AUGUST 04, 2015

By Manish Jain

FOREIGN Trade Policy (FTP) provides for various export promotions schemes. One such scheme is scheme for Export Oriented Units (EOUs). Principally, EOUs are those manufacturing units who undertake to export theirentire production # .FTP also permits EOUs to undertake jobwork for DTA units subject to thecondition that the goods have to be exported directly from the EOU @ .It is felt that this condition of " direct export from EOU " is in contradiction with the other existing schemes and the overall objective of promoting exports and the "Make in India" programme. For sake of convenience, the provisions governing the job work by EOU for DTA units is reproduced as under:

Clause (b) of the Para 6.14 of the FTP provides that,

"EOU may, with annual permission from Customs authorities, undertake job work for export, on behalf of DTA exporter, provided that goods are exported directly from EOU and export document shall jointly be in name of DTA / EOU. For such exports, DTA units will be entitled for refund of duty paid on inputs by way of brand rate of duty drawback."

According to the above provisions, an EOU can undertake sub-contracting on behalf of the DTA Unit, subject to the following key conditions:

1) EOU to obtain an annual permission from the Customs Authorities;

2) Goods are directly exported from an EOU ; and

3) Export documents are to be in the name of DTA Unit as well as EOU. 

Condition of "direct export from EOU" is contrary to concept of deemed export

Deemed export is a legal fiction created in the FTP which provides that though the goods are actually not exported out of India, nevertheless, certain supplies would be considered as export. Para 7.02 of the FTP provides that various supplies, interalia supplies against advance authorization/DFIA/EPCG,etc.,would be treated as deemed export. Para 7.04 of FTPfurther provides that supplier would be entitled to claim export incentive i.e. advance authorization/ drawback/ refund etc. The whole idea of granting deemed export benefits is to incentivize the domestic intermediate suppliers who manufacture intermediate goods which are further used for manufacture of finished goods being exported out of India.

Thisconcept of deemed export is completely ignored while restricting the EOUs to undertake jobwork for advance authorization holders for manufacture of intermediate goods. Infact, condition of direct export from EOU is contrary to the said concept of deemed export.Further, the said contradiction may be explained by following examples where in all the situations the final products are being exported out of India however, there are contradictions in terms of supply of intermediate goods.

Situation A:

"A" is an EOU who gets an order from advance authorization holder "B" for jobwork for manufacture of one of its intermediate goods "X". The said goods "X" will be used by "B" for manufacture of finished goods "Y" which is to be exported.

The current provisions on FTP will not permit such transaction because the FTP provides that goods have to be directly exported from EOU after jobwork. Thus the EOU will not get jobwork order though the final products are being exported out of India.

Situation-B:

"A" is an EOU who gets an order from advance authorization holder "B" who wants to purchase one of its intermediate goods "X". The said goods "X" has to be used further for manufacture of finished goods "Y" which is to be exported. This is principal to principal to transaction.

The EOU will be permitted to clear said goods to advance authorisation holder without payment of excise duty in terms of Notification No. 23/2003-C.E. because there is no restriction under FTP on such transaction. On the contrary, FTP (Para 6.9 of FTP) considers this supply for fulfillment of positive NFE by the EOU and Para 4.20 (v) allows for procurement of inputs by the advance authorization holder in DTA from the EOU without ARO or invalidation letter.

Situation-C:

"A" is an EOU who gets an order from another EOU"B" who wants to avail job-work services for manufacture of one of its intermediate goods "X". The said goods "X" has to be further used for manufacture of finished goods "Y" which is to be exported or either cleared in DTA by the other EOU "B".

Para 6.14(b)(iii) provides that EOU may undertake job-work for another EOU. Thus there is no restriction on EOU "A".Moreover, there is no obligation on the other EOU "B" to necessarily export the said goods (X) or finished goods (Y) $ .Therefore, in this situation also the EOU "A" can easilyget the order because the FTPdoes not provide any condition of direct export by EOU when EOU undertakes job-work for another EOU.

It can be noted that in situations B and C intermediate goods are permitted to be manufactured and supplied to principal manufacturer when the finished goods are exported by the principal manufacturer. However, in situation A, though the finished goods are exported by principal manufacturer, the EOU is not permitted to clear intermediate goods to DTA exporter/ advance license holder/principal manufacturerafter job-work. Thus, there is contradiction in FTP with regard to the provisions providing for job work by EOU.

Conclusion

In order to realise the "Make in India" dream, the FTP shouldendeavor to facilitate the EOUs to utilize their full manufacturing capacity even when they are manufacturing intermediate goods which are being used for manufacture of final products which are exported. Thus suitable amendments need to be made in FTP permitting EOUs to undertake job work for exporters/ advance authorization holders, permitting to manufacture the intermediate goods which are further consumed in manufacturing final products being exported from India.

# However, as a relaxation, Para 6.08 of FTP also permits EOUs to clear finished goods in DTAs on payment of applicable duties of customs.

@In other words, EOU cannot undertake jobwork for manufacture of intermediate goods even though the said goods are further used in manufacture of export goods.

$ On the contrary Para 6.13 (a) read with clause (b) of FTP provides that transfer from one EOU to other EOU is permitted without payment of duty. However, if second EOU clear the said goods in DTA then second EOU has to treat the said goods (X) as imported goods.

[The author is associated with Lakshmikumaran&Sridharan, Ahmedabad and the views expressed are personal.]