In view
of representations from industry and field formations and, in the larger spirit
of trade facilitation for Oil and Gas industry in availing and continuing with
the exemptions granted to goods imported for petroleum operations, Ministry of
Finance has issued Circular No 21/ 2013 – Customs dated May 16, 2013
(‘Circular’) and Notification No 28/ 2013 – Customs, dated May 16, 2013
(‘Notification 28/ 2013’).
Existing
legislation
With a
view to promote and encourage petroleum exploration activities in India,
Ministry of Finance allows duty-free imports of goods through Notification No
12/ 2012 – Customs dated March 17, 2012 (‘Notification 12/ 2012’). Serial No
356, 358 and 359 of the Notification 12/ 2012 extends duty-free import status to
goods required in connection with petroleum operations undertaken inter
alia under the New Exploration Licensing Policy (‘NELP’). The Notification
12/ 2012 also prescribes various conditions to be satisfied, to avail the
duty-free status.
Background
Government
of India periodically awards exploration blocks (both offshore and onshore) to
Operators/ Contractors under the NELP. The blocks are awarded through a
Production Sharing Contract (‘PSC’) between such Operators/ Contractors and the
Government of India. Essentiality Certificate (‘EC’) is required to be obtained
from the Director General of Hydrocarbons (‘DGH’), specifying the goods required
to be imported for such exploration activities. Depending on the specialized
drilling/ exploration activity required, various sub-contractors are also
appointed.
Notification
12/ 2012 prescribes various conditions to be satisfied to avail the duty-free
status. However, it was felt that, on account of diversity in interpretation of
spirit of Notification 12/ 2012 in cases of transfer of assets from one
contract/ contractor/ block/ project to another, certain conditions of the
Notification 12/ 2012 required clarifications to bring transparency and
objectivity in administration of the said notification.
Representations
were filed with the Ministry of Finance; in some cases with active assistance
and engagement of BMR & Associates, LLP (‘BMR’). Basis these
representations and the meetings conducted with officials from time to time, the
Circular and Notification 28/ 2013 has been issued.
Clarifications
issued
1.
Transfer
of duty free goods from one eligible project to another
In
absence of explicit guidelines, one of the view which was adopted and discussed
in some instances was that goods imported duty-free for a specified eligible
project can be used only for such project and on completion of the same, the
goods are required to be re-exported. The view read into the conditions of
Notification 12/ 2012 and was inefficient from a time and resource perspective.
Option to re-export the goods to a Special Economic Zone and re-import the same
for a new contract/ project/ sub-contractor was seen as a response by the
industry so as to be compliant yet efficient from a resource
perspective.
It is
now clarified that goods imported duty-free under Notification 12/ 2012 for an
eligible exploration project can be transferred to another eligible exploration
project without exporting the same. Necessary modifications to extend this
trade facilitation measure have been made through amendments to Conditions No
41, 43 and 44 of Notification 12/ 2012. For this, Notification 28/2013 has been
issued.
Certain
conditions have been articulated in Notification 28/ 2013; in our view, these
conditions were always implicit in the existing Notification 12/ 2012 and were
also adopted in spirit during transfer of assets in the past. These conditions
now specifically include submitting the following documents by the transferor
contractor/ sub-contractor:
·
Certificate
from DGH that the goods are allowed to be transferred to another
sub-contractor or to another contractor or to another
sub-contractor of such another contractor;
·
Undertaking
from the transferee to comply with conditions of Notification 12/ 2012,
including payment of duty, fine or penalty by the transferee in case of
non-compliance by the transferee or contractor/ sub-contractor of the
transferee; and
·
Certificate
(in specific cases) that no foreign exchange remittance is made for the transfer
of such goods
2.
Requirement
to furnish a re-export bond
Although
Notification 12/ 2012 did not stipulate that a re-export bond is required to be
executed on importation of duty-free goods, the Customs Department insisted on
the same. This again led to increased costs and compliances in relation to
execution and cancellation of re-export bonds.
It is
now clarified that since Notification 12/ 2012 does not stipule any such
condition, execution of a re-export bond should not be insisted upon at the time
of clearance of goods.
In our
view, all the re-export bonds given in the past and which were not required to
be furnished, should be cancelled and returned to the beneficiary. Achieving
closure of the open re-exports bonds with Customs Department will be a great
relief to companies from a compliance perspective.
3.
Importation
of goods by individual members of a Consortium
In
various cases, exploration activities are undertaken through a Consortium of two
or more different legal entities. The benefit under Notification 12/ 2012 is
available to importers for goods meant to be used for eligible projects.
Hardships were being faced by the Trade in cases where the Customs Department
adopted a stand that the importer should necessarily be the Consortium and not
the individual legal entities.
It is
now clarified that a Consortium is not a distinct legal entity and therefore not
capable of importing goods by themselves. Accordingly, import duty benefits
should be extended to imports made by the individual legal entities (of the
Consortium), if their names appear on the EC.
4.
Importation
of goods by sub-contractors
Duty-free
imports of goods used for exploration activities are permitted to
sub-contractors on satisfaction of various conditions of Notification 12/ 2012.
The sub-contractor is required to produce a certificate (ie EC) from the DGH, to
the effect that the goods imported are required for eligible petroleum
operations as contracted through the PSC. Hardships were being faced by the
Trade, in cases where the Customs Department adopted a stand that the
sub-contractor’s name should also appear on the PSC.
It is
now clarified that Notification 12/ 2012 requires the sub-contractor’s name to
be mentioned on the EC only. The Circular recognizes that the main contractor
is generally unaware of the sub-contractors to be appointed for exploration
activity and hence such a condition (of mentioning the sub-contractor’s name in
the PSC) is not possible to be satisfied. In any case, the subsequent condition
of submitting an affidavit to the effect that “the sub-contractor is a bona
fide sub-contractor of the contractor” would be superfluous if the
sub-contractor’s name is insisted to be included in the PSC. Therefore,
non-mention of the sub-contractor’s name in the PSC should not be a ground for
denying the benefit.
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