Introduction:
Ill gotten gains are not the ill-ones if caused due to the interpretations of law. To survive in the cut-throat competition, the EOUs were allowed to clear the goods in Domestic Tariff Area. Being allowed the benefits like duty free import of inputs and capital goods, the cost of production came very low. So, in order to harmonize the DTA clearance of EOU without curtailing the survival of domestic manufacturers, it was proposed to impose the lot of duties just like import on such clearances. But the lacuna remained there in the drafting and the effect of it was that the clandestine removal by EOU did not attract the huge duties. Though rectified a decade back, this anomaly is still teasing the Revenue in form of the cases decided by the various appellate authorities. This piece says the story of the EOUs and clandestine removal made by them...
What is a 100% EOU:
The 100% EOU scheme introduced in the 1980s has acted as limelight for the Indian exports. A 100% EOU simply said as an EOU was defined to include an industrial unit offering for exports it entire production excluding certain permitted level of rejects. The EOUs belong to an industry, the export potential of which is considered and recommended by the relevant Export Promotion Council. The EOU's in the general parlance are thought of as the units that are located in India but are to be treated as outside India. These units are allowed to import all the specified necessary inputs and capital goods without payment of duty. Besides this, various other amenities and tax benefits have been given to these units.
DTA Clearance by EOU The quantum:
The export market is full of uncertainties. Lots of ups and downs are faced by the units working in this market. To survive in the competitive market it was very necessary to provide some relaxations to the 100% EOU. In 1983 for the first time the units in the Kandla EPZ and the Santa Cruz EPZ were allowed to sell the goods not exceeding 25% of their production, in the Domestic Tariff Area. But the procedures were rigid with lot of specification to be followed. As on the date the EOUs are allowed to make DTA sale upto 50% of the exports made in the previous quarter with concessional rate of Basic Custom Duty applicable on them.
DTA clearance Rate of duty:
As the EOU is treated as located out of India, the DTA sale attracts the duty equivalent to the aggregate of custom duties levied on that product at the time of import. This aggregate of custom duties includes the Basic custom duty, Additional custom duty levied in lieu of excise duty, Special additional duty levied in lieu of sales tax or VAT and the three times education cess and secondary higher education cess leviable on such duties. This makes the rate of duty very high for the EOUs.
Clandestine Removal:
The word clandestine means any act performed secretly in order to conceal an illicit or improper purpose. As discussed, there are specifications regarding the maximum amount of DTA clearance to be done in a particular year. Further, the clearance of production by EOU in DTA can be only done on issuance of a removal authorisation by Development Commissioner. If the said specifications, whether related to quantum of clearance or related to procedure of the clearance in the domestic tariff area, is not followed then it means that the assessee is engaged in the acts of clandestine removal of goods.
The issue:
The levy of excise duty on DTA clearance (which is aggregate of custom duties) is governed by the proviso to section 3 of the Central Excise Act, 1944. This proviso previously read as follows:-
The Proviso of Section 3(1) reads as follows:-
Provided that the duties of excise which shall be levied and collected on any excisable goods which are produced or manufactured, -
(i) * * * * * *
(ii) by a hundred per cent export-oriented undertaking and allowed to be sold in India, shall be an amount equal to the aggregate of the duties of customs which would be leviable under the Customs Act, 1962 (52 of 1962) or any other law for the time being in force], on like goods produced or manufactured outside India if imported into India, and where the said duties of customs are chargeable by reference to their value; the value of such excisable goods shall, notwithstanding anything contained in any other provision of this Act, be determined in accordance with the provisions of the Customs Act, 1962 (52 of 1962) and the Customs Tariff Act, 1975 (51 of 1975).
The analysis of this proviso and highlighted portion [as it stood in this proviso upto 1.3.2001] and allowed to be sold in India clarifies that this proviso will be applicable if the two conditions are satisfied:-
(i) The goods should be manufactured by 100% EOU; and
(ii) The goods so manufactured should be ALLOWED to be sold in India.
In other words, the language implied that the aforesaid proviso will be applicable only if the goods manufactured by the EOU are sold in India only after being permitted. Thus, the goods cleared illicitly or without obtaining the permission of Development Commissioner were not covered under this proviso. The language created an anomaly and this anomaly was rectified as from 1.3.2001, by substituting the words and brought to any other place in India instead of and allowed to be sold in India. The effect of this language was that the goods brought in DTA anyhow were covered under this proviso. But the period prior to this date was subject to litigation. The issue of prior period was in favour of the assessees due to decision of Apex Court.
