JULY 01, 2016

By Nirav S Karia

IN this article, I have discussed the significant changes in the newly introduced Customs (Import of Goods at Concessional Rate of Duty for Manufacture of Excisable Goods) Rules, 2016 (hereinafter referred to as "New Customs Rules, 2016") vide Notification No.32/2016-Cus(NT) dated 1.3.2016 by Union Budget, 2016 in supersession of erstwhile Customs Rules, 1996 and its impact on on any "importer/manufacturer"intending to import any goods to be used for manufacture of excisable goods from loan-licensee or job workers , by availing the benefit of the benefit of exemption/concessional rate of customs duties under any of the Notification issued under Section 25 of the Customs Act.

Relevant legal provisions under erstwhile Customs Rules, 1996 for sake of reference are discussed as under:

- As per Rule 2(1) of erstwhile Customs Rules, 1996, these rules shall apply to an "importer" who intends to avail of the benefit of an exemption notification issued under sub-section (1) of section 25 of the Customs Act, 1962 and where the benefit of such exemption is dependent upon the use of imported goods covered by the notification for the manufacture of any excisable commodity.

- As per Rule 3(1) of erstwhile Customs Rules, 1996 , a "manufacturer intending to avail of the benefit of an exemption notification referred to in sub-rule (1) of rule 2, shall obtain a registration from the Assistant Commissioner of Central Excise or Deputy Commissioner of Central Excise having jurisdiction over his factory .

- As per Rule 4(1) of erstwhile Customs Rules, 1996, a "manufacturer" who has obtained a certificate referred to in sub-rule (3) of rule 3 and intends to import any goods for use in his factory at concessional rate of duty, shall make an application to this effect to the Assistant Commissioner of Central Excise or Deputy Commissioner of Central Excise indicating the estimated quantity and value of such goods to be imported, particulars of the notification applicable on such import and the port of import.

- As per Rule 4(3) of erstwhile Customs Rules, 1996 it provides that the application shall be countersigned by the Assistant Commissioner of Central Excise or Deputy Commissioner of Central Excise who shall certify therein that the manufacturer is registered in his office and has executed a bond to his satisfaction in respect of end use of the imported goods in the manufacturer's factory and indicate the particulars of such bond.

In light of above legal provisions in the erstwhile Customs Rules, 1996, it is clear that any importer intending to import any goods to be used for manufacture of excisable goods , by availing the benefit of the benefit of exemption/concessional rate of customs duties under any of the Notification issued under Section 25 of the Customs Act, shall follow the procedure prescribed under erstwhile Customs Rules, 1996 . The erstwhile Customs Rules, 1996 required that the "importer" intending to avail exemption has to get itself registered with the AC/DC having jurisdiction over his factory.

A reading of erstwhile Customs Rules, 1996 shows that it has been contemplated that benefits which are subject to these rules shall be availed only bymanufacturers based on actual use of the goods being procured at a concessional rate. In other words, such benefit will be available only to the importers or the manufacturers if they satisfy the use of the goods being procured for manufacture of excisable goods. It appears that such benefit may not be available to mere 'traders' who do not undertake any activity of manufacture in respect of the goods being procured duty free.

Under the erstwhile Customs Rules, 1996 there existed a doubt as to whether the goods imported under the erstwhile Customs Rules, 1996 can be transferred to the job-worker or not. If the imported goods are transferred by importer (say ‘A') to job worker-manufacturer (say ‘B') then whetherthe benefit of exemption/concessional rate of customs duties shall be available to importer or not.

To understand the above question, it is relevant to discuss and analyse the views taken by Tribunals/Court and departmental clarifications issued in the past on the above issue.

In the case of Panacea Biotech Limited vs. CCE reported at - 2003-TIOL-328-CESTAT-DEL, the Tribunal held that the word "his factory" appearing in Rule 3(1) of erstwhile Customs Rules, 1996 will only mean the factory owned by the manufacturer and it can be a factory taken on lease by such manufacturer. In that case, Panacea Biotech Limited was manufacturing P & P medicaments themselves as well as getting the same manufactured from other manufacturers on loan-licence basis. Panacea Biotech Limited imported two consignments of bulk drugs for the manufacture of life saving drugs and availed exemption from payment of duty subject to the condition that imported goods are used in the manufacture of specified life-saving drugs and following of the procedure set out in erstwhile Customs Rules, 1996. Since Panacea Biotech Limited did not have enough production capacity in their factory, they obtained loan-licence and were getting part of the products manufactured on job-work basis after intimating to the AC. In such circumstances, Court held that the intended purpose is confined only to the manufacture taking place within the factory of Panacea Biotech Limited which has been registered under Rule 3 of erstwhile Customs Rules, 1996 and not in the factory of job-worker. Thus, it was held that Panacea Biotech Limited was not entitled to the exemption from custom duty.

