EOU DTA Sales: Complexities, Rules and Implications Explained

Introduction: Export Oriented Units (EOUs) play a crucial role in India’s export-driven economy. These units enjoy several benefits, including exemptions from certain procurement duties, making them competitive in the global market. However, the introduction of the Goods and Services Tax (GST) in July 2017 brought about significant changes in how EOUs operate, particularly regarding Domestic Tariff Area (DTA) sales. In this article, we’ll delve into the complexities, rules, and implications of DTA sales by EOUs.

Notification No. 52/2003-Cus dated 31^st March, 2003 is the notification for 100% Export Oriented Units (EOU). This exempts the procurement duties for EOU units. After introduction of GST w.e.f 01^st July, 2017, the above notification has been amended vide Notification No. 59/2017-Cus dt.30^th June, 2017 wherein the exemption was restricted only to BCD, CVD and SAD. Realizing that IGST exemption has not been extended, a further amendment was made vide Notification No. 78/2017-Cus dt.10th Oct, 2017 to extend the exemption to cover IGST and Compensation cess also for the imports by EOU. However the exemption for IGST has been given till 31^st March, 2018. Thereafter vide a series of amendments, the exemption has been extended from time to time and finally vide Notification No.37/2022-Cus dt.30^th June, 2022 the exemption has been permanently given without any time limit.

Similarly vide Notification No.44/2016-Cus dt. 29^th July, 2016 read with Circular No.35/2016-Cus dt. 29^th July 2016 the warehousing and bonding of EOUs has been done away with. Later on amendments were made in Import of Goods at Concessional Rate of Duty or for Specified End Use (IGCR) in the year 2022 and Rule 5 has been specifically made applicable to EOUs. Of course, without following Rule 4, EOU cannot follow Rule 5. Now EOUs are following the IGCR Rules and the procedures thereof. The relevant Circular No. 10/2021-Customs dt.17^th May, 2021.

The issue on hand is now is how to go about for DTA sale by an EOU. This involves two aspects:

1. Sale of finished goods

2. Sale of goods as such – can be inputs or capital goods

For the sale of finished goods, the FTP 2023 states as under

6.07 DTA Sale of Finished Products/Rejects/ Waste/Scrap/Remnants and By- products: Entire production of EOU/EHTP/ STP/BTP units shall be exported. However, the following are allowed as exceptions subject to the conditions specified.

(a) (i) Units, other than those of gems and jewellery may sell finished goods manufactured by them as specified in LoP (including by-products, rejects, waste and scraps arising in the course of production, manufacture, processing or packaging of such goods) which are freely importable under FTP in DTA, subject to fulfillment of positive NFE, on payment of excise duty, if applicable, and/ or payment of GST and compensation cess along with reversal of duties of Custom leviable under First Schedule to the Customs Tariff Act, 1975 availed as exemption, if any on the inputs utilized for the purpose of manufacturing of such finished goods (including by-products, rejects, waste and scraps arising in the course of production, manufacture, processing or packaging of such goods). No DTA sale shall be permissible in respect of, pepper & pepper products, marble and such other items as may notified from time to time. This reversal of Customs Duty would be as per prevailing SION norms or norms fixed by Norms Committee (where no SION norms are fixed).

The provisions under Hand Book of Procedure 2023 are as under:

6.14 DTA Supplies: Notwithstanding provision of DTA sales in Paragraph 6.07 of FTP, such DTA sales shall not affect application, to any goods, of any other prohibition or regulation affecting import thereof in force at the time, when such goods are imported. This also does not confer any immunity, exemption or relaxation at any time from any commitment or compliance with any requirements to which importer may be subject to under other laws or regulations.

It is very clear that there is no separate provision made for the sale of goods as such in either the FTP or HBP.

Reference is also invited to the Circular No.29/2017-Customs dt.17th July, 2017 while on the topic of inter unit transfer, it has been clarified vide Para 3 as under:

(iv) The inter unit transfer would be on invoice on payment of applicable GST taxes. However, such transfer would be without payment of custom duty. The supplier unit will endorse on such documents the amount of custom duty, availed as exemption, if any, on the goods intended to be transferred. The recipient unit would be responsible for paying such basic customs duty, as is obligated under Notification no. 52/2003-Cus dated 31-3-2003 (as amended), when the finished goods made out of such goods or such goods are cleared in DTA. The circular no. 35/2016 –Custom dated 29-7-2016 would stand amended to the extent that no procurement certificates would be required for inter- unit transfer.

