Introduction:-
The Export Oriented Units (EOUs) scheme is introduced in the early 1981. It adopts the same production regime but offers a wide option in locations with reference to factors like source of raw materials, ports of export, availability of technological skills, existence of an industrial base and the need for a larger area of land for the project.
100% export oriented units fall into 3 categories:
(a) The export oriented units established anywhere in India and exporting 100% products except certain fixed percentage of sales in the domestic tariff area as may be permissible under the policy.
(b) Units in free trade zones in special economic zones and exporting 100% of their products.
(c) The export oriented units set up in software technology parks and electronic hardware technology parks of India for development of software & electronic hardware.
The export oriented units scheme covers manufacturing/processing and services. The export oriented units scheme’s main thrust is to boost and attract sector specific exports from all parts of India having huge potential near to raw material source. The scheme has undergone several changes over a period and the present policy parameter is most liberalised and conducive to the entrepreneur for setting up its export oriented unit.
The export oriented units are entitled to full reimbursement of central sales tax paid by them on purchase from domestic tariff area units, when goods are used by them for production of finished goods meant for export. Accordingly, reimbursement of central sales tax on inputs used in goods meant for domestic tariff area sale by export oriented units is not admissible. In addition, even on exported goods where foreign exchange has not been realised, central sales tax benefit received by export oriented units are recoverable.
Here Examples are as follows:
M/s. Thomson Press (I) Ltd. Noida was reimbursed central sales tax (CST) amounting to Rs.16.94 crore on raw materials/consumables procured and utilised by them in entire production during 2001-02 to 2004-05. As this unit cleared 62 per cent of its finished product in DTA, it was not eligible for reimbursement of central sales tax (CST) to the extent of Rs.10.45 crore allowed on such DTA sales.
M/s. Pacific Cotspin Ltd. (Kolkata Air) had procured raw materials i.e. cotton from DTA on which periodical reimbursements of central sales tax (CST) were made, to full extent as applied by the unit. Scrutiny of records revealed that the unit had made DTA sale of Rs.145.75 crore, during the period 1997-98 to 2004-05. Reimbursement of central sales tax (CST) on raw material used for production of goods sold in DTA was not in line with the provisions of the Exim Policy. This resulted in excess reimbursement of CST of Rs.3.22 crore.
We ‘ll discuss the topic in more detail in coming paras-
Constitution regulations:
Entry 54 of the Constitution of India, Seventh Schedule, State List becomes relevant. It entitles the State Legislature to enact Sales Tax Act under Entry 54 of the Concurrent list. As per the said entry, the State Legislature would be competent to tax sale or purchase of goods, which takes place within its territory for the purpose of being utilized in the same State territory. Thus, export and import of goods governed by the EXIM policy by export oriented units functioning under the said policy have nothing to do with the sales tax net of Act, 1969 enacted as per Entry 54 aforesaid. Any attempt by the taxing authority to bring such transactions inter-se export oriented units of goods which ultimately get exported out of the State when earlier stored in the same bonded warehouses and which may get further processed by export oriented units would be totally ultra virus the legislative scheme of the Act and if the provisions of the Act, 1969 are considered as covering such transactions, then, the provision itself would become ultra virus Entry 54 of the Constitution and the state Legislature would be treated to be incompetent to touch such transactions for bringing them within the network of State Sales Tax.
Further to above the general principle of inter-se transaction between export oriented units under the EXIM policy, one important aspect of the matter will also have to be kept in view. Section 87 of the Act, 1969 reads as under:
Sec. 87. Certain sales and purchases not to be liable to tax.
Nothing in this Act or the rules made there under shall be deemed to impose or authorise the imposition of a tax on any sale or purchase of any goods, where such sale or purchase takes place –
(i) in this course of inter-State trade or commerce, or
(ii) outside the State, or
(iii) in the course of the import of the goods into the territory of India or the export of the goods out of such territory, and the provision of this Act and the said rules shall be read and construed accordingly.
Explanation – For the purpose of this section whether a sale or purchase takes place –
(a) in the course of inter-State trade or commerce, or
(b) outside the State, or
(c) in the course of the import of the goods into territory of India or export of the goods out of such territory.
shall be determined in accordance with the principles specified in section 3, 4 and 5 of the Central Sales Tax Act, 1956 (LXXIV of 1956).
Foreign Trade Policy- CST:- ,
According to para 6.11 (c) (i) of the foreign trade policy (FTP), export oriented units are entitled to reimbursement of central sales tax on goods manufactured in India. Thus, the only condition in foreign trade policy (FTP) is that the goods must have been manufactured in India.
Analysis for Foreign Trade Policy-CST:-
Before September 16, 2008, condition for grant of central sales tax (Annexure) refund, in para 2(a) of Appendix-14-I-I of the Handbook of Procedures, Vol. 1 (HB-1), said that the supplies from the domestic tariff area to EOU/EHTP/STP units must be utilised by them for production of goods meant for export and/or utilised for export production. Based on these wordings, the central revenue audit alleged that the central sales tax refunds granted in respect of inputs procured from the domestic tariff area used in the manufacture of goods cleared into the domestic tariff area are improper, and that even the central sales tax refunds granted in respect of inputs procured by any export oriented units from another export oriented units are incorrect.
