Receipt of foreign currency plays a very vital role in development of the economy of any of the country and therefore, many of the countries maintain foreign exchange reserves in order to meet international payment obligation including sovereign and commercial debts, financing imports etc. As we all are aware, foreign currency can be generated through exports and therefore, in order to encourage more and more exports, the Government of India has provided various schemes and tax incentives on export of goods. By using such tax incentives, the selling price of the export goods gets reduced and thereby such export goods becomes compatible in the foreign market. Accordingly, Indian goods get more demand in the foreign market and thereby foreign currency can be generated.
By keeping the above intention in the mind, the tax law makers have drafted various procedures, conditions and documentation in order to satisfy export requirements and thereby exporters can enjoy export benefits in India.
Now, coming back to the main subject of central excise, Government of India has given two options under Rule 18 and Rule 19 of Central Excise Rules, 2002. These options are as under:
Accordingly, based on the above two Rules, the Government of India has issued Notification No. 41/2001-CE (NT) and 42/2001-CE (NT), both as amended from time to time, wherein detailed terms, procedures and documentations are provided for enjoying excise duty benefits. As per these Notification, any goods exported to all the countries, except Nepal and Bhutan, were eligible for all the export incentives / benefits. Therefore, any export to Nepal was not eligible for export benefits.
However, Indian Government entered into Treaty with Nepal Government for the purpose of smooth trading. Based on this Treaty, excise notification no. 26/2011-CE(NT) is issued wherein it was amended that export benefits will also be available even when goods are exported to Nepal. (in the original notification, the wordings were “export to all the countries, except Nepal and Bhutan”. In the amended notification, the word “Nepal” has been omitted and now we can read as “export to all the countries except Bhutan”). Thus, from 1st March 2012 onwards, all the export benefits are available to exports made to Nepal.
Now the question remains that if export is made to Nepal in Indian Rupee (INR) then whether excise duty benefits continues to be available to the manufacturer-exporter taking into consideration the intention of the Government as discussed in the first paragraph. This is because, as a normal practice, when a manufacturer export his goods, he needs to submit proof of export such as EP copy of Shipping Bill, Bill of Lading, ARE-1 Form etc. I have observed that along with these documents, excise officers also demand Bank Realization Certificate (BRC) as a proof of receipt of foreign currency. I have seen some cases, where duty was demanded for non-submission of BRC. In this connection, it is important to note that none of the Rules 18 or Rule 19 of Central Excise Rules, 2002 or the above said Notifications provides a condition to receive foreign currency in order to enjoy excise duty benefits. More importantly, the CBE&C has issued a Circular bearing number 961/04/2012-CX dated 26th March 2012, wherein in the 3rd para, it has been clarified that export to Nepal will continue to be permissible even when the export proceeds are paid in Indian Rupees as long as payment proceeds are in accordance with applicable RBI guidelines. Text of para 3 of the Circular is reproduced below for your ready reference:
Thus, considering the above referred Circular, excise duty benefit will be available to the manufacturer-exporter even if goods are exported against INR.
Now, let’s discuss the second issue i.e. whether excise benefits are available when goods are exported without having any commercial value i.e. Free of Cost (FOC).
As mentioned in my above discussion, none of the Rules 18 or Rule 19 of Central Excise Rules, 2002 or the above said Notifications provides a condition to receive foreign currency in order to enjoy excise duty benefits. The only condition to fulfil is that the manufactured goods to be exported within a period of six months from the date of removal from the factory of manufacturer. Now it is important to understand as to which point of time goods can be treated as “exported”. The term “export” is not defined under Excise Rules and therefore, we need to refer the definition of the term “export” under Section 2(18) of the Customs Act, 1962. The definition is reproduced below for your ready reference:
(18) “export”, with its grammatical variations and cognate expressions, means taking out of India to a place outside India;
It is important to note that the term “India” is also defined under Section 2(27) of the Customs Act, 1962 which is reproduced below for your ready reference:
(27) “India” includes the territorial waters of India;
Territorial waters means water measuring upto 12 nautical miles (approx. 22.2 km) from the Indian land. Thus, after the combine reading of the above two definitions, one can say that goods can be treated as “exported” only when such goods cross the 12 nautical miles from the Indian land.
Considering the above definitions and scope related to the term “export”, the Hon’ble Supreme Court, in the case of UOI v/s Rajindra Dyeing and Printing Mills Ltd. reported in 2005 (180) ELT 433 (SC) held that a ship destroyed in an accident which took place within territorial waters of India and therefore, goods cannot be treated as “exported” out of India. In another case, the Hon’ble Supreme Court, in the case of CC, Culcutta v/s Sun Industries – reported in 1988 (35) ELT 241 (SC) held that the words and phrases “taking out to a place outside India” means any place beyond territorial waters of India including High Seas.
As mentioned in my earlier discussion, none of the Rules and Notifications puts any condition to receive foreign currency in order to enjoy excise duty benefit on export of goods. The only condition is that goods to be exported within six months. It is important to note here that receipt of foreign currency is a “must” condition in order to apply for duty drawback under Customs which is expressly provided in the Customs law and Foreign Trade Policy.
Thus, after considering the clear “absence” of condition of receipt of foreign currency under central excise laws, CBE&C Circular No. 961/04/2012-CX dated 26th March 2012 and clear understanding of the point of time when goods can be treated as “exported”, one can conclude that realization / receipt of foreign currency is not a condition to enjoy excise duty benefit in case of export of goods. Therefore, export of manufactured goods made on FOC basis will also eligible for excise duty benefits.