Vide Bangalore Customs Public Notice 25/2021 dt.27^th May, 2021 detailing the SOP to be followed by EOUs, it has been clarified as under:

8. Domestic Tariff Area (DTA) sale: 8.1. The EOUs are entitled to sell finished goods (subject to restrictions in FTP) in OTA subject to reversal of customs duty, availed as concession at the time of imports along with the payment of IGST. The duties and cess to be reversed will be those as provided in para 6.08 of FTP. The reversal of customs duty is based on the duty foregone on inputs that have gone into the production of such finished goods. DTA sale shall be subject to fulfilment of the following main four conditions: I. Net Foreign Exchange fulfilment: II. Payment of applicable GST on product under DTA sale: III. Reversal of the BCD exemption IV. Refund of any benefits taken (including those mentioned in Para 6) 8.2. The Importer who has cleared the goods in DTA is required to give an intimation to AC/DC of EPC in the format enclosed to this PN(In addition, Permissions if required from various authorities, including from customs, for DTA sales as per FTP 2015-20, HBP and relevant APPENDIX may be obtained). The reversal of customs duty shall be remitted under TR6 Challans duly counter signed by the Superintendent/Inspector at the jurisdictional export promotion cell. However, on a case-to-case basis, subject to requirements of banks regarding process of manual challan, Assistant Commissioner/Deputy Commissioner may allow importers, intimation by way of, sending the scanned copies of TR6 Challans (with bank seal) along with the copies of Demand Draft/ Cheque by mail. The data in the intimations, to be submitted before the submission of Form-A for the relevant month, will have to be reconciled with the Form-A figures and in case of discrepancies, the customs authorities may call for documents to verify the same and units should be able to produce documents that will enable the department to reconcile thee-way bills generated and DTA sales. All DTA sales transactions are to be invariably reported in the monthly return in Form A along with duty paid particulars.

(Reference: Para 6.08 of FTP 2015-20 read with Notification No. 52/2003 Cus dated 31.03.2003, as amended)

9. Inter-unit transfer 9.1. Inter-unit transfer of manufactured and capital goods from one EOU unit to another EOU / SEZ unit is permitted in terms of Para 6.13 of the FTP. Sale of unutilized goods is also allowed from one EOU to another EOU / SEZ unit in terms of Para 6.15 of FTP. The inter unit transfer can also be under the cover of a tax invoice or delivery challan along with payment of GST as applicable. However, such transfer would be without payment of custom duty. The supplier unit will endorse on such documents the amount of custom duty, availed as exemption, if any, on the goods intended to be transferred. The recipient unit would be responsible for paying such basic customs duty, as is obligated under Notification no. 52/2003-Cus dated 31-3-2003, when the finished goods made out of such goods or such goods are cleared in DTA. The Units making inter-unit transfer or supplier are required to furnish the prior intimations to the jurisdictional EPC.

(Refer Circular No.29/2017 Customs date 17.7.2017 & 35/2016 Cus dated 29.7.2016)

DGFT has issued FAQ post introduction of GST on the various queries of EOU and vide Question No.

10. Will the exemptions, available to 100% EOUs & SEZs in the pre GST regime would continue ?, it has been clarified as under:

(iii) DTA sale DTA sale shall be subject to fulfillment of the following conditions:

• • fulfillment of positive NFE
  • payment of applicable GST on product under DTA sale
  • Reversal of the BCD exemption availed on the inputs used in the manufacture of products under DTA sale. The reversal of BCD would be as per Standard Input Output norms published by the DGFT or norms fixed by Norms Committee of DGFT(where no SION is fixed).
  • Refund of any benefits taken on procurement of inputs from DTA under Chapter 7 of FTP and used in the manufacture of products under DTA sale.

(iv) Inter Unit Transfers 4 Supply of goods from one EOU to another EOU (inter-unit transfer) will require payment of applicable GST. The BCD exemption availed on inputs by the supplier EOU, utilized in such transferred goods would have to be reversed by the recipient EOU at the time clearance of such goods in DTA. Same provisions apply on sending of Goods for Job work.

From all the above references, it is concluded that in case of sale of finished goods from an EOU to DTA, the EOU has to compute the prorated BCD and SWS on the imported inputs that have gone into the manufacture of the finished goods exported and the same has to be reversed vide TR-6 challan and GST has to be charged on the sale consideration on forward charge while issuing sale invoice to the DTA customer.

In the case of sale of unused/partially used raw materials also, the same method is being followed by the trade. They will compute the BCD and SWS to be reversed vide TR-6 challan and GST is charged on forward basis on the output sale invoice issued to the DTA customer.

But the revenue authorities in the EPD cell, who are the jurisdictional authorities for EOU are insisting that in the case of sale of imported raw materials as such, EOU unit has to pay back not only BCD, SWS vide TR-6 challan, they need to pay back the IGST also as part of import duties which were exempted to them based on the procurement certificate issued to them. But such insistence was not there in the case of sale of finished goods, though for manufacture of such finished goods sold, the raw materials could have been procured by availing exemption of BCD, SWS and IGST based on the procurement certificate. The insistence for accounting back the IGST exempted is only in the case of sale of imported raw materials as such into DTA.

