The Finance Ministry issued basic exemption Notification No. 25/2002-Cus dated March 01, 2002, wherein certain goods falling under chapter heading 82, 84, 85 and 90 of the First Schedule to the Customs Tariff Act, 1975 are exempt from payment of basic customs duty at the time of imports. For the purpose of availing this exemption, a manufacturer needs to fulfill the below mentioned conditions:
1. Imported goods must be used in the manufacture of finished goods which are specified in the said Notification; and
2. A manufacturer needs to follow the procedure given under Customs (Import of Goods at Concessional Rate of Duty for Manufacture of Excisable Goods) Rules, 1996 (hereinafter referred to as “IGCR”).
As per IGCR, a manufacturer is required to register and execute a bond with the Assistant / Deputy Commissioner of Central Excise and intimate the details of goods at each time of import of such goods. Registration Certificate shall contain details of goods to be imported and finished goods. Moreover, a manufacturer is also required to give an undertaking that the imported goods are to be used for intended purpose only.
Since only basic customs duty is exempted, a manufacturer needs to pay CVD, Education Cess, Secondary and Higher Education Cess and Special Additional Duty of Customs (SAD). A manufacturer can avail Cenvat Credit of CVD and SAD paid at the time of import of goods.
A manufacturer can import capital goods under the provisions of IGCR. However, a situation may come where a manufacturer is required to re-export the imported capital goods may be “as such” or after using for some period. In such a case, a manufacturer needs to obtain permission from the Assistant / Deputy Commissioner of Central Excise to re-export such capital goods. While giving re-export permission, it is observed that the Excise Department is asking such manufacturer not only to pay basic customs duty which was saved at the time of import along with interest but also to reverse Cenvat Credit availed on CVD and SAD paid.
Firstly, I wish to discuss on the issue of payment of basic customs duty along with interest:
Basic customs duty is chargeable at the time of removal of imported goods from the customs area. However, these duties are exempted in certain cases based on certain conditions. Some of such cases are given below for the purpose of analysis:
|EPCG||EPCG License||Fulfillment of value based export obligation within the prescribed period|
|Advance Authorization||Advance License||Fulfillment of value based export obligation within the prescribed period|
|Repairing or reconditioning||Bond||Export of such goods within the prescribed time|
|IGCR||Bond & IGCR Registration Certificate||Use of imported goods for manufacture of specific goods|
Rule 3 (2) of IGCR specifically states the particulars which are required to be mentioned in Registration Certificate in order to get the benefit of exemption. It is important to note that IGCR neither talks about specific limit of minimum value of goods to be manufactured nor the specific minimum period for which such imported goods to be used. Rule 3 (2) is reproduced below for your ready reference:
(2) The registration shall contain particulars about the name and address of the manufacturer, the excisable goods produced in his factory, the nature and description of imported goods used in the manufacture of such goods.
Further, I wish to bring your attention to Rule 8 of IGCR which talks about recovery of duty in certain cases. As per Rule 8 of IGCR, the Assistant / Deputy Commissioner of Central Excise has power to recover basic customs duty saved at the time of import only if it is found that the imported goods are not used by the concern manufacturer and / or such imported goods are not used for the intended / permitted purpose of manufacture. The relevant extract of Rule 8 of IGCR Rules is reproduced below for your ready reference:
RULE 8. Recovery of duty in certain case – The Assistant Commissioner of Central Excise or Deputy Commissioner of Central Excise shall ensure that the goods imported are used by the manufacturer for the intended purpose and in case they are not so used take action to recover the amount equal to the difference between the duty leviable on such goods but for the exemption and that already paid, if any, at the time of importation, alongwith interest, at the rate fixed by notification issued under section 28AB of the Customs Act, 1962, for the period starting from the date of importation of the goods on which the exemption was availed and ending with the date of actual payment of the entire amount of the difference of duty that he is liable to pay.
