MARCH 21, 2012

Conversion of Foreign Going Vessels for Coastal Trade - Levy of CVD – Is It a Happy Voyage?

By J M Kishore

ONE of the significant levies on Customs side in the recent Budget 2012 is a new levy of Additional duty of Customs when vessels/ships are converted from Foreign status for the purpose of Coastal Trade. The immediate reaction for the proposal from the Shipping Industry is apparent that it is expressed that it can not keep its head above water . Initial reading of the notifications certainly has given an impression to all that the procedure is cumbersome. I have tried my best to understand the provisions and attempted to analyze the same for the benefit of all concerned. I would be happy if I am corrected in case of any wrong interpretation.

Heading 8901 of the Customs Tariff include Cruise Ships, Excursion-Boats, Ferry-Boats, Cargo Ships, Barges and similar vessels for transport of persons /goods. The heading also covers Launches, tankers etc. Import of the above goods could be either for the purpose of usage as Foreign going vessels or for use in coastal trading/coastal movement.

Histroy :

Prior to the presentation of Budget 2011, importers of these goods were said to be relatively in a comfortable position as far as the stipulated import procedure,conditions and duty structure were concerned. Except for import of vessels and other floating structures meant for breaking up, all other goods under 8901 were exempted from payment of Basic Customs duty as well as CVD in terms of The Customs Notification 21/2002 Dt.01.03.2002 Sl.No 352 as amended from time to time. It all started from Budget 2011, where in, vide 10 th Schedule of the Finance Bill,2011, the Excise Tariff Rate was specified as 5% and thus the CVD exemption was withdrawn on import of these goods. Though, a concessional duty of 1% was payable vide CEN 1/2011 Dt.01.03.2011, it was on the condition that no Cenvat Credit is taken. Due to the fact of non-verifiability of the same, on import side, at the time of import, CVD at the rate of 5% became payable. Ministry of Finance, however, with an intension to give exemption from payment of this CVD ,vide CEN no.38/2011-CE dated 29 th July, 2011, granted full exemption to all goods of heading 8901 in respect of which a general licence under section 406 of the Merchant Shipping Act, 1958(44of 1958) has been granted by the Director General Shipping.

Before going into the issue, certain statutory /practical issues connected to the licensing/permission with DG Shipping may need to be understood.

+ Section 406 of The Merchant shipping Act,1958 specifies that "no Indian ship and no other ship chartered by a citizen of India or a company shall be taken to sea from a port or place within or outside India except under a licence granted by the Director-General under this section. It also specifies that a a licence granted under this section may be (i) a general licence (ii) a licence for the whole or any part of the coasting trade of India or (iii) a licence for a specified period or voyage. A licence granted under this section shall be in such form and shall be valid for such period as may be prescribed, and shall be subject to such conditions as may be specified by the Director-General.

+ Licence under Section 407 of The Merchant shipping Act,1958 is given only for Indian owned vessels for Coastal Trading and this may be for a specified period or voyage.

+ Presently, the Licences are issued to the Indian Owned Foreign Going Vessels/ships under SECTION 406 & SECTION 407 simultaneously and period given is usually for one/two/five years.

Levy of CVD on conversion to Coastal Status

By taking the possibilities into consideration for import of goods under 8901, the following situations may occur:

(A) Import of other floating structures which include Launches, Boats, Barges etc. (after owning the same by buying) which are not capable of doing foreign trade and to be used for the purpose of Coastal Trade only.

(B) Vessels/ships brought into India after purchase/lease and a general Trading Licence is

obtained from DG Shipping for Foreign Trade.

+ In respect of cases at (A) above :

These are smaller in size and usually lesser than 15NRT and do not qualify for licence under Merchant Shipping Act,1958. Importers to file Bill of Entry by making payment of duty as below:

NIL BCD ( under S.No.461 of CN 12/2012 Dt.17.03.2012) +

6% CVD (Excise Tariff Standard Rate is 6% now and the exemption of CVD under CEN 6/2006 as amended by CEN 38/2011 Dt. 29.07.2011 is no more applicable as the CEN 6/2006 is rescinded) +

NIL SCVD (vide CN 21/2012 Dt. 17.03.2012 SL .No. 96)

Interestingly, the CN 21/2012 Dt. 17.03.2012 does not indicate SCVD payable is NIL but the respective column is just empty/blank. I Believe that it's a case of printing error/missing print.

