DUTY DRAWBACK PROVISIONS
Drawback means the rebate of duty chargeable on any imported materials or excisable materials used in manufacture or processing of goods which are manufactured in India and exported. Export means taking out of India. Supply of stores for use in vessel or aircraft proceeding to foreign port is also covered, since it is treated as ‘export’ as per section 89 of Customs Act.
Duty Drawback is equal to
(a) customs duty paid on imported inputs including SAD plus
(b) excise duty paid on indigenous inputs. Duty paid on packing material is also eligible. However, if inputs are obtained without payment of customs/excise duty, no drawback will be paid. If customs/excise duty is paid on part of inputs or rebate/refund is obtained, only that part on which duty is paid and on which rebate/refund is not obtained will be eligible for drawback.
No drawback is available on other taxes like sales tax and octroi.
Processing also eligible for Drawback - Drawback is allowable if any manufacture; process or any operation is carried out in India [section 75(1) of Customs Act]. Thus, drawback is available not only on manufacture, but also on processing and job work, where goods may not change its identity and no ‘manufacture’ has taken place.
Type of Drawback Rates –
o All Industry Drawback rates are fixed by Directorate of Drawback, Dept. of Revenue, Ministry of Finance, Govt. of India, Jeevan Deep, Parliament Street, New Delhi - 110 001. The rates are periodically revised - normally on 1st June every year. Data from industry is collected for this purpose. The types of rates are as follows:
o ALL INDUSTRY RATE –
This rate is fixed under rule 3 of Drawback Rules by considering average quantity and value of each class of inputs imported or manufactured in India. Average amount of duties paid is considered. These rates are fixed for broad categories of products. The rates include drawback on packing materials. Normally, the rates are revised every year from 1st June, i.e. after considering the impact of budget, which is presented in February every year. All Industry drawback rate is not fixed if the rate is less than 1% of FOB Value, unless the drawback claim per shipment exceeds Rs 500.
o The AIR (All Industry Rate) is usually fixed as % of FOB price of export products. However, in respect of many export products, duty drawback cap (ceiling) has been prescribed, so that even if an exporter gets high price, his duty drawback eligibility does not go above the ceiling prescribed.
o The table gives allocation of the drawback allowed under two heads namely – Customs and Central Excise. The Customs portion covers basic customs duty, surcharge and SAD. Excise portion covers basic and special excise duty and CVD. Duty drawback of customs portion can be paid even if exporter has availed Cenvat credit, as Cenvat credit is only of excise duty and CVD.
o The All Industry Rate (AIR) is fixed on the basis of weighted averages of consumption of imported/ indigenous inputs of a representative cross section of exporters and average incidence of duties. Hence, individual exporter is not required to produce any evidence in respect of actual duties paid by him on inputs
o BRAND RATE - It is possible to fix All Industry Rate only for some standard products. It cannot be fixed for special type of products. In such cases, brand rate is fixed under rule 6. The manufacturer has to submit application with all details to Commissioner, Central Excise. Such application must be made within 60 days of export. This period can be extended by Central Government by further 30 days. Further extension can be granted even upto one year in if delay was due to abnormal situations
o SPECIAL BRAND RATE - All Industry rate is fixed on average basis. Thus, a particular manufacturer may find that the actual duty paid on inputs is higher than All Industry Rate fixed for his product. In such case, he can apply under rule 7 of Drawback Rules for fixation of Special Brand Rate, within 30 days from export. The conditions of eligibility are
(a) the all Industry rate fixed should be less than 80% of the duties paid by him
(b) rate should not be less than 1% of FOB value of product except when amount of drawback per shipment is more than Rs. 500
(c) export value is not less than the value of imported material used in them - i.e. there should not be ‘negative value addition’.
