By TIOL News Service

KOLKATA, OCT 06, 2017: BY an order in original, the Assistant Commissioner of Customs rejected the claim of drawback primarily on the following grounds-

(i) M/s. Kariwala Green Bags, Falta Special Economic Zone and Kariwala Industries Ltd., Falta Special Economic Zone were not the same entity in the Zone.

(ii) The goods procured by M/s. Kariwala Green Bags cannot be termed as raw material for Kariwala Industries Ltd. and there had been violation of rules 22(2) and 34 of the Rules. The raw materials were procured by M/s. Kariwala Green Bags but the finished goods were manufactured and exported by Kariwala Industries Ltd.

(iii) Submission of shipping bills with the exporter as Kariwala Industries Ltd. but with the particulars of letter of permission of M/s. Kariwala Green Bags was a mis-declaration of facts constituting violation of section 50(2) of the Customs Act, 1962.

(iv) Payment from current account by conversion into foreign currency was not in accordance with rule 30(8) of the Rules, which required payment from a foreign currency account and as such there had been violation of section 75 of the Customs Act, 1962.

The Commissioner (Appeals) allowed the appeal by accepting the contention of the writ petitioner that the different Units of the petitioner cannot be treated as different entities;that since the finished goods were exported and export proceeds had been realized, drawback cannot be denied.

The respondent Revenue preferred a revisional application and the Joint Secretary reversed the order of the Commissioner (Appeals).

This order dated May 28, 2013 has been challenged in the instant writ petition.

The following two questions arise for consideration in the facts of the instant case -

(i) Whether there was violation of Rules 22(2) and 34 of the Rules because according to the Customs Authorities, the duty paid raw materials were brought into one unit in the Zone but finished goods were manufactured and exported from another unit in the Zone?

(ii) Whether there was violation of Rule 30(8) of the Rules because payment for the duty paid raw materials in foreign currency was made from a current account and not a foreign currency account?

The High Court extracted the relevant rules and inter alia observed -

++ It is not the case of the Customs Authorities that the duty paid raw materials brought into the zone were used otherwise than for manufacture of goods which were exported. If the Customs Authorities were not satisfied that the materials were so used, they would have demanded duty from the writ petitioner as provided under Rule 34 (of Special Economic Zone Rules, 2006). The said Rule has been invoked by the Customs Authorities in the instant case not for demanding duty but because, according to them, the raw materials brought into one unit cannot be treated as raw materials of another unit in the same zone.

++ However, if one looks at the proviso to Rule 34 carefully, one would find that the said proviso itself contemplates of transfer of goods from one unit to another in the same zone without payment of duty. Rule 30(15) also provides for transfer from one unit to the another in the same zone without filing of any Bill of Entry.

++ The finding of the revisional authority regarding non-maintenance of records which would demonstrate utilization of raw materials brought into Unit-III by another Unit of the writ petitioner in the same zone is not in consonance with the findings in the Order-in-Original.

++ Even if the three Units in the zone did not maintain separate accounts or that there was intermingling of accounts of different Units, assuming that the raw materials brought into Unit-III, i.e., Kariwala Green Bags, were utilized in the manufacture of goods in another Unit of the writ petitioner in the zone and exported therefrom, this was permissible since Rule 30(15)(v) and the proviso to Rule 34 of the said Rules permit inter-unit transfer.

++ Sub-section (2) of section 26 provides for the manner in which the Central Government may prescribe the terms and conditions subject to which, the exemptions, concessions, drawback or other benefits shall be granted to the developer or entrepreneur under sub-section (1).

++ The Rule containing the terms and conditions adverted to in sub-section (2) of section 26 of the SEZ Act is Rule 22 of the said Rules. The said Rule 22 provides for the terms and conditions for availing exemptions, drawbacks and concessions to every developer and entrepreneur for authorized operations. There is no provision in the said Rule 22 which stipulates payment for goods procured from Domestic Tariff Area from a Foreign Currency Account.

++ Sub-rule (8) of Rule 30 of the said Rules …makes it clear that payment from Foreign Currency Accounts is a matter of procedure only. It is the admitted position that at the material period the writ petitioner did not maintain a Foreign Currency Account. However, it can be said that the writ petitioner substantially complied with the requirements of Rule 30(8) by making payment in foreign currency. The export proceeds of Unit-III received in foreign currency were credited to a current account from which payment was made.

++ The writ petitioner was, in fact, granted drawback for other periods where payment in foreign currency was made from the same current account which was not a Foreign Currency Account. The fact that the concerned respondent authorities granted drawback for other periods during which payment was made in foreign currency from the same current account and not a Foreign Currency Account, by itself, will clearly demonstrates that the provisions of Rule 30(8) of the said Rules are not mandatory in nature and substantial compliance has been accepted by the respondent authorities in the past.

++ The Customs Authorities have referred to Regulation 6A of the Foreign Exchange Management (Foreign Currency Accounts by a person resident in India) (Third Amendment) Regulations, 2002. The language of the said Regulation makes it clear that a unit located in a Special Economic Zone "may open, hold and maintain a Foreign Currency Account…." (emphasis supplied).

++ As such, it would be apparent that Regulation 6A does not make it mandatory for a unit located in a Special Economic Zone to open a Foreign Currency Account. If such a unit chooses to open a Foreign Currency Account as provided under Regulation 6A, it has also to comply with the other requirements provided under the said Regulation; such as credit of all foreign exchange funds received by the unit into such account, etc.

++ Regulation 6A is only an enabling provision whereby a unit in a Special Economic Zone is permitted to open a Foreign Currency Account - if it so chooses - subject to the compliance of the conditions as stipulated therein. Simply because a unit has not opened a Foreign Currency Account as provided under the said Regulation, neither realization of the export proceeds become invalid nor can the actual receipt of foreign currency be either ignored or dismissed.

The Writ Petition was allowed by setting aside the Revisional order dated 28th May, 2013 with a direction to allow the drawback claim of the writ petitioner - as applicable - preferably within a period of six weeks.

(See 2017-TIOL-2110-HC-KOL-CUS)