SEZ Instructions are pertinent in this connection:

- While clarifying that units in FTWZ can undertake FTWZ - DTA and DTA - FTWZ transactions, Instruction 49 dated 12.03.2010 remained silent on inter-FTWZ transactions.

- Instruction no. 80 dated 18.05.2014 clarified that an FTWZ in sector-specific SEZs shall be allowed to provide services for products as approved for that sector-specific SEZ to other SEZ/SEZ units.

- While the above instructions cannot be relied on to arrive at a conclusion to the issue, it must be noted that the Special Economic Zones Act, 2005 ("SEZ Act") or the SEZ Rules, 2006 ("SEZ Rules") do not appear to prohibit such inter-zone transfers either.

- In fact, as per Section 2(n) of the SEZ Act, an FTWZ is an SEZ. As per Section 2(m)(iii), "export" includes supply of goods or services from one SEZ Unit to another, whether in the same SEZ or in a different SEZ. Further, in terms of Rule 46(12), goods may be transferred from one SEZ Unit to another SEZ Unit upon filing of BOE for home consumption by the receiving unit.

- In that view, it is possible to contend that the Act itself contemplates supply/ transfer between FTWZs.

Background/ Impetus for the present Instruction

- It is a cardinal principle of statutory interpretation that where the statute and rules made thereunder are silent on any point, the Government can issue instructions to fill up gaps, so long as they do not contradict the statute or rules.

- As per unconfirmed industry sources, it is possible that the Instruction has been issued to counter issues relating to circular trading within FTWZs.

- Circular trading can occur when the same goods are routed through multiple FTWZs, and these FTWZs account for such goods towards the fulfilment of their NFE obligations, as calculated under Rule 53 of the SEZ Rules. Alternatively, clients may seek to account for the quantum of such sales towards their financial reporting or other purposes.

- In the past as well, it has been clarified vide Clarification dated 31.01.2017, that goods held on account of a client shall not be taken into account in the calculation of the NFE obligations of the Unit. The values of such goods shall be counted towards the NFE obligations of the Unit only in case it is the Unit making the purchase and sale of goods.

Other compliance aspects laid down by the Instruction

- It reiterates the stance that sub-letting of premises is not permitted under SEZ law. However, it is not clear in what context this position is being referred to.

- There is to be increased scrutiny for trade in sensitive goods such as areca nuts, betel nut, black pepper and dates. The DC may consider restricting trading in these commodities by FTWZ Units. The list is subject to further review based on risk perception.

- To avoid issues pertaining to undervaluation or overvaluation, Customs officers must verify the transaction value against NIDB data.

- To provide for compliance aspects like KYC Norms for the FTWZ Units as well as their Clients, including Income Tax Returns of the last three years. Such returns are to be furnished before the first transaction in respect of a Client. Audit of FTWZ Units shall be prioritized for the purposes of Rule 79.

It is to be seen how the judiciary is going to respond to this Instruction when SEZ law has remained silent on this point so far. Will the Ministry of Commerce and Industry have to amend the extant law to bring in clarity? In any case, this Instruction has far-reaching implications for many clients operating out of FTWZs.

[The views expressed are strictly personal.]