FEBRUARY 27, 2016

By Uma Lohray

RULE 5 of Cenvat Credit Rulesprovides for refund of unutilizedcredit of excise duty and service tax when any input or input service is used in the manufacture of final product which is cleared for export under bond or letter of undertaking, used in the intermediate product cleared for export, or in providing output service which is exported.

When a DTA unit sells its finished goods to a customer EOU whichuses the said goods in the manufacture of their final goods and either exports the same under bond or disposes it off to a DTA unit, the question that arises here is whether the DTA unit is entitled to claim cenvat credit under Rule 5.

Argument of Department

The Department argues that the term "export" refers to physical exports and not deemed exports since s. 2 (18) of the Customs Act defines export to mean taking out of India to a place outside India. Thus, the aforementioned clearance amounts to deemed export and not physical export.

Assesse's Arguments

The term used in the Cenvat Credit Rules is "exports" and not "physical exports". The concept of EOU had been introduced in the Foreign Trade Policy. The Policy as a rule states that every 100% EOU is obliged to manufacture or produce from duty free imported raw materials capital goods etc., and as a rule every 100% EOU is obliged to export its entire production and earn foreign exchange. This is the concept of physical exports. However, this rule has certain exceptions namely, DTA sales. The general rule is physical exports and "other supplies in DTA"can be equated to physical exports. This equation is necessary because other supplies in DTA give certain benefits to the economy like preservation of foreign exchange, import substitution, savings of transportation costs, competitiveness and level-playing field for Indian exporters.

The Apex Court's decision in Virlon Textile Mills Ltd. v. Commissioner of Central Excise, Mumbai - 2007-TIOL-69-SC-CX states that if DTA sale against rupee is allowed benefit of the Notification, DTA supplies against foreign exchange, which is at par with physical exports cannot be denied the same benefits. In Commissioner v. NBM Industries - 2011-TIOL-677-HC-AHM-CX the Hon'ble Gujarat High Court relied upon Virlon Textile Mills and heldthat DTA sales against foreign exchange or other supplies in India can be equated with physical exports. The decision in the case of Amitex Silk Mills Pvt. Ltd. v. Commissioner - 2005-TIOL-1134-CESTAT-DEL may be relied upon wherein it is observed that the provisions itself make no distinction among various types of exports. The Apex Court's decision in Commissioner v. Ginni International Ltd. is also on the same lines. The Board's Circular No. 220/54/96-CX., dated 04.06.1996 and more particularly in para 2 thereof, states that refund even in case of deemed export by 100% EOU is admissible.

The High Court of Gujarat had considered the issue of deemed exports being equated with physical exports in the case of Commr. of C. Ex. & Cus., Surat-II v. Sabnam Synthetics Ltd. It held that the DTA clearances made by 100% EOU are to be treated as deemed exports in terms of para 9.9 of EXIM Policy and cannot be questioned when Development Commissioner granted permission therefor. The Supreme Court affirmed the said decision in view of Virlon Textile Mills . The simple underlying logic is that clearance into an EOU is deemed to be export, whether the same is physically exported or not. Thus, refund under Rule 5 would be available even if goods are exported to 100% EOUs which in turn may dispose it off into DTA.

Defective Amendment in Rule 5

However, vide Notification 06/2015-CE dated 01.03.2015 an explanation was inserted clarifying that "export goods" means any goods which are to be taken out of India to a place outside India. Vide this explanation, deemed exports are sought to be disallowed the benefit of refund under Rule 5.

CBEC issued an Instruction 96/85/2015-CX dated 07.12.2015 conveying the Minutes of the Tariff Conference and wherein it is stated that:

The provisions of refund of accumulated credit under rule 5 of the Cenvat Credit Rules, 2004 are only meant for physical exports and not for deemed exports with one exception i.e. supplies to SEZs which is treated as exports. The meaning of the expression export goods has been inserted in the rule 5 of CCR, 2004 by notification no. 6/2015-C.E. (N.T.), dated 1-3-2015 to say that export goods means any goods which are to be taken out of India to a place outside India. Thus, supplies to EOU and supplies under ICB can not avail the benefit of refund of accumulated credit under rule 5. Under the present policy, it would not be possible to allow refund of accumulated credit on supplies to ICB.

It may be noted that the above Minutes cannot be attached to any particular context since the term export goods is not referred in Rule 5 of the Cenvat Credit Rules.

Further the concept of deemed export is at the core various export promotions schemes such as EOU, advance license, EPCG etc. wherein supplies to EOUs are considered as deemed export and export incentives are granted to EOU's supplier of goods. Rule 5 is also a type of export promotion scheme wherein the benefit of refund of unutilised CENVAT is granted to the exporters. Thus, disallowing this benefit amounts to discriminatory treatment which is not sustainable.The aforementioned amendment inserting the explanation without amending the definition of "export" under Customs Act and provisions of the FTP is defective by reason of being contrary to the judgment of the Supreme Court in Virlon Textile Mills . Thus even after the amendment, the dispute would not be solved and it may be argued that supplies to EOU would be eligible for the refund under Rule 5 of the Cenvat Credit Rules.

Hopefully, the Union Budget 2016 has a solution to the issue.

(The author is an Associate at Lakshmikumaran & Sridharan, Ahmedabad.)