Drawback Rate Fixation
Forms and procedures have been prescribed for submitting details to jurisdictional Commissioner of Central Excise, who will fix the rate of duty drawback
Drawback claim procedure
o Exporter shall endorse on the ‘shipping bill’ the description, quantity and other details to decide whether goods are eligible for duty drawback. He should submit one extra copy of shipping bill for drawback purposes. Copy of Invoice should be submitted.
o DECLARATION BY EXPORTER - A declaration should be made rule 12(1)(a)(ii) of Duty Drawback Rules, on shipping bill or bill of export that claim of drawback is being made and that duties of customs and excise have been paid on materials, containers and packing materials and that no separate claim for rebate of duty will be made. If the exporter or his authorised agent was unable to make such declaration due to reasons beyond his control, Commissioner of Customs can grant exemption from this provision of making declaration on shipping bill or bill of export.
o Further declarations are also required when brand rate or special brand rate has been fixed. These declarations have to be signed by exporter.
o Triplicate copy of shipping Bill is the drawback copy and should be marked as ‘Drawback Claim Copy’. It should be submitted with pre-receipt on reverse side with revenue stamp.
o DECLARATION FOR NON-AVAILMENT OF CENVAT –
(a) If the manufacturer-exporter or supporting manufacturer of merchant exporter is registered with Central Excise, fact of non-availment of Cenvat credit can be verified from ARE-1 form furnished
(b) If the manufacturer-exporter or supporting manufacturer of merchant exporter is not registered with Central Excise, they have to submit self-declaration about non-availment of Cenvat in prescribed form. The drawback rate consists of two components - customs portion (consisting of basic customs duty, surcharge and SAD) and excise portion (consisting of basic excise duty, special excise duty and CVD).
The Cenvat credit is only in respect of central excise. Hence, it has been clarified that even if Cenvat credit has been availed, duty drawback in respect of customs portion will be available.
Duty drawback on Re-export
o Section 74 of Customs Act, 1962 provide for drawback if the goods are re-exported as such or after use. This may happen in cases like import for exhibitions, goods rejected or wrong shipment etc. The re-exported goods should be identifiable as having been imported and should be re-exported within two years from date of payment of duty when they were imported. This period (of two years) can be extended by CBE&C on sufficient cause being shown. These should be declared and inspected by Customs Officer. Original shipping bill under which the goods were imported should be produced. The goods can be exported as cargo by air or sea, or as baggage or by post.
o After inspection, export and submission of application with full details, 98% of the customs duty paid while importing the goods is repaid as drawback.
o DISTINCTION BETWEEN SECTION 74 AND 75 -
Section 74 is applicable when imported goods are re-exported as it is and article is easily identifiable, while section 75 is applicable when imported materials are used in the manufacture of goods which are then exported
o VALUE AT THE TIME OF EXPORT IS RELEVANT -
As per section 74(4), goods are deemed to have been entered for export on the date rate of duty is to be calculated under section 16. As per section 16, value of export goods will be taken on the date on which proper officer makes an order permitting clearance of goods for export under section 51 of Customs Act. Hence, ‘Value’ for the purposes of section 76(1) (b) will be value at the time of export and not the original value of import of the goods.
GOODS CAN BE RE-EXPORTED TO ANY PARTY AND FROM ANY PORT –
It has been clarified that goods can be re-exported to any party (and not only to the same supplier) and re-export can take place from any port
DRAWBACK FOR USED GOODS –
If the imported goods are used before re-export, the drawback will be allowed at a reduced percentage [section 76(2) of Customs Act, 2162]. If the goods were in possession of the importer, they might be treated as used by the importer. As per the rules framed by Central Government, the table is as follows:
(a) use upto 6 months; 85%
(b) 6 months to 12 months: 70%
(c) 12 months to 18 months: 60%
(d) 18 months to 24 months: 50%
(e) 24 months to 30 months: 40% (f) 30 months to 36 months: 30%
(g) over 36 months: Nil.
Drawback is allowed if the use is over 24 months only with permission of Commissioner of Customs if sufficient cause is shown.
