FEBRUARY 01, 2016

By Atish Laddha

THE scheme of Export Oriented Unit (EOU) was introduced in Foreign Trade Policy (FTP) in order to promote the exports out of India. However, in order to boost the setting up more EOU's, the Government has permitted to clear the goods in Domestic Tariff Area (DTA) at concessional rate of duty as against duty structure as proposed in proviso to Section 3 of Central Excise Act, 1944.

However, such clearance at concessional rate of duty is permitted by way of exemption notification issued from time to time and the corresponding prevailing notification is 23/2003-CE. Further such exemption notification was issued in line with the provisions in Para 6.8 of FTP wherein an EOU is permitted to clear the manufactured goods domestically using the duty free inputs procured by it at concessional rate of duty.

At this juncture, it is pertinent to note that Para 6.8 of FTP has merely prescribed the basis on which the entitlement of DTA clearance shall be computed. However, it has not prescribed the manner in which the entitlement shall be utilized by the EOU unit. The manner of utilization of DTA sales entitlement is prescribed in Appendix 14-I-H of Handbook of Procedure (HBP).

This article discusses the anomaly in the exemption notification issued by the Ministry of Finance vis-à-vis the intention and roadmap of the Ministry of Commerce while extending the said benefit.

Relevant Legal Provisions

As discussed above, the proviso to Section 3 of Central Excise Act, 1944 has levied the excise duty on the goods manufactured by EOU and cleared in DTA equivalent to the customs duty imposable if like goods imported in India. However, in order to extend the benefit of concessional rate of duty as proposed in Para 6.8 of FTP, from time to time exemption notification(s) has been issued by the Ministry of Finance.

In the present case, there is anomaly in the manner in which the eligibility of DTA clearance calculated for any given financial year is concerned. As per Appendix 14-I-H of HBP, the DTA clearance entitlement obtained by any unit is valid for a period of 3 years from the year in which it is availed and balance to the extent it remains unutilized can be utilized in the subsequent financial year maximum upto period of 3 years. The relevant portion of the Appendix 14-I-H reads as under:

"(d) The DTA sales entitlement shall be availed of within a period of three years of the year of accrual."

However, corresponding condition in Notification No. 23/2003-CE reads as under:

Further relevant portion of condition no. 2 of the exemption notification reads as under:

"(b) the total value of such goods being cleared under sub-paragraphs (a), (b), (e) and (g) of Paragraph of the Foreign Trade Policy, into Domestic Tariff Area from the unit does not exceed 50% of the Free on Board value of exports made during the year (starting from 1st April of the year and ending with 31st March of next year) by the said unit."

(Emphasis Supplied)

Dispute raised by the revenue authorities

In the present case, the authorities have raised dispute that that while calculating the DTA clearance which shall be entitled to avail the benefit of Notification No. 23/2003-CE shall be strictly in accordance with the condition of the notification. Therefore, since the condition specifically allows only upto 50% of FOB value of exports made during the year, the balance unutilized DTA sale entitlement shall not be allowed to be utilized in the current financial year at concessional rate of duty. The contention of the revenue is explained with the example below:

In the above example, the contention of the revenue authorities is that if excess DTA clearance exceeds the DTA sale entitlement accrued during the year (i.e. wherever column 'e'>'d' in above example), then such excess DTA clearances shall be subjected to the normal rate of duty as per proviso to Section 3 of Central Excise Act, 1944 without extending the benefit of Notification No. 23/2003-CE.

However, as per the provisions of FTP read with Appendix 14-I-H of HBP, there is no excess DTA clearance effected by the EOU unit in the example above (refer column 'f') and hence the concessional rate of duty shall be extended to all the clearances made in the above example.

Therefore, there exists an anomaly in the FTP and Notification No. 23/2003-CE wherein the beneficial provisions of FTP are not extended in complete sense to the exporters and it may lead to unwarranted litigation. Therefore, appropriate amendment shall be effected in the notification. Attention in this regard is also invited to the observations of the Hon'ble Supreme Court in case of Pennar Industries Ltd. - 2015-TIOL-162-SC-CUS which reads as under:

"20) Though we have rendered this decision keeping in view the legal position discussed above, at the same time, we deem it necessary to observe that the Government should bestow its consideration and make appropriate provision dealing with such situations. After all, the Exemption Notification No. 30/1997 has been issued to implement and effect the EXIM Policy provisions. Therefore, the purport of the exemption notification is to advance the objectives of the EXIM Policy. When the DGFT has itself accepted the benefits of the assessee and carried out the amendment in the import licence and further that the assessee could make the exports on the basis of the amendment; albeit through third party, such person should not be left high and dry. Therefore, necessary amendments are needed in such notifications making appropriate provisions to meet these types of eventualities. We are hopeful that the competent authority shall look into these aspects and cater for such situations as well so that unnecessary hardship is not caused to the bona fide assessees as well."

(Emphasis supplied)

Conclusion

Considering the budget session is around the corner and Central Government has promised to address the issues impacting the industry, an appropriate representation should be filed before the Ministry of Finance to take corrective steps to amend the notification and avoid disputes, if any, which may creep up in future.

(The author is Senior Associate,  Lakshmikumaran & Sridharan, Pune.)