On September 16, 2008, the said condition was amended through Public Notice no. 81/2008, stating that the supplies from the domestic tariff area to EOU/EHTP/STP units must be utilised by them for production of goods and services. Apparently, the DGFT realised that restrictions regarding use of inputs procured from domestic tariff area only for export production was inconsistent with the provisions of foreign trade policy (FTP) and so amended the said condition to prescribe only utilisation in the export oriented units, whether for exports or for clearances into domestic tariff area. However, the said amendment was not explicitly given retrospective effect.
Case Digests:
In under mention cases i.e.:
• CCE Vs. Mysore Electricals Ind. Limited [(2006) 204-ELT-517 (SC)].
• Suchitra Components Limited Vs. CCE [(2007) 208-ELT-321 (SC)].
Supreme Court held that beneficial circular has to be applied retrospectively while an oppressive circular has to be applied prospectively and that when the circular is against the assessee, they have a right to claim the enforcement of the same prospectively.
Latest Event:
Latest event export-oriented units in Gujarat have a new problem. The development commissioner, Kandla, has asked the units to return the Central Sales Tax refunded to them, on the basis of objections raised by the Central Revenue Audit team from Ahmedabad. The Central Revenue Audit cannot be faulted because the wordings of the condition do restrict the Central Sales Tax facility to supplies from Domestic Tariff Area only and before September 16, 2008, the goods procured on Central Sales Tax payment had to be used for export production only. It is for the Director General of Foreign Trade to sort out the mess caused by faulty drafting of the conditions for grant of Central Sales Tax refund.
The best way forward is to issue a public notice recognising retrospective effect to the beneficial and clarificatory public notice no. 81/2008 dated September 16, 2008. He should also issue another public notice stating that the Central Sales Tax refund will be granted for procurement by an export-oriented unit from another export-oriented unit also and conceding retrospective effect to that public notice also.
Conclusion:-
Export-oriented units can contest the directive of development commissioner to return the Central Sales Tax refunded on grounds that the restrictions prescribed by the Director General of Foreign Trade cannot override the Foreign Trade Policy provisions that allow Central Sales Tax refund on all goods manufactured in India, without any distinction between goods procured from any other export-oriented units and Domestic Tariff Area. They can also contend that reading the conditions prescribed by Director General of Foreign Trade harmoniously with the Foreign Trade Policy (FTP) and based on the principles upheld by the courts that beneficial amendments must be given retrospective effect, the Public Notice no. 81/2008 dated September 16, 2008, should apply for procurements before the date of that public notice. They can also say all goods manufactured in export-oriented units (EOUs) are meant for export, even if they are not exported physically.
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Annexure:
PROCEDURE TO BE FOLLOWED FOR REIMBURSEMENT OF CENTRAL SALES TAX (CST) ON SUPPLIES MADE TO EXPORT ORIENTED UNITS (EOUS) AND UNITS IN ELECTRONIC HARDWARE TECHNOLOGY PARK (EHTP) AND SOFTWARE TECHNOLOGY PARK (STP) (Please see Para 6.11(c)(i) of FTP)
Note: Please see paragraph 6.11(c)(i) of the Chapter 6 of Foreign Trade Policy
1. The procedure given hereunder shall be applicable for reimbursement of Central Sales Tax. 2. The Export Oriented Units (EOUs) and units in Electronic Hardware Technology Park (EHTP) and Software Technology Park (STP) will be entitled to full reimbursement of Central Sales Tax (CST) paid by them on purchases made from the Domestic Tariff Area (DTA), for production of goods and services as per EOU Scheme on the following terms and conditions: (a) The supplies from DTA to EOU/EHTP/STP units must be utilised by them for production of goods/services and may include raw material, components, consumables, packing materials, capital goods, spares, material handling equipment etc. on which CST has been actually paid by the EOU/EHTP/STP. (b) While dealing with the application for reimbursement of CST, the Development Commissioner or the designated officer of EHTP/STP shall see, inter alia, that the purchases are essential for the production of goods/services by the units. (c) For payment of interest in accordance with para 6.11 (c) (i) of FTP, separate application for claiming interest is not required and a single cheque for main claim and interest can be issued to the claimant. However, separate account will be maintained by Development Commissioner of Special Economic Zones for the amount of interest disbursed by them. 3. The procedure to be followed in this regard is indicated hereinafter and shall be strictly adhered to: Procedure: (i) The unit shall present its claim for reimbursement of CST in the prescribed form (Annexure – I) to the Development Commissioner of the SEZ concerned or the designated officer of the EHTP/STP. (ii) As soon as the goods are received by the EOU/EHTP/STP unit in its premises it will be entered in the material receipt register kept for the purpose. The register must show the details of goods, quantity, the source of purchase and the ‘C’ Form against which purchase is made, etc. which will be subject to periodical check by the authorised staff of the Zone/Customs administration. A Chartered Accountant’s certificate regarding the verification of the materials receipt register relevant to the claim as at Annexure – II shall be submitted alongwith the claim. (iii) The reimbursement of CST shall be admissible only to those units who get themselves registered with the Sales Tax authorities in terms of Section 7 of the CST Act, 1956 read with (Registration and Turnover) Rules, 1957 and furnish a Photostat copy of the Registration Certificate issued by the Sales Tax authorities to the Zone office concerned for keeping it in the relevant file. (iv) Claims shall be admissible only if payments are made through the bank accounts maintained by EOU/EHTP/STP unit or DD emanated from its accounts. (v) The claim shall be submitted along with the following documents: a) Chartered Accountant’s Certificate, meeting the following criteria, certifying receipt of the goods as shown in Annexure-II in the bonded premises, scrutiny of original invoice/bill of the supplier and proof of payment against each invoice/bill and its reconciliation with ‘C’ Form. In case of IT enabled services (ITES)/Business Process Outsourcing (BPO) units, reconciliation with ‘C’ form will not be necessary as they are not eligible for issue of ‘C’ form.