Supreme Court Verdicts:
In the case of SIV Industries v. CCE [2000 (117) ELT 281 (SC)], the Apex Court held that the proviso to Section 3(1) regarding the duty chargeable on goods cleared by EOU's shall be applicable only to sales made in DTA upto 25% of production which are allowed to be sold in India as per the provisions of EXIM policy. This decision was followed by many other decisions like in the case of Noel Agritech Ltd. v. CC, Bangalore [2001 (128) ELT 227 (Tribunal)] it was held that on removal of goods to DTA the duty is imposable only on such goods which are permitted to be sold in this area in terms of Section 3 of Central Excise Act, 1944. Also custom duty and penalty are not imposable.
Circular by Board:
The Board now was along with its new Circular No. 618/9/2002-CX.8. The said decision was interpreted by the field formations as if the goods cleared by EOU's are not allowed to be sold into India, the Section 3(1) of the Central Excise Act, 1944 is not applicable and the duty can be demanded under the provisions of Customs Act, 1962 only. The Board was very serious about the matter and the circular said that the clearance if not allowed to be sold in India, shall continue to be chargeable to duty under Section 3 (1) of the Central Excise Act, 1944.
But then came the decision in the case of M/s Himalaya International Ltd. v. Commissioner of Central Excise, Chandigarh [2003 (154) ELT 580 (Tri. - LB)] wherein it was held that
"Rate of duty as per the proviso to Section 3(1) of the Central excise Act, 1944 would be applicable for assessing all the excisable goods, which are cleared by 100% EOU to DTA whether in terms of permission granted or in excess of permission granted"
Thus, the larger bench favoured the assessees. The Board circular No. 618/9/2002-CX., was withdrawn after this judgement.
Clandestine Removal in DTA beneficial for EOU:
All these decisions and circular made the clandestine removal more beneficial for the assessee. Clandestine removal has acted as Blessing in Disguise for the 100% Export Oriented Units. The language in the law is such that on making clandestine removal by EOU to DTA is more beneficial to the assessee. There are various decisions given by various tribunals and courts which tell the same story for the 100% EOU. Some are stated below:
In the decision of Sarthi Textiles v. CCE, Surat [2004 (167) ELT 308 (Tribunal)] it has been said that the clearances made by an EOU are subject to levy of excise duty and not custom duty. Hence duty demands and penalties confirmed under provisions of Custom Act, 1962 are not sustainable.
In the decision in the case of Winsome Yarn Ltd. v. CCE, Chandigarh [2001 (131) ELT 955 (Tri.)] it has been held that on clearance of goods by EOU to DTA in terms of provisions of Section 3 of Central Excise Act, 1944 only duty, equivalent to custom duty payable under Section 12 of the Customs Act, 1962 is payable on clearance of goods by 100% EOU to DTA. The demand of CVD payable under Customs Tariff Act, 1975 is not sustainable.
Recent Decision:
In a recent decision given by the Supreme Court in the case of Commissioner of Central Excise, Vishakhapatnam-II Vs M/s NCC Blue Water Products Ltd. reported in [2010-TIOL-73-SC-CX]. It has been held that -
Goods are cleared by the EOU in the DTA without permission that is the Development Commissioner has not issued the requisite removal authorisation. The provisions of Central Excise Act, 1944 shall apply to all goods manufactured or produced in India for which Section 3 is charging section. The duty will be payable under Section 3(1) of the Central Excise Act, 1944. It was said that if the department's contention is accepted then also the excise duty chargeable on the shrimp products is NIL. As the excise duty chargeable is NIL the other questions relating to the case like extended period of limitation alleging suppression of sales on the assessee are insignificant.
Thus, the Supreme Court held that if the EOU sells the goods in DTA without obtaining the permission; section 3(1) will apply. Since the excise duty was chargeable at NIL rate of duty; the extended period was not held as invokable. The assessee therefore does not have to pay the aggregate of custom duties and no penalty was imposable as no suppression was proved due to NIL rate of duty. Only excise duty was held as payable. Thus, clandestine removal ended up with the dual benefit in the hands of law-breaker EOU. This decision has once again ignited the issue.
Before Parting:
The scheme of Export Oriented Units was taken out by the government to encourage the exports and provide maximum benefits to the exporters. But the government is finding it a Pleasure to Burn that is why the clandestine removal has also turned to be a benefit for the EOU's. As such, the benefit of DTA clearance as allowed to the EOUs has turned into undue benefit and is harming the intentions of the scheme of establishing the EOU's. So the government has taken up corrective steps and amended the law as stated earlier in this article. But why the government thinks twice when the law is drafted? The litigation has not started if the law is drafted in simple words so that no litigation has taken place. But provisions are drafted in such a manner that everyone needs experts to know the exact meaning of language used in the Act. Further the things are worsen when these experts give different interpretation to same set of words in the provisions. The intention behind the amendment is lost in these interpretations.
CA. Pradeep Jain
CA. Preeti Parihar
CA. Ridhi Anchalia
CAclubindia