GOODS FOR PERSONAL USE - If the goods (including motor car) were imported for personal use, the reduction in import duty refundable is 4% per quarter for first year, 3% per quarter for second year, 2.5% per quarter for third year and 2%
CLASSIFICATION OF GOODS UNDER THE ACT
Section 2 of the Customs Tariff Act, 1975 provides that the custom duty shall be levied at the rate specified in the schedules to the Act read with exemption notification if any. Thus the customs duty is leviable under the Customs Act, 1962 on the basis of value or quantity as specified in the Import Tariff to the Customs Tariff Act, 1975. Basic customs duty is charged in accordance with the First Schedule to the Customs Tariff Act, 1975 which is import Tariff. There are 21 sections in the Import Tariff, divided into 98 Chapters in all, with section notes and chapter notes. These notes are statutorily binding in nature. The interpretation of the Tariff schedule is strictly governed by six "Interpretative Rules" incorporated in First Schedule itself. Imported goods are to be classified under the appropriate headings, sub-headings, sub-division to sub-headings strictly, in accordance with section notes, chapter notes that are appearing in the Tariff.
In the event when classification cannot be made as above and when more than one classification appear appropriate under the Tariff and goods imported do not find appropriate classification, then a resort to, "Interpretative Rules" may be taken.
VALUATION OF GOODS
The quantification of customs duty payable essentially requires the calculation of the ‘value’ for customs purpose. As per the provisions, customs duty is payable as a percentage of ‘value’ often called ‘Assessable Value’ or ‘Customs Value’. The value may either be
(a) ‘Value’ as defined in section 14(1) of Customs Act, or
(b) ‘Tariff Value’ prescribed under section 14(2) of Customs Act.
Tariff value
Tariff value is the value that is fixed by Central Government for any class of imported goods or exported goods. Government takes into consideration trends of value of such or like goods while fixing tariff value. Once so fixed, duty is payable as percentage of this value.
Customs value
Customs value as calculated as per section 14(1) is the ‘value’ normally used for calculating customs duty payable. As per section 14(1) ‘value’ for the purpose of customs duty is the
(a) Price at which such or like goods are ordinarily sold or offered for sale and the
(b) Price is for delivery at the time and place of importation and such
(c) Price is in course of international trade, where neither seller nor buyer has interest in the business of the other or one of them has no interest in the business of the other and the,
(d) Price is the sole consideration for sale or offer for sale.
The price mentioned above has to be computed for customs duty purpose at the rate of exchange, as on date of submission of bill of entry, as fixed by the Central Government. As per the provisions contained in section 14(1A) of the Act, the ‘price’ referred to above, in case of imported goods has to be determined in accordance of the Customs Valuation Rules, 1988. Subject to three conditions laid down in section 14(1) of Customs Act, 1962, of time, place and special circumstances, price of imported goods is to be determined in terms of provisions contained in section 14(1A) and in accordance with the provisions contained in Valuation (Determination of Price of Imported Goods) Rules, 1988. The ‘Special Circumstances’ have been statutorily provided in Rule 4(2) and in the absence of these exceptions it is mandatory for customs authorities to accept the price actually paid or payable for the goods in a particular transaction. Valuation Rule 4(2) deals with the extraordinary or special circumstances under which the transaction value of the goods cannot be accepted. They are as follows:
(a) The sale is not in the ordinary course of trade under fully competitive conditions.
(b) The sale involves any abnormal discount or reduction from the ordinary competitive price.
(c) The sale involves special discount limited to exclusive agents.
(d) Non-existence of objective and quantifiable data with regard to the adjustments required to be made, under the provisions of rule 9, to the transaction value.
(e) Restrictions of a non-statutory nature or non-commercial nature on the disposition or use of the goods after import, which substantially affect the value of the goods.
(f) Sale or price being subject to some condition or consideration for which a value cannot be determined.
(g) There exists an additional consideration, direct or indirect.