(i) In case of units located in the States of J&K, Orissa, North-Eastern States, Andaman and Nicobar islands and Lakshadweep, the Chartered Accountant firm should be at least a Sole Proprietorship firm who should be an FCA and engaged full time with the firm. (ii) In case of partnership Chartered Accountant firms located in the regions indicated in (i) above, should have at least two full time partners, one of whom should be an FCA. (iii) In case of units located in other regions, the partnership Chartered Accountant firms should have at least one full time partner, who should be an FCA. (iv) For the regions indicated in (i) above, the Chartered Accountant firm be located in the area where the unit is situated otherwise qualification of (iii) shall apply. b) Photostat copy of C Form except in case of IT enabled Services (ITES)/Business Process Outsourcing (BPOs) Units, issued by the EOU/EHTP/STP to the supplier in the DTA with reference to the counterfoil produced by the unit. The counterfoil of C form will be returned to the unit after making suitable endorsement like ‘cancelled/CST reimbursed’ duly signed by the authorised officer of the Zone administration. While making the endorsement only, the items for which CST has been reimbursed should be indicated as cancelled and the Photostat copy will be retained by the officer for keeping in respective file. In the event of the same `C’ form being used again, the verification could be done at the time of scrutiny from the self-attested photocopies. The firm must indicate the file No. on which the original stands submitted. (vi)The reimbursement will be limited to the payment of CST against C Form only except in case of IT enabled services (ITES)/Business Process Outsourcing (BPO) units. (vii) The EOU/EHTP/STP shall also intimate the name of the person/persons who are authorised by them to sign the C Form and furnish three copies of his/their specimen signature(s) which will be kept in the relevant file of the unit. (viii) Reimbursement of CST will be made on quarterly basis. The application for claiming reimbursement should be filed within a period of 6 months from the completion of the quarter in which the claim has arisen. In case of procurement of goods against payment in installments, the CST reimbursement claim may be made in the quarter in which the full payment has been effected against the invoice/bill. Whenever application is received after expiry of last date of submission of such application, provisions of para 9.3 of the HBP Vol. 1, would apply. (ix) Application for supplementary claim will be considered as per provisions of para 9.4 of HBP Vol I. (x) The claim for CST reimbursement for the amount below Rs. 100/- on any single invoice shall not be entertained. (xi) The disbursing authority for the claim of reimbursement of CST will be Development Commissioner/designated officer of EHTP/STP who will make payment to the units. All claims shall be subjected to post audit. (xii) The unit shall preserve for three years all the original documents viz. Original invoice/bill, money receipt/bank statement for random/sample checking and produce the same as and when called for by the office of the Development Commissioner. Random checking of 5% of the claims of a particular quarter should be done in the next quarter through generation of computer statements on the basis of serial numbers. The random list will be generated by the Development Commissioner personally. (xiii) In case some glaring error or irregularity is detected against any unit in claiming CST reimbursement, action to recover the amount paid and levy penalty would be taken under FTDR Act against such unit. (xiv) Any dues of the Government viz. arrears of Lease rent, amount on account of a Court’s decree or Income tax recovery note, etc. will also be deductible from the claim amount or it can be set off from the subsequent payment.
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Hi Sir, Thanks for the good article. Btw can u please clarify me that although the local sales tax cannot be levied for an export/import as it would be ultra vires the constitution, and it directs us to the CST Act for such transactions, In what power can CST be charged when there is no inter-state transaction, and it is only a deemed export for the DTA units supplying materials to the EOU/STP. Will the DTA unit charge CST when they supply to the EOU/STP unit? or supplies to EOU/STP’s are treated as inter-state sales? Experts, Pls answer my question, it would be of great help.