FEBRUARY 09, 2016

By Rajat Dosi

SIMULTANEOUS availment of benefit of the Advance authorization scheme and rebate under Rule 18 of the Central Excise Rules, 2002 is an everlasting area of dispute and un-resolving issues. This article analyses some resolved and un-resolved issues surrounding the same. It also highlights the fact that despite loud and clear intention of the Government to allow rebate to advance authorization holders, subject to certain conditions, all efforts are being made by the Excise Department to deny the rebatebasis provisions which leave a lot to be desired.

Before dwelling into the various issues it would be helpful to briefly highlight the statutory scheme surrounding the grant of rebate and the advance authorization scheme:

++ Advance Authorization Scheme –This scheme allows a manufacturer to import or domestically procure inputs or raw materials required for manufacture of final products to be exported out of India. The relevant customs notification allowing duty free import of inputs is Notification No. 93/2004-Cus dated September 10, 2004.

++ Excise Rules –Rule 18 of the CER, 2002 provides for grant of rebate to an exporter on export of goods out of India. An exporter under this provision can avail rebate of excise duty paid on final export product (output stage benefit) andduties suffered on inputs utilized in the manufacture of final export product (input stage benefit) [Spentex Industries Ltd. 2015-TIOL-239-SC-CX refers]. Alternatively, Rule 19(1) of the CER, 2002allows an exporter to clear its product for export under bond without payment of applicable excise duty. Rule 19(2) allows a manufacturer to supply intermediate products without payment of applicable duties for use in manufacture or processing of final products which are to be exported.

As highlighted above, the advance authorization scheme allows benefit at the inputs stage (i.e., inputs can be procured or imported without payment of applicable duties). However, the scheme provides noexemption in respect of excise duty payable on the final export product (i.e., duty payable at the output stage). Thus, all advance authorization holdersseek to clear their final products for exports either without payment of central excise duty under Rule 19(1) of the CERor on payment of duty and later claiming rebate of such excise duty paid under Rule 18of the CER.

It is in respect of such rebate claims, under Rule 18 of the CER, by advance authorization holders that disputes have arisen. Such rebate claims are rejected by the Excise Department under one or the other pretext despite the clear intention of the Government to not export taxes by allowing either exemption or refund of all duties suffered by an advance authorization holder at the input stage as well as at the output stage.

Rebate of duty paid at the output stage

Initially, rebate claims made by advance authorization holders, in respect of duty suffered at the output stage,were rejected by the excise department citing condition no. (v) of Notification No. 93/2004-Cus, which has been reproduced below:

"(v) that the export obligation as specified in the said licence (both in value and quantity terms) is discharged within the period specified in the said licence or within such extended period as may be granted by the Licensing Authority by exporting resultant products, manufactured in India which are specified in the said licence and in respect of which facility under rule 18 or sub-rule (2) of 19 of the Central Excise Rules, 2002 has not been availed."

The department relying solely on strict interpretation of the aforementioned provision sought to reject therebate claims, as being something which has been specifically disallowed. Against such rejection, it was argued by the advance authorization holders that such rebate claimsshould be allowed in line withthe intention of the Government. They argued that the intention of the Government is to disallow double benefit to an advance authorization holder in respect of duty payable at the input stage (i.e., they are not allowed to claim benefit of both (a) exemption under the advance authorization scheme and (b) rebate under the Excise Rules in respect of inputs). This restriction is not to curtail benefit of rebate in respect of duty paid at output stage.

Ignoring the overall scheme of the Government, such rebate claims were rejected by the Excise Department. The Government had to finally issue a corrigendum [F. No. 605/50/2005-DBK, dated May 17, 2005] to Notification No. 93/2002-Cus correcting condition no. (v) of this notification. The word and figure 'rule 18 ' in the condition was corrected to read as "rule 18 (rebate of duty paid on materials used in the manufacture of resultant product)".

Thus, pursuant to the correction it was clear that the restriction is only limited to availing rebate in respect of duties paid at the input stage and rebate in respect of duty paid at the output stage is not disallowed.However, the controversy surrounding rebate claim by an advance authorization holder in respect of duty paid at output stage was not resolved. The department started reviewing and denying all sanctioned rebate claims which pertained to a period prior to issuance of the aforementioned corrigendum. This was litigated by the advance authorization holders on the grounds that a corrigendum is essentially a correction to the concerned notification and would be applicable retrospectively from the date of such concerned notification. This issue was finally resolved by the Karnataka High Court vide its judgment in the case of Jubilant Organosys Ltd. [2011-TIOL-961-HC-KAR-CX] [ given in the context of predecessor notification No. 43/2002-Cus dated April 19, 2002 which was also corrected vide issuance of corrigendum [ M.F. (D.R.) Corrigendum F. No. 605/201/2001-DBK, dated November 29, 2002 ] wherein the High Court accepted the above-mentioned arguments advanced by the advance authorization holders and rejected the argument of the department that correction made vide the corrigendum will be applicable prospectively.

Even though the aforementioned issue has been resolved there remains several issues that are still not resolved. There is one such issue I would like to highlight in this article, the same has been analysed herein below.

Rebate of duty paid inputs

Manufacture of an item or a final product requires a number of inputs. From such list of inputs there can be items for which the advance authorization holder cannot avail the benefit of the advance authorization scheme i.e., such inputs cannot be imported or procured duty free and are to be necessarily imported or procured on payment of applicable duties (duty paid inputs). When such advance authorization holder intends to avail rebate of duty paid on such duty paid inputs, the same is rejected by the department citing condition no. (v) of the notification which does not demarcate or provide for differential treatment in relation to duty free inputs and duty paid inputs. While the principle of strict interpretation necessitates rejection of rebate claim even in respect of duty paid inputs in terms of condition no. (v) of the notification, which is what is being followed by the department and rebate claims in such cases are being denied. The overall scheme and intention of the Government to just disallow double benefit to an advance authorization holder and to not export taxes, as discussed above, seems to suggest that such rebate of duty paid inputs should be allowed. Going by the loud and clear intention of the Government, the provision should be read to prohibit rebate claims in respect of those inputs which have been imported or procured duty free under the advance authorization scheme and should not prohibit rebate in respect of duty paid inputs. This issue being of vital relevance to many advance authorization holders, the Government should come out with a clarification in this regard either disallowing the rebate citing strict interpretation or allowing the rebate citing its intention and overall scheme.

Having said this, business cannot wait indefinitely for a clarification from the Government in this regard. Therefore, in such cases the advance authorization holders,as an alternative measure, can apply for brand rate of duty drawback, which would reimburse all the duties suffered by themat the input stage (in respect of which benefit of advance authorization scheme has not been claimed). Para 4.15 of Foreign Trade Policy, 2015-20, CBEC Circular No. 89/2003-Cus.dated October 6, 2003 and Circular No. 48/2011-Cus. dated October 31, 2011allows such simultaneous availment of brand rate of duty drawback and the advance authorization scheme in respect of duty paid inputs.

Advance authorization holders who have been issued notices seeking recovery of already sanctioned rebate in respect of duty paid inputs, relying upon the aforementioned, can always argue on the principle of revenue neutrality.

(The author is working as an associate in Trilegal and the views expressed are strictly personal.)