Saturday 25 January 2020

Woes of EOUs with regard to DTA clearances after implantation of GST




In the pre-GST era, an EOU was required to pay the excise duty on the higher side in respect of the goods cleared in DTA for the reason that the EOU has availed the benefit of exemption from custom duty on the inputs imported by it. Normally, there was no difficulty in calculating the excise duty payable on the goods removed in DTA in terms of Notification No. 23/2003-CE dated 31.03.2003 because the excise duty was payable on the transaction value of the goods cleared in DTA at the rate applicable on the date of clearance. There was no question of interest as well for such clearances of goods in DTA in the pre-GST era.


2.                  However, after the implementation of GST law with affect from 1.07.2017, the custom Notification No.52/2003-CUS dated 31.03.2003 was amended by Notification No. 59/2017-Cus dated 30.6.2017. By this amendment, it was provided as under:
“3. Notwithstanding anything contained in this notification, the exemption from the whole of duty of Customs leviable thereon under First Schedule to the Customs Tariff Act, 1975 (51 of 1975), shall not apply to inputs which on importation into India or procurement, are used for the purpose of manufacture of finished goods or services and such finished goods and services, are supplied in Domestic Tariff Area …”

3.                  In this regard, the amending notification also added the following explanation in the original notification (relevant portion reproduced):
“Explanation.- For the purpose of this paragraph, on payment of whole of duty of Customs leviable thereon under the First Schedule to the Customs Tariff Act 1975 availed as exemption, under this notification, on the inputs utilised for the purpose of manufacture of finished goods, before clearance of such finished goods or services on payment of applicable, Goods and Service Tax leviable thereon, in Domestic Tariff Area or as are in stock at the time of exit, it shall be treated as if no exemption was availed under this notification.”


4.                  Thus, now an EOU is required to pay the custom duty in respect of the inputs used in the manufacture of the goods or services cleared in DTA. We apprehend that this sort of bald provision (without suitable clarification) would create unnecessary litigation in the times to come. The following issues are likely to be faced by the EOU’s while calculating the custom duty in respect of the inputs used in the manufacture of goods and services cleared in DTA.

I.         Value

An EOU imports the inputs on regular basis for its authorised operations. Inputs are imported from different countries at different times and at different values. The value may also be different in the basis of quality of inputs. If any goods are sold in DTA, say in the month of December, 2019, then it may not be possible to work out the value of the inputs used in the manufacture of the goods sold/cleared in DTA. It is quite possible that the inputs might have been imported in the month of say October or November or December and at different values. No clarification has been provided as to whether an EOU has to follow the FIFO method, LIFO method, average method or any other method for calculating the value which has to be taken into account for payment of customs duty cleared in DTA.

II.         Rate of duty

Likewise, it may happen that an EOU has imported the inputs from time to ti me where the custom duty rates are different (Due to change in rate of custom duty or import from FTA countries etc). It is not clear how the rate of duty will be applied in respect of the inputs in such situations.

III.         Domestic Procurement Vs. Imported procurement

Many a time it happens that an EOU procures the inputs domestically and also import the same. There is no clarity as to how the apportionment of the inputs would be made between the domestic inputs and imported inputs.

IV.         Quantity of Inputs

It is also not clear as to how the quantity of the inputs required for the manufacture of the goods sold in DTA would be worked out. Logically, it should

be based on SION specified by the DGFT for such product but the problem would arise where no SION have been fixed for the products sold/cleared in DTA. Further, there is no question of application of SION in respect of services sold/cleared in India.

V.        Interest:

In the amended notification, it has not been clarified whether such duty has to be paid with interest or without interest. One view would be that no interest is payable because customs duty itself has become payable at the time of clearance of goods in DTA. Another possible interpretation would be that such duty is payable with interest because it has been deemed in the notification as if no exemption has been availed at the time of import. It means if the inputs were imported three months ago and the duty is paid now then it has to be paid with applicable interest. Thus, the applicability of interest on such duty is also a contentious issue.

VI.         Supply of goods in DTA (which amount to export of service under GST Law)

It has been observed that some of the EOU’s (Particularly printing books/ magazines etc.) get the content of such Books/ Magazines from the overseas customer. The EOU makes the books/ Magazines by use of such content supplied by the overseas customer. Such books/ magazines are supplied in DTA as per the instruction of the overseas customer. In such scenario, EOU gets the amount in foreign exchange from the overseas customer but the goods are supplied/cleared in DTA. Under the GST Law, this amount of export of services as the recipient of it is located outside India and the amount is received in foreign exchange but this creates an anomaly as much as there remains no level field between a DTA unit and an EOU performing similar activity. In the case of an EOU, the inputs like paper, binding material, glues, ink etc are imported without payment of custom duty where a normal DTA unit imports all such goods on payment of applicable custom duty. In the absence of suitable clarification, this type of practice would lead to prolong litigation. There may be a similar situation with regard to other job work activities done by an EOU on

the behest of overseas customer but the goods after job work are supplied in DTA as per the instruction of the Overseas customer.

VII.         Supply of excisable goods like HSD/natural gas etc in EOU

An EOU is entitled to procure the HSD/natural gas etc without payment of excise duty in terms of Notification No.22/2003-CE dated 31.03.2003. The benefit of the excise duty is available in case goods manufactured by an EOU are exported outside India but no such exemption is available to EOU from payment of excise duty on HSD/natural gas in respect of the manufactured goods sold in DTA. Hence, on such portion of HSD, excise duty has to be reversed by the EOU. However, in this situation a similar problem would arise as in the case of payment of custom duty on the inputs used in the goods sold in DTA as detailed above.

5.                  In nut shell, the EOUs are likely to face the above issues which would lead to prolonged litigation in the times to come. It would be in the interest of the revenue and also in the interest of the EOUs if the suitable clarifications are issued on the above aspects with regard to calculation of duty and interest in respect of the goods and services sold/ cleared in DTA.

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