(h) Buyer and seller are related and the relationship has influenced the price. The assessable value has to be adjusted where the buyer has undertaken some value-adding activities in relation to the goods, and such activities fall under the adjustments provided under rule 9 of the valuation rules. If no such adjustment is provided in rule 9, and the activities of the buyer are on his own account; i.e., they do not result in an indirect payment to the seller even though they result in a benefit to the seller, then the assessable value need not be adjusted. Costs for construction, erection, assembly, maintenance or technical assistance undertaken after the import of goods like plant, machinery or equipment should be distinguished, in the contract or invoice, to ensure that these costs are not included in the assessable value. The onus is now on the customs department to prove that the invoice price is not genuine or that the price is unbelievably or ridiculously low. The department cannot plead that it has discharged the onus by merely producing the manufacturer’s price list or quotation or published prices or computer print outs of previous imports by other importers as evidence of the so called ordinary international price. The department must establish the existence of special circumstances mentioned in the law. If they (revenue authorities) do not establish this by leading adequate evidence, they will have to accept the transaction value under rule 4(1). The transaction value need not be uniform for all customers. It has been consistently held by the Hon’ble Supreme Court that all customers have bargaining power and as long as the discount is based on commercial considerations, the same is permissible and the assessable shall be net of discount. According to Rule 5 of the Valuation Rules, the transaction value to be determined on the basis of identical goods imported into India at the same time. Rule 6 allows this on the basis of the value of similar goods imported into India at the same time.
The CEGAT laid down in the Hydro Krimp case that comparable goods should be of same quality and specification and from same manufacturer and country of production. They should be roughly in the same quantity. The imports should belong to the same commercial world.
Rule 7 of the Valuation Rules allows the value to be determined on the basis of deductive method in cases where there are no contemporaneous imports. Here also the decision of the CEGAT is relevant. The deductive value is based on the unit price at which the imported goods or identical goods or similar imported goods are sold in the greatest aggregate quantity to unrelated persons in India. The following deductions are available:
(i) the commission usually paid or agreed to be paid or the additions usually made for profits and general expenses in connection with sales in India of imported goods of the same class or kind.
(ii) usual costs of transport and insurance and associated costs incurred within India.
(iii) the customs duties and other taxes payable in India by reason of importation or sale of goods. Alternatively, transaction/assessable value may be determined under rule 7A. It consists of the following:
(a) the cost or value of material and fabrication or other processing employed in producing the imported goods;
(b) an amount for profit and general expenses equal to that usually reflected in sales of goods of the same class or kind as the goods being valued which are made by producers in the country of exportation for export to India;
(c) the cost or value of all other relevant expenses.
In a case, where the value cannot be determined by any of the aforesaid rules, then resort will be made to Rule 8, Residual Method, under which the value shall be determined using reasonable means consistent with the principles and the general provisions of the rule.
RATE OF DUTY AND VALUATION AND TIME OF LEVY/INCIDENCE
The rate of duty and tariff valuation shall be as applicable on
(a) In the case of goods directly cleared for home consumption the date of the presentation of the bill of entry.
(b) In case of goods cleared from warehouse, the date when bill of entry is presented for home clearance of such goods from the warehouse. In case, bill of entry is submitted prior to arrival of the vessel or the aircraft, the date would be the later of the date of submission of the bill of entry and the grant of entry inward to the vessel.
ADVANCE RULINGS
The provisions relating to advance rulings are covered in Chapter VB of the Act. Advance rulings can be sought by a residents and/ or non-residents in case of joint ventures in India, and by wholly owned subsidiaries of foreign companies proposing to undertake business activity in India. The Advance Ruling can be sought on matters regarding classification and valuation of goods, notifications having a bearing on rate of duty and notifications issued under the Customs Tariff Act and any other duty chargeable in the manner as duty of customs, under any other law for the time being in force.
The advance ruling authority created under section 245(O) of the Income-tax Act, 1961 will be considered as advance ruling authority under the Central Excise Act and the Customs Act also.
Under the Customs Act there are basically two systems for assessment of duty. These are:
(a) First appraisement: In case of First appraisement the assessment of goods is done only after the goods are examined first. This system is generally not resorted to except in cases where complete documents are not submitted by the importer, it is not possible for the appraiser to determine the value or classification of the goods or for any other reasons, on the basis of the documents as produced by the importer, or the importer himself requests for the examination of goods before payment of goods.
