CHAPTER - 8
DUTY EXEMPTION SCHEMES

8.1    Non fulfilment of export obligation

(a)    Advance Licensing Scheme

In terms of Para 128 of Handbook of Procedures 1992-97 Vol.I, if the export obligation is not fulfilled both in terms of quantity and value, the licence holder of both VABAL and QBAL shall, for regularisation, pay:

i)    to the customs authority, customs duty on the unutilised imported material along with interest at the rate of 24 per cent per annum thereon;

ii)    to the licensing authority a sum which is equivalent to the CIF value of unutilised material imported and a sum equivalent to the short fall in export obligation.

In addition, if the holder of a duty free licence under the scheme violates any conditions of the licence, a penalty in terms of Section 11(2) of F.T.(D&R) Act, 1992 was also leviable.

(i)    Two quantity based advance licences (QBAL) were issued to two exporters between May and October 1995 by the licensing authority at Vadodara for duty free imports of goods valued at Rs.1.10 crore against prescribed export obligation of Rs.1.84 crore. Against the import of goods worth Rs.1.12 crore, the licencee could export goods worth Rs.1.69 lakh only within the validity period of the licences, resulting in shortfall of Rs.1.83 crore in export obligation. The licencees were liable to pay; (i) Rs.63.53 lakh towards the customs duty on the unutilised imported materials and interest of Rs.58.94 lakh thereon. (ii) Rs.1.11 crore as the sum equivalent to the unutilised imports and Rs.1.83 crore equivalent to the shortfall in export obligation.

On being pointed out (October 1997 to March 1999), the licensing authority reported (July 1999) that a show cause notice had been issued to the licencee in one case. Reply in the other case is awaited (January 2001).

(ii)    A special imprest licence with CIF of Rs.30.17 lakh and FOB of Rs.1.56 crore was issued by Dy. DGFT, Bhopal to a public undertaking in September 1996. While discharging the export obligation exports worth Rs.60 lakh made prior to the submission of application was accounted for resulting in short fall of export obligation in terms of quantity and value both. Therefore the licensee is liable to pay Rs.5.38 lakh towards the customs duty on the unutilised imports and interest of Rs.3.12 lakh upto March 2000 thereon and to the licensing authority an amount of Rs.60 lakh and Rs.11.30 lakh respectively towards short fall in export obligation and value of excess imports..

On being pointed out (May 1998), the licensing authority reported (May 2000) recovery of Rs.8.57 lakh towards customs duty and interest thereon and surrender of SIL of Rs.22.61 lakh.

(b)    EOU/EPZ Scheme

Customs notification No.133/94 dated 22 June 1994, allowed import of duty free capital goods and raw materials etc. by a unit in an EPZ subject to the condition that the unit should achieve the prescribed value addition and export obligation. Notification No.65/99-Cus dated 19 May 1999 empowers the department to demand duty and interest at the rate of 20 per cent on the duty on goods imported duty free in the event of failure to achieve the stipulated export obligation and the value addition. As per clause 7 of the LUT signed by an EPZ unit, customs duty alongwith interest at the rate of 18 per cent is recoverable in the event of failure to fulfill export obligation.