Earlier the revenue did not object when an assessee has availed ITC on the basis of duties paid on TR-6 challan though the same is not one of the documents notified under Sec 16(2)(a) of CGST Act, 2017 as they were under the impression that the same is one of tax paying documents. The relevant section is as under:

• he is in possession of a tax invoice or debit note issued by a supplier registered under this Act, or such other tax paying documents as may be prescribed ;

However no such corresponding understanding is available in the CGST Rules, 2017 wherein the bill of entry has been mentioned as one of the documents for availing the ITC under Rule 36 (1) (d), which states as under:

(d) a bill of entry or any similar document prescribed under the Customs Act, 1962 or rules made thereunder for the assessment of integrated tax on imports;

It would be difficult to consider TR-6 challan as any similar document on par with Bill of entry for the revenue authorities. The fact is that even after the assessment or reassessment of Bill of Entry, the import duties are paid on the basis of TR-6 challan only. Hence the evidencing the payment of import duties, invariably one has to go through the TR-6 challan procedure only even after BoE assessment.

Now vide Circular No.16/2023-Customs dt.07^th June, 2023 while clarifying the ITC availment in case of AA holders, CBIC in para 5.1 held as under:

• Under GST Law, the BE for assessment of integrated tax/compensation cess on imports is one of the documents based on which the input tax credit may be availed by the registered person. ATR-6 challan is not a prescribed document for the purpose.

This has given a shot in arm for the jurisdictional GST authorities now to deny the IGST if reversed on the TR-6 challan as mandated by the EPD authorities in the case of DTA sale of imported raw materials as such by the EOU units, as re-assessment as suggested as an alternative in the above cited circular is not possible in all the scenarios as the raw materials offered for sale in DTA can be remnant goods imported against a bill of entry after partially using some quantity by the EOU. If the entire lot imported against a Bill of entry are offered for sale in DTA, there is a possibility for seeking the re-assessment of bill of entry by requesting for full payment of import duties, but partial re-assessment of bill of entry is not possible.

Moreover reassessment also comes with its own issues like seeking approval from higher authorities as the goods were already issued with Out of Charge (OOC) from Customs and to recall the bill, permission is needed from higher authorities and is a cumbersome process also. Then there is an issue of time limit for seeking such re-assessment also, though Sec 149 of Customs Act, 1962 which is reproduced hereunder does not specify any time limit, the field formations refuse to entertain such requests.

Section 149. Amendment of documents. –

Save as otherwise provided in sections 30 and 41, the proper officer may, in his discretion, authorise any document, after it has been presented in the custom house to be amended in such form and manner, within such time, subject to such restrictions and conditions, as may be prescribed:

Provided that no amendment of a bill of entry or a shipping bill or bill of export shall be so authorised to be amended after the imported goods have been cleared for home consumption or deposited in a warehouse, or the export goods have been exported, except on the basis of documentary evidence which was in existence at the time the goods were cleared, deposited or exported, as the case may be.

Provided further that such authorisation or amendment may also be done electronically through the customs automated system on the basis of risk evaluation through appropriate selection criteria:

Provided also that such amendments, as may be specified by the Board, may be done by the importer or exporter on the common portal.

The other important issue needing clarity is the period for payment of interest. As per the notification no.52/03-Cus as amended, when the goods are offered for sale in DTA there is need to charge interest from the date of import to the date of such clearance. But no such provisions are available from the FTP, HBP provisions. As per the Rule 10 of the IGCR Rules, 2022 interest need to be paid. The rule is as under:

(3) The importer who intends to clear unutilised or defective goods for home consumption shall have an option of voluntary payment of applicable duty along with interest on the common portal and the particulars of such clearance and the duty payment shall be recorded by the importer in the monthly statement.

Here it is due to business exigency that the goods are not put to intended use and hence are being cleared in DTA. Hence there cannot be any demand for interest in such a case.

The other issue is under GST, there is no provision for reversal of balance ITC in case of sale of goods as such at a lower rate. To illustrate, when a product is purchase at INR 100 with 18% GST, the ITC available is INR 18. When the same product is sold for INR 150, the GST payable is INR 27, wherein the ITC of INR 18 and additional cash of INR 9 from the value addition would be utilized for discharging the output GST liability. In the other case, when the product is sold for INR 50, the GST payable is only INR 9. There is no provision demanding the reversal of INR 9 saved on the ITC availed under GST in such a case. But in most of the sale to DTA cases by EOU, the authorities are insisting that the GST reversal should be equal to or more than the IGST paid as part of import duties.

Hence there is an urgent need for the authorities to clarify on the below issues in order to have certainty for the trade:

1. Whether there are two methods for sale of goods by EOU to DTA, wherein only prorated BCD, SWS need to be reversed on TR-6 challan in the case of finished goods and BCD, SWS, IGST need to be reversed in the case of sale of imported goods as such and in both the cases again, IGST need to be charged on forward charge basis for sale in DTA

2. Whether in the case of reversal of IGST on the basis of TR-6 challan, whether ITC can be availed

3. Whether interest need to be paid in all such cases from the date of import till date of sale in DTA

4. Whether the sale can be for any value and whether the ITC saved need to be reversed in such cases

These kinds of confusions can be avoided if the EOUs are also having an online portal on the lines of SEZ Online or ICEGATE for undertaking their transactions so that the standard operating systems could have been implemented. There is a study which was undertaken at the field level for system integration of EOUs with ICEGATE but no further steps could be seen being implemented till date.