FEBRUARY 22, 2016

By C T Krishna Murthy, Advocate

I. WHILE sanctioning rebate on export goods now the department is comparing the following i.e.,

1. Transaction Value

(arriving from CIF Value by deducting the Local Freight, Ocean Freight/Air Freight, Insurance and also Commission)

2. FOB value minus Local Freight.

3. ARE1 value minus Local Freight.

4. Market value of identical goods minus local freight.

and taking the value whichever is less.

II. When there are no domestic clearances of the export goods or when there is no scope to ascertain domestic market value of similar goods, department is comparing ARE1 value with that of CAS 4 value for granting Rebate.

III. When the goods are exported to subsidiary units abroad, department is taking CAS4 value for sanctioning rebate.

IV. On the issue involved the following are the related Circulars/Notifications/Case Law:

1. CBEC Circular No. 687/3/2003-CX Dated 03.01.2003. [F. No. 267/57/2002-CX-8]

2. CBEC Circular No. 510/06/2000-CX Dated. 03.02.2000.

3. CBEC Circular No. 203/37/96-CX Dated 26.04.1996 (discussed in Delhi High Court judgment dated 14.08.2014).

4. Notification No. 19/2004-CE(NT) Dated 06.09.2004 as amended.

5. Hon'ble Delhi High Court judgment dated 14.08.2014 in the case of Dr. Reddy's Laboratories Ltd. V. UOI and Others reported in - 2014-TIOL-1616-HC-DEL-CX.

V.

1. Arriving the value by comparing the values of

A. Transaction Value

B. FOB value (minus Local Freight).

C. ARE1 Value (minus Local Freight).

D. Market value of identical goods (minus local freight)

for the purpose of sanctioning Rebate in cash and balance in CENVAT, there is no legal backing supported by any provisions of law.

2. From the Circular No. 687/3/2003-CX Dated 03.01.2003, it is very clear that there is no discretion with the sanctioning authority to grant the rebate through credit account except payment in cash.

The relevant para 2 is reproduced below:

"2. The matter has been examined by the Board. It is the view that there is no discretion with the sanctioning authority to give the refund of the duty paid on goods exported through credit accounts. It is therefore clarified that the duty paid through the actual credit or deemed credit account on the goods exported must be refunded in cash". (Emphasis Supplied)

3. As per condition 2(e) of Notification No. 19/2004-CE(NT) Dated 06.09.2004, the rebate claimed should not be more than the market price of the excisable goods at the time of exportation.

The extract of the said condition is reproduced below:

"(e) that the market price of the excisable goods at the time of exportation is not less than the amount of rebate of duty claimed"

The above condition envisages that the department has to ensure that the rebate claimed is not more than the market price of the excisable goods at the time of export.

However, the department is comparing value of the goods exported with that of domestic value of similar goods and taking the lower value of the two for the purpose of granting Rebate which is not required under the provisions of law as cited above.

Thus it is seen that the department misconstrued the above condition and comparing the value of export goods with that of domestic value of similar goods for the purpose of granting rebate.

4. In view of the above especially taking the Circular dated 03.01.2003 into consideration, it requires the urgent attention of the CBEC on the above issue so that necessary Notification/ Circular/Instructions can be issued for sanctioning rebate in cash.

VI. When there are no domestic clearances of the export goods or when there is no scope to ascertain domestic market value of similar goods, the comparison of ARE1 value with that of CAS 4 value for granting rebate is unwarranted as there is no legal sanction for the same.

In such cases it is just and correct to follow the Transaction Value.

This requires the attention of CBEC for issuing instruction to the field officers in this regard.

VII. The department is also not correct in adopting CAS 4 value for the purpose of sanctioning rebate in cases where the goods are exported to subsidiary units abroad by following Rule 11 read with Rule 8 of Central Excise Valuation Rules, 2000 when there is a Transaction Value.

Whenever goods are exported, relevant Notifications ,if any, relating to Central Excise Act, 1944, Customs Act, 1962 and Foreign Trade (Development& Regulations) Act, 1992 come into play and have to be considered. The provisions of the Customs Valuation (Determination of Value of Export Goods) Rules, 2007 have to be resorted to in respect of export goods and according to which the value shall be ‘Transaction Value' within the meaning of sub section (1) of Section 14 of the Customs Act, 1962.

In this connection the extract of Rule 3 of Customs Valuation Rules, 2007 is reproduced below:

"3. Determination of the method of valuation. - (1) Subject to rule 8, the value of export goods shall be the transaction value.

(2) The transaction value shall be accepted even where the buyer and seller are related, provided that the relationship has not influenced the price. (Emphasis Supplied)

(3) ………………………………….."

Though the units are related the Transaction Value can be followed for sanctioning rebate provided there is no flow back.

In this connection it is also relevant to go through paras 16 and 17 of the Hon'ble Delhi High Court judgment in the case of M/s. Dr. Reddy's Laboratories Ltd v. UOI & Others which are extracted below for the purpose of convenience of ready reference:

"16. The revisionary authority discarded these prices on the ground that the price charged by the inventor cannot be a basis for comparison and that the substantially lower price charged by Sun Pharmaceuticals in India is a better comparison. It was further held that the substantial mark-up in the transaction between Dr. Reddy's and its Jersey subsidiary implied some distortion in the transaction value. Thus, the best judgment method was used with a cost plus 10% mark up as the correct value.

17. This reasoning is unacceptable. Under Rule 18- which contemplates return of the excise duty paid in cases of exported goods,- the market price must necessarily refer to the market where the goods are sold, - in this case, the United States market. The goods in question are neither meant for, nor did they ever enter, the Indian market. If this were not to be the position, the valuation of goods meant for export (in cases of export to countries with a stronger currency valuation; or simply, "developed' countries) would always be incongruous even bizarre. In such cases, the actual value of goods sold abroad would likely exceed the value domestically. Following the Revenue's logic, unless the exporter decides to export the goods at the lower domestic price, he or she may never recover the entire excise duty paid on the higher international price. This extinguishes the purpose of Rule 18 of the 2002 Rules, and the policy of ensuring competitive exports". (Emphasis Supplied)

As seen from para 17 supra, it is clear that the excise duty paid by debiting in CENVAT account in case of exported goods has to be returned. As CENVAT is nothing but duty of excise as per Section 3 of Central Excise Act, 1944, whatever debited in CENVAT account has to be paid back in cash for granting rebate in view of the Board Circular dated 03.01.2003.

VIII. Further for the exports, is reliably learnt that in some places department is granting major rebate amount in cash and the remaining minor amount in Cenvat whereas in some places department is granting rebate by resorting to comparison of (1) Transaction Value (arriving from CIF Value by deducting the Local Freight, Ocean Freight/Air Freight, Insurance and also Commission), (2) FOB value (minus Local Freight), (3) ARE1 Value (minus Local Freight) and (4) Market value of identical goods (minus local freight)values and granting rebate in cash on the basis of the lowest value and the remaining in Cenvat account. Thus there is no consistency in understanding the provisions of law in the department itself.

IX. It is not out of place to mention here that the provisions contained in Rule18 of Central Excise Rules, 2002 are in a way incentive to exporters to export goods. This is to ensure that whatever duty is paid at the time of export can be got back to the exporter in Cash.

X. In view of the foregoing it is quite clear that whatever duty is paid at the time of export has to be returned by way of rebate in cash in terms of CBEC Circular dated 03.01.2003 which is binding on the department.

XI. As the department is not following the Circular in toto, it is prayed that necessary instructions may kindly be issued in this regard especially to encourage the exports.