(b) Second appraisement: This type of system is normally followed practically. Second appraisement means making the assessment on the basis of the declaration and submission made by the importer; i.e., on the strength of documents such as invoice, catalogue, literature showing the composition and use, price lists etc. as produced by the importers. Under this system goods are examined after assessment and collection of duty. The goods are examined on a selective basis on the basis of risk assessment or on the basis of specific intelligence report.
However, on importation of any goods capable of being easily identified, any duty has been paid on clearance of such goods for home consumption, such duty shall be refunded to the person if the goods are found defective or otherwise not in conformity with the specification agreed upon provided the goods have not been repaired or used after importation. The following conditions shall be satisfied:-—
(a) The goods are identified to the satisfaction of the Assistant Commissioner or Deputy Commissioner.
(b) The importer does not claim drawback under any of the provisions of the Act.
(c) The goods are exported or the importer relinquishes its title to the goods and abandons them to customs or such goods are destroyed.
DEMAND, RECOVERY AND REFUND OF DUTY
A demand for duty arises in cases where duty on goods has not been levied though such goods are leviable to duty or duty has been short levied or refunded erroneously. The Act provides the provisions for the recovery of such duty.
Section 28 specifies the procedure to the department for recovery thereof by service of a show cause notice for demand within the specified time limits and thereafter by considering the representation, if any, made by the person on whom such demand notice is served.
The notice must be issued within one year from relevant date. The above period of limitation is extended to five years in case the short levy or non-levy or refund was due to collusion, misstatement, suppression of facts or fraud by the Importer/ Exporter.
Where the assessee notices the short levy or non-levy, he can pay it along with interest, without a show cause notice and inform the jurisdictional officer accordingly. If the assessee does not pay the short levy or non-levy in full, he will be liable to pay interest under sections 28AA and 28AB on the whole amount including the amount part paid.
Refunds
The refund of duty is subject to the principle of ‘no unjust enrichment’. Refund of duty is granted to the importer only when he is able to substantiate that the burden of the customs duty levied and paid under Customs Act claimed in refund has not been passed on to the customer. The Hon’ble Supreme Court in the case of Solar Pesticides has held that, even in case of imported goods that have been consumed in the manufacture of final product, the importer is required to substantiate similarly.
Application for refund must be made in the prescribed form in duplicate within one year from the relevant date one year as the case may be. If application is found complete in all respects, the applicant will be issued an acknowledgement in prescribed form within ten days. If application is found incomplete, it will be returned and a fresh application shall be filed removing the deficiencies.
CUSTOMS DUTY DRAWBACKS
The term ‘drawback’ refers to the amount of duties of Customs and Central Excise, whether in whole or in part, levied on the inputs of goods exported, which is remitted or paid back by Government on export of commodities. The goods to be entitled for drawback, they must be exported to a foreign port. The object of the relief provided by the drawback provision is to enable the goods to be disposed of in a foreign market as if they had never been taxed on account of Customs and Central Excise duties. Drawback for Customs purposes means, the refund of duty of customs and duty of Central Excise that are chargeable on imported and indigenous materials used in the manufacture of exported goods. Drawback, as the name itself suggests, is procedure to relieve export goods of duties suffered by them at various stages of manufacture. Sections 74 to 76 and notifications issued thereunder provide for the quantification of the amounts of and the procedure to claim drawback. The drawback is in respect of duties paid on:
(a) Imported goods which are exported as such (without use)
(b) Imported goods which are exported after use
(c) Imported materials used in the manufacture of goods exported.
According to Finance Act, 2003, exporters may be able to claim refund of duty and interest paid by him, if he has not passed on the incidence of such duty and interest to any other person. Section 27 of the Customs Act is amended for the purpose. Section 75A of the Customs Act has been amended so as to reduce the period from two months to one month beyond which interest is payable to the claimant, after filing a drawback claim.
APPELLATE PROVISIONS AND PROCEDURES
The Appellate provisions in Customs are almost the same as in Excise, which have already been covered under the respective article, which may please be referred to.