However, in the case of Tamil Trading Corporation v Commissioner of Central Excise, Tuticorin – 2005-TIOL-1652-CESTAT-MAD the Tribunal took a view contrary to the view taken by the Tribunal in Panacea Biotech Ltd . In the said decision, the Tribunal, SRB Chennai held that in case of import of crude palm oil for manufacture of refined oil in the factory of job worker the benefit of Notification No.21/2002-Cus dated 1.3.2002 cannot be denied to the importer on the ground that the importer does not own the factory in which the imported goods have been used. The Tribunal held that the term ‘his factory' in Rule 3 of erstwhile Customs Rules, 1996 is to be interpreted to mean the factory where the importer wants to utilise the imported goods in terms of the Notification and ownership of factory cannot be insisted upon. The Tribunal also relied upon the Board's Circular dated 6.2.2002 which enables a manufacturer to send duty free goods received to another manufacturer having registration for carrying of repairs/re-conditioning etc. In the abovesaid Circular, the Board has clarified that the goods received duty free can be removed to another eligible manufacturer under the Central Excise (Removal of Goods under the Concessional Rate of Duty for Manufacture of Excisable Goods) Rules, 2001. However, the recipient manufacturer would require registration under Rule 3 of erstwhile Customs Rules, 1996.

In this regard Special Civil Application No.858/1998 was filed by M/s. Indon Healthcare Ltd before the Hon'ble High Court of Gujarat wherein the Hon'ble High Court vide Order dated 18.3.1998 held that loan-licensee or job workers are also a ‘manufacturer' within the meaning of Central Excise Act and Rules and the factory to be registered under Rule 3(1) of erstwhile Customs Rules, 1996 is only the factory in which the manufacturer intends to manufacture the finished goods and not "his own factory".

In light of the above decisions, it can be said goods imported by importer, being not a manufacturer, by availing of the exemption/concession subject to erstwhile Customs Rules, 1996 may be allowed to be transferred to a unit of loan-licensee or job workers, being a manufacturer, for undertaking specific processes, and under due intimations/permissions.

In shall be noted that vide Notification No.32/2016-Cus(NT) dated 1.3.2016 the erstwhile Customs Rules, 1996 were superseded and New Customs Rules, 2016 stands inserted to come in force w.e.f. 1 st March 2016.  As per Rule 2 of New Customs Rules, 2016, the provisions of these rules shall apply to an "importer, being a manufacturer," who intends to avail the benefit of an exemption notification issued under sub-section (1) of section 25 of the Customs Act, 1962 (52 of 1962) and where the benefit of such exemption is dependent upon the use of imported goods covered by that notification for the manufacture of any excisable commodity. 

In erstwhile Rule 2(1) of erstwhile Customs Rules, 1996 the expression "being a manufacturer" after the word ‘importer' was not in existence. 

Therefore, now under the garb of New Customs Rules, 2016 it shall be difficult to contend that the benefit should be allowed to an importer/trader who does not undertake any activity of manufacture on the subject imported goods and transfers the said imported goods to another manufacturer (loan-licensee or job workers) for undertaking the entire or partial manufacturing process.

Though, it can be argued the purpose of allowing benefit subject to New Customs Rules, 2016 is to promote manufacture of excisable goods in India and that shall be met even if the importer/manufacturer transfers the goods to a job worker or loan-licensee, it shall be highly prone to dispute.

Thus, how to overcome the restrictions put under New Customs Rules, 2016 in order to get the goods manufactured from loan-licensee or job workers even after fulfilling the procedures prescribed under said New Customs Rules, 2016 ???

In the wake of the above, it is hoped that the above chaos, confusion and ambiguity on the above issue will be clarified and the same will get settled by way of suitable and reasonable clarification by CBEC.

(The Author is Principal Associate in Lakshmikumaran & Sridharan and the views expressed are strictly personal.)