Duty Drawback - Customs Act,1962

DUTY DRAWBACK - CUSTOMS ACT, 1962

Duty Drawback is governed by a couple of sections in the Customs Act, 1962 namely Sec.74 and Sec.75. The common intention is apparently to refund the import duty borne by the importer on exporting the goods. One (Sec.74) being for duty drawback on re-export back in specie and the other (Sec.75) for duty drawback on imported Materials used in Exported product. Importing of Raw materials and manufacturing finished Goods only to export out of India is omnipotent and Sec.75 presents a heavy relief to these manufacturer-exporters. Sec.74 is an occasional phenomenon

Under Sec.75 the goods that are eligible are 1) those on which manufacturing or processing takes place and 2) those on which any operation is carried out. The words ’on which any operation is carried out’ would mean that even those non value adding activities that are incidental or ancillary to the main manufacturing process are also considered for e.g. a specific packing. If it is a packing material that is being imported, there is a choice to the exporter to avail the benefit of Sec.74 (by proving the Commissioner on the specie export under packaged condition) or Sec.75. But then the very obvious alternative is Sec.75 which gives 100% duty drawback rather than Sec.74 which gives only 98% of duty drawback with onus of proofs on assessee and many other practical difficulties.

In Sec.75, the words “being goods which have been entered for export and in respect of which an order permitting the clearance and loading thereof for exportation has been made under......” clearly require that the order for clearance of export is required as a prerequisite to make an application for Duty drawback. In USA the sale of Drawback rights is made legitimate to permit companies not exporting any goods to transfer the right to an exporter to enable him claim the drawback. This is similar to our Duty Entitlement Pass Book Scheme. But here in India we do not have such facility. Consider the case of a last sale preceding the export, where the manufacture procures imported materials and transfers the stock to an overseas distributor. There is no way the manufacturer can claim duty drawback of the import duty since the Bill of entry and hence the order permitting export clearance will be in the name of the distributor and not the manufacturer. If there had been a facility to transfer Duty drawback rights or some scheme like DEPB the manufacturer can probably claim the drawback. In this context the above words assume utmost significance.

The amount of drawback available under Sec.75 is “the duties of customs chargeable under this Act on any imported materials of a class or description used in the [manufacture or processing of such goods or carrying out any operation on such goods”. Shouldthere be a question what will happen if due to some reason there is a remission of duty from Government? The answer is cleverly replied in the subsequent clause (2a) of the section. It says that the Central Government shall make rules among various other aspects to allow drawback of the amount actually paid by the manufacturer for carrying out the purposes of the act. It is relevant to note that as per Circular No.41/2005, drawback is not to be denied when duty is paid through DEPB scheme. The duty drawback for many industries is fixed based on a trend of average import material consumption and incidence of duty which is popularly called as ‘Brand Rate’ fixation.

Extra Duty Deposit recovery under Customs act 1962 (Valuation Rules) is a frequent occurrence nowadays with the advent of Globalisation and off shoring. Branches of MNCs in India which import materials and components from their Parent company are very consistently demanded an Extra Duty deposit which as per law ranges from 1% - 5%. Extra Duty Deposit (EDD) is nothing but a result of investigations into the Cross border transfer pricing. EDD is collected by way of provisional assessment and depending upon the final order passed by the SVB (Special Valuation Branch which investigates the Invoicing) the deposit is either converted to Duty or refunded back to the assessee.

When a Brand rate is fixed for an Industry as per Sec.75, there could be problem for a manufacturer to claim the Extra Duty deposit if any paid under a provisional assessment. There are two reasons for this

1.       Provisionally assessed Duty cannot be claimed as a duty drawback until the final assessment (Refer Sec.18 (5) (e)). Also the usage of words ‘duties chargeable’ supply adequate inference.

2.       A Brand Rate fixation is claimed to be based on normal transaction value and consumption of material. Hence on a final assessment of the EDD as Duty payable, the department will argue that the EDD is a normal duty on the Normal Transaction value which is already factored in fixing the ‘Brand Rate’. In which case it becomes an uphill task to claim drawback of the EDD paid.

Though there is no circular issued with regard to (2) above, Circular No.19/2005 issued by CBEC throws caution to the wind. It states that Duty drawback should not be reduced because of usage of some duty exempted goods in production and while deciding so it reasoned that drawback is already calculated normal consumption of such duty free items as well. If this is possible, then department can rake up the same argument for EDD drawback as well.

The export proceeds have to be received in India within the time permitted by FEMA act and FOB Price of exports should not be less the value of imports. For SEZ netting of foreign currency receivables and payable is permitted. Hence they will have to be careful in resorting to Duty drawback.

This apart, there are powers to the Central Government conferred under this section to specify by way of rules as to how much is the percentage of a specific imported material in a particular exported product on which duty drawback is available. In doing so, it is the duty of Central Government to ensure consistency with the relevant ‘Tariff reduction’ agreements with other countries. This is because these agreements spell out the required percentage of ‘Regional Value Content’ in the exported commodity to obtain the Certificate of origin. This Certificate is the proof for claiming concessional tariffs under the agreement. If there is lack of consistency in this regard it will become a ‘Catch 22’ sort of situation for the exporter.

Overall, there is no Drawback in the Duty drawback provisions.