PENALTIES
Penalty for improper importation of goods
For improper importation of goods
(i) any person who does or omits to do any act or abets doing or omission of such act on goods which are liable for confiscation or
(ii) who acquires possession or in any way concerned with carrying, removing, depositing, harbouring, keeping, concealing, selling or purchasing, or in any other manner dealing with any goods which he knows or has reason to believe are liable to confiscation under section 11, shall be liable for penalty of the various amounts specified in section 112
For short levy or non levy of duty in certain cases
As per section 114(A) where demand for duty arises on account of collusion, or any wilful misstatement or suppression of fact, the person is liable for penalty equal to the duty amount. As per first proviso if the duty, interest is paid within 30 days from the date of communication of the order, the penalty amount shall be reduced to 25% of the duty. However, the benefit of reduction in penalty is available only when the penalty amount is also paid.
For use of false and incorrect materials
As per section 114(AA), if any person knowingly or intentionally makes, signs, or uses or causes to make any declaration, statement or document which falls or is incorrect in any material particular, he shall be liable for penalty not exceeding 5 times the value of goods.
For not expressly mentioned
Any person who contravenes the provision of this Act or abets in such contravention and where no expressed penalty is provided elsewhere shall be liable for penalty up to Rs. 1 lakh under section 117.
PROSECUTION
Section 135 of the Customs Act provides that any person
a) In respect of any goods knowingly concerned in mis-declaration of value or any fraudulent evasion or attempt of evasion of any duty or any prohibition for the time being imposed under the Act or
b) acquires possession of or is in any way concerned in carrying, removing, depositing, harbouring, keeping, concealing, selling or purchasing or in any other manner dealing with any goods which he knows or has reason to believe are liable to confiscation or
c) attempts to export any goods which he knows or has reason to believe are liable to confiscation or
d) fraudulently avails of or attempts to avail of drawback or any exemption from duty provided under this Act in connection with export of goods.
he shall be punishable with an offence
(i) in case the offence relates to goods, market price of which exceeds Rs. 1 crore, evasion of duty exceeding Rs. 30 lakhs, such categories of prohibited goods notified by central government or fraudulently availing drawback exceeding Rs. 30 lakhs with an imprisonment for term which may extend to seven years or with fine.
(ii) in any other case, for imprisonment which may extend to three years or fine or both.
GLOSSARY
The various key words, which arise in this chapter, are Aircraft means any machine, which can derive support in the atmosphere from reactions of the air and includes balloons whether fixed, or free, airships, kites, gliders and flying machines.”
Assessments include provisional assessment, reassessment and any order of assessment in which the duty assessed is nil.
Bill of export refers to a prescribed form for the goods to be exported by land
Board means the Central Board of Excise and Customs constituted under the Central Boards of Revenue Act, 1963. [2(6)1]
Conveyance includes a vessel, an aircraft and a vehicle.
Duty means a duty of customs leviable under this Act.
Examination in relation to any goods, includes measurement and weighment thereof
Export Price means the price at which goods are exported. If the export price is unreliable due to association or compensatory arrangement between exporter and importer or a third party, export price can be constructed (revised) on the basis of price at which the imported articles are first sold to independent buyer or according to rules made for determining margin of dumping.
Vehicle means conveyance of any kind used on land and includes a railway vehicle
Warehouse means a public warehouse appointed under section 57 or private warehouse licensed under section 58
Warehoused Goods means goods deposited in a warehouse.
Disclaimer: In this note, we have attempted to summarise some of the significant aspects to be kept in mind by readers to ensure compliance of tax laws and regulations. Readers should ensure to verify specific provisions as applicable to each case before taking any business decisions. It would be pertinent to note that some changes are being made to the tax laws and rules and regulations on a continuous basis by way of notifications, clarifications etc issued by the department based on their practical experience in implementing the legislation.
It may be noted that nothing contained in this note should be regarded as our opinion. Professional advice should be sought for applicability of legal provisions based on specific facts. Though reasonable efforts have been taken to avoid errors or omissions in this note we are not responsible for any liability arising to readers directly or indirectly due to any mis-statements or error contained in this note. It must be noted that the views expressed in the note are based on our understanding of the law and regulations as published by the Government authorities and we may or may not agree or subscribe to such views.
The information in this blog about duty drawback service is useful for business.
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