Apart from the duties at the above rates under 8901 for goods such as Launche, Boat,Barge and Other floating structures, duty is separately payable on items (such as consumables and bunkers on board) under respective headings and on the appropriate value.

Importers to file Bill of Entry at the time of import of the vessel/ship with the following duties:

NIL BCD & NIL CVD ( under S.No.462 of CN 12/2012 Dt.17.03.2012) +

NIL SCVD (vide CN 21/2012 Dt. 17.03.2012 SL .No. 96).

Further, subsequently (at a later stage), if the importer opts for conversion of the vessel so as to engage in Coastal Trade, a Bill of Entry to be filed by paying additional duty of Customs (CVD) [under Section 3(1) of The Customs Tariff Act,1975] on the full lease or contract value. The quantum of duty liability is:

(a) When the licence under Section 407 is without mention of a specific period for Coastal Trade, Full CVD, i.e, 6% (as if there is no exemption)

(b) When the licence under Section 407 is for with a mention of specified period for Coastal trade, then, 1/120 th part of the aggregate CVD for each month (or part thereof) of stay in India as a coastal vessel.

Two types of situations may occur under this category.

Illustration I : Vessel/ship is obtained on purchase basis,

Value of the Vessel/ship is say Rs 2 Crores.

Period for Coastal Trade as per Licence (under Section 407) is 6 months.

The duty payable on conversion of such vessel/ship is 20000000 X 6% X 6/120 = Rs. 60000/-

Illustration II : Vessel/ship is obtained on lease basis,

Rent /lease Value is say Rs 50 Lakhs for 3 months

Period for Coastal Trade as per Licence (under Section 407) is 3 months.

The duty payable on conversion of such vessel/ship is 5000000 X 6% = Rs. 300000/-

Valuation for levy of CVD on leased amount –Technical flaw?

In terms of the notification CN 12/2012 Dt.17.03.2012, the CVD to be levied is nothing but the additional duty of Customs under sub-section (1) of section 3 of the Customs tariff Act, 1975. The said Section provides that "value" for levy is that amount paid or payable as stipulated under Section 14 of The Customs Act, 1962. The illustration shown by the Board suggests that the lease amount/rent be taken for calculation of the CVD portion which appears against the statute.

Importers to file Bills for the same Vessel/Ship THREE times?

The new notifications in the Budget 2012 appear to put importers in tight spot making them obligatory to file Bills Of Entry thrice in case goods under 8901 are imported. FIRST one at the time of import of the vessel/ship, SECOND at the time of conversion for payment of CVD portion and the THIRD in order to follow the procedure for collection of duty on ship stores consumed during coastal run as provided under Board Circular 58/97-Cus, Dt 06.11.1997.

Burden of payment of CVD on import of the same vessel every time !

Hitherto importers of these vessels/ships are exempted from payment of all customs duties at the time of import and are only subjected to payment of duties on estimated quantities of ship stores at the time of conversion. Henceforth, every time the vessel visits India and the owner opts for a conversion for even shorter period, he may have to obtain a licence under section 407 for that period from DG Shipping and has pay the CVD.

Monitoring the period in Coastal Trade– isn't it practically difficult for Customs?

When a vessel/Ship is converted and CVD is paid for a specific period as mentioned in the Licence, what if the period is extended? As it is difficult for Customs to monitor the same, proper mechanism for monitoring and collection of CVD for the extended time may be put in a place by Board. It is also possible that importers, may initially obtain licence for a specific time period, gets converted, pays the CVD but, later, due to certain circumstances, may opt to cut short the period and may opt for reversion. to Foreign run. In such cases, they may have to claim refund of the excess CVD paid .It increases paper work also for both trade and department.