Thus, it can be seen that in this Rule, only two conditions are mentioned which are as under:
1. Goods imported are used by the manufacturer; and
2. Such imported goods are used for intended purpose.
Now assuming a situation where a manufacturer wishes to re-export the capital goods “as such”, in my opinion, such manufacturer needs to pay basic customs duty along with interest since such manufacturer does not fulfill the second condition. However, in other situation where a manufacturer wishes to re-export the capital goods after using for some period, then in my opinion, such manufacturer is neither required to pay basic customs duty nor interest. This is because IGCR neither talks about specific limit of minimum value of goods to be manufactured nor the specific minimum period for which such imported goods to be used. Once it is proved that such capital good was used only for intended purpose, then such manufacturer fulfills the second condition and therefore, there is no need to pay basic customs duty.
Secondly, with regard to reversal of Cenvat Credit availed on CVD and SAD paid at the time of import of machineries under IGCR, I wish to discuss the following:
As per Cenvat Credit Rules, 2004 (Cenvat Rules), when any capital goods are removed “as such”, then a manufacturer needs to reverse equal Cenvat Credit which was availed whereas when any capital goods are removed after use, then Cenvat Credit needs to be reversed after deducting deprecation @ 2.5% per quarter. However, Cenvat Rules do not specifically provide treatment of reversal of Cenvat Credit at the time of removal of capital goods to the local market or to export. Therefore, one needs to consider the provisions under Rule 19 of Central Excise Rules, 2002 which says that excisable goods can be exported without payment of duty. Excisable goods mean all the goods which are covered under the First Schedule to the Central Excise Tariff Act and therefore, capital goods are also excisable goods.
Further, in para 8 of MFDR Circular No. 345/2/2000-TRU dated 29.08.2000, it has been specifically mentioned that as per Rule 57AB (similar existing rule at that time) in a situation where capital goods are purchased and subsequently removed for export, then Cenvat Credit is taken on the same need not be reversed. Subsequently, these rules were replaced by Cenvat Credit Rules in the years 2001, 2002 and lastly 2004 however, principle remains the same. This can be supported by the Circular No. 816/13/2005-CX dated June 16, 2005 wherein it has been clarified that provisions of Rule 3(5) of Cenvat Credit Rules, 2004 shall apply to situations where when provisions of Rule 57AB of Central Excise Rules, 1944, or Rule 3(4) of Cenvat Credit Rules, 2001 or Rule 3(4) of Cenvat Credit Rules, 2002 were in force. Moreover, in the Trade Notice No. 16/C.EXCISE/VALUATION OF GOODS/2005, the Commissioner of Central Excise, Mumbai – II has specifically been mentioned that the provisions of Rule 57AB remains unchanged in Rule 3(5) of Cenvat Credit Rules, 2004.
Further, reliance can be placed in the case of Videocon International Ltd. v/s CCE, VADODARA-II reported in 2009 (235) ELT 135 (Tri. Ahmd.) wherein it was held that no excise duty is required to be paid when capital goods are cleared as such for export under bond. In a situation where capital goods are to be re-exported after use, then in my opinion, change in a situation should not affect while applying the ratio given in the case based on the ratio given by the Larger Bench of Hon’ble CESTAT in the case of Modernova Plastyles Pvt. Ltd. v/s CCE, Raigad reported in 2008 (232) ELT 29 (Tri. LB). In this case, the Larger Bench of Hon’ble Tribunal held that expression “as such” to be interpreted as commonly understood which is in the original form and without any addition, alteration or modification and therefore, the expression “as such” shall include removal of capital goods after use.
After discussing the above, I wish to conclude that
1. Basic customs duty is payable only when imported goods are not used for the intended purpose (i.e. manufacture of specified finished goods); and
2. Cenvat Credit which is availed on imported goods is not required to reverse when such goods are required to be re-exported under bond.
The issue discussed herein above is totally based on the law point of view and therefore, one may require to study and go through the facts of the case in order to apply the above legal provisions. Moreover, I personally feel that this issue happens in rare cases and therefore, open for discussion.
(Author is Manager – Indirect Taxes with a Practicing CA Firm and can be reached at Advocate.firstname.lastname@example.org )