APRIL 26, 2016

By B V Kumar, Former CBEC Member

IN the Foreign Trade Policy (FTP) 2015-20, Para 4.03 reads as follows:

"4.03 Advance Authorisation

(a) Advance Authorisation is issued to allow duty free import of input, which is physically incorporated in export product (making normal allowance for wastage). In addition, fuel, oil, catalyst which is consumed / utilised in the process of production of export product may also be allowed.

(b) Advance Authorisation is issued for inputs in relation to resultant product, on the following basis:

(i) As per Standard Input-Output Norms (SION) notified (available in Handbook of Procedures),

OR

(ii) On the basis of self declaration as per Paragraph 4.07 of Handbook of Procedures.

It can be seen from the above that if an Advance Authorisation is issued, the FTP envisages that the inputs imported under an Advance Authorisation as per SION, should be physically incorporated in the resultant product, which is exported.

The policy makers have not applied their mind while framing the FTP, inasmuch as in any number of situations, the inputs imported under the Advance Authorisation may not be present physically in the export product. This apart, in respect of certain products, the Inspection Agencies in the Importing countries have prescribed that certain inputs should not be present physically in the resultant product.

For e.g., machinery is imported for the manufacture of shrimp / prawn feed under the EPCG Scheme clearly mentioning that the shrimp / prawn feed is used only in aqua culture farms and the shrimps / prawns obtained from the aqua culture farms are exported after processing. It is also common knowledge that shrimp / prawn feed cannot be consumed for any other purpose, as the formulation varies depending on the end use.

It doesn't need much of intelligence to understand that shrimp / prawn feed will not be physically present in theshrimps / prawns exported. Similarly, from the time shrimps / prawns are fished from the sea, various chemicals, such as salt, Sodium Tripoly Phosphate, Sodium Meta Bi-Sulphate, Citric acid and sometimes even Antibiotics are used to preserve the shrimps/prawns, from deterioration. However, when the shrimps/prawns are taken up for processing, (Peeling / deheading / deveining)to remove the chemicals used at different stages, they are repeatedly washed till the presence of the chemicals are brought down to one in a million.

However, as per the standards prescribed for the finished product both for the EU, USA and the Japanese Government, the final product should not contain any chemicals. However, if on test, if traces are found they should be within the tolerance limits. It is an accepted practice that the specified chemicals are used from the catch stage till they are received by the exporters / processors. However, before they are finally packed for export such chemicals are required to be washed to ensure that no traces of such chemicals are present in the export product. The ideal product is one, which on test is found to contain no traces of such chemicals. Since, this may not be possible always, micro quantities (Parts Per Million) are permitted in terms of EU standards. This is the reason as to why in certain test reports the presence of Sulphite is shown either as nil or less than the prescribed tolerance levels. Otherwise such processed shrimps/prawns are not accepted and the consignments are rejected.

This issue has come up before the Hon'ble Tribunal in the case of Adani Exports Ltd. vs. AC Customs, Cochin, as reported in - 2006-TIOL-1065-CESTAT-BANG. The Department filed an Appeal in the case of CC Mangalore vs. Sterling Foods as reported in 2011 (269) ELT 341(TRI-Kar), and which was dismissed by the Hon'ble High Court of Karnataka. Attention is also invited to CBEC Circular No. 45/2003-Cus dated 4.6.2003 (F.No. 605/19/2002-DBK).

In the case of Commissioner of Customs vs. Stumpp Schuele& Somappa Ltd. (Tribunal Order upheld by Madras High Court – 2014-TIOL-2286-HC-MAD-CUS vide Para 10 & 11 the Hon'ble Tribunal, inter alia , observed as follows:

"10. On a careful consideration of the submissions made, it is very clear from the record that the definition of the word 'Materials' and 'Raw materials' as in the Notification Nos. 116/88-Cus, dated 30-3-1988 and 159/90-Cus, dated 30-3-1990 has been amended in the subsequent Notification of 204/92-Cus, dated 19-5-1992 because on 30-3-1988, the definition of "materials” meant "Goods which are raw materials, components, intermediate products or consumables used in the manufacture of resultant products ....”. This has been amended to mean "Raw Materials, components, intermediates, consumables, and parts required for manufacture of resultant products”. The appellants have contended that the Commissioner has applied the ratio of Zenith Tin Works , which interpreted the term 'Raw materials' as applicable in the earlier Notification 116/88 which stated that the "materials” means raw materials used in the manufacture of resultant products which is subsequently been altered to mean "raw materials required for manufacture of resultant products". In this connection, the subsequent judgment of the Apex Court in the case of Oblum Electrical Industries Pvt. Ltd., and Jay Engineering Works Ltd. (cited supra) has been relied. In the case of Oblum Electrical Industries Pvt. Ltd. (supra), the Apex Court has clearly held that in the Notification, two different expressions have been used namely, 'materials required to be imported for the purpose of manufacture of products' and 'replenishments of materials used in the manufacture of resultant products' which indicates that the two expressions have not been used in the same sense. The Apex Court further clarifies that the expression 'materials required to be imported for the purpose of manufacture of products' cannot be construed as referring only to materials, which are used in the manufacture of products. It is further held that the exemption must be given its natural meaning to include materials that are required in order to manufacture the resultant products. On that view, the Court further clarified that the exemption cannot be confined to materials, which are actually used in the manufacture of the resultant product but would also include materials, which though not used in the manufacture of the resultant product are required in order to manufacture the resultant product. Similarly, in the case of Jay Engineering Works Ltd. (supra), the Tribunal again went into the definition of the term "required for manufacture of the export product” and have clarified that the Notification places no restrictions on actual use. It clarifies that once a specified item has a standard input (aluminium alloy) for manufacture of ceiling fans and an Advance Licence has been issued for the import of the said aluminium alloy, it is a material required for the manufacture of ceiling fans. It has been held in dealing with the Revenue's contention that the use of the imported raw materials is the option of the importer. He can either use it in the export product or import it and keep it in the factory, manufacture the export product using inputs procured from other sources, fulfil the export obligation and, thereafter, dispose off the raw materials imported as per Standard Input / Output Norms. It has been held that if the Customs authorities take a view that certain materials are not required for the manufacture, contrary to the view of the Standard Input / Output Norms of the EXIM Policy, it would lead to disharmonious situation, as while import Licences granted will entitle the import under DEEC Scheme while the clearances of the same into the country would not be in conformity with the DEEC Scheme. It has been held that the EXIM Policy of the Government has to be harmoniously interpreted and no discordant notes be made. It has been further held that if Input / Output Norms permit, clearance as per Policy have to be allowed by the Customs. If the norms are not correct, the norms could be changed not the clearances effected. In a like situation, the Tribunal, in the said case, has held that once export obligations have been fulfilled, then the raw materials imported for replenishment be used in the manufacture of the goods, which are sold in the domestic market and that the Customs authorities cannot demand duty on the ground that the goods imported have not been used in the exported goods. The Tribunal has relied on the judgments of Dolphin Drugs (P) Ltd, Standard Industries Ltd. and CC, Hyderabad v. Cheminor Drugs Ltd . (supra).

11. On a careful consideration of the judgment of the Apex Court ruling in the case of CC, Kolkata v. Rupa and Co. Ltd . - 2004 (170) ELT 129 (S.C.) (supra), we find that the Apex Court's explanation of the term 'Goods required for manufacture' to mean to include materials not directly used in the manufacture of resultant product but still required therein, also applies to the facts of the case. The Apex Court has relied on the earlier ruling rendered in the case of Oblum Electrical Industries Pvt. Ltd. We find that a similar view was expressed by the Tribunal in the case of Siddhartha Tubes Ltd . and in the case of Kitply Industries Ltd . (supra). In the ITC Ltd. (supra) case also, a similar view has been expressed by the Tribunal. All these judgments clearly apply to the facts of the case and the appellants' contention that the replenishment materials are required for manufacture of resultant products and they have been used so and it satisfies the Notification, should be accepted. The judgments relied by the Revenue in the case of Zenith Tin Works (supra) is clearly distinguishable as the terms of the Notifications have changed thereafter. The further case of the assessee that the demands are barred by time is a well taken ground for the reason that all the details and particulars have been mentioned in the records and on our perusal of the entire records, including the licence and the documents furnished at the time of export and at the time of import of the raw materials for replenishment, we find that the details had been furnished. Licence, DEEC passbook and other documents had been scrutinized by the DGFT and the Customs Authorities and there was no details which had not been declared was discovered by the DRI in the investigation. There was no suppression or mis-declaration of facts. Therefore, in the light of the judgment cited by the Counsel, the demands are clearly barred by time. The appellants succeed on both grounds and the appeals are allowed with consequential relief if any."

In the input output norms (D) Fish and Marine Products, General Note for Fish and Marine Products, reference is invited to D1, D2, D3 and D4 which deal with export items, viz., Block Frozen Headon Shrimps Black Tiger (P. Monodon) white (P.Indicus) in polybags and 'Scampi'. If these type of shrimps / prawns are exported then shrimp/prawn feed is permitted to be imported. However if other species of prawns, including those superior to Black Tiger such as 'Vannamei' are exported they are not entitled to import shrimps/prawn feed.

Vice versa ifEPCG Authorisation is taken for the manufacture of shrimp/prawn feed, clearly mentioning that the export obligation would be discharged against export of shrimps/prawns the DGFT is not being permitting the discharge of the export obligation against the exports of a superior variety of shrimps / prawns.

It is obvious that the approach of the DGFT and the Ministry of Commerce is myopic and is not keeping pace with the developments in the industry. The attitude of the persons posted in the Office of the DGFT and the Ministry of Commerce is so negative and this could probably be one of the reasons as to why there is a sharp decline in the exports month after month, widening the difference in the balance of payments position of the country. The question of implementing the "Ease of Doing Business” policy is only a slogan, and its implementation is not seen at least in the Ministry of Commerce. Hopefully corrective steps will be taken by the Hon'ble Minister of Commerce, to change the wording in Para 4.03 of the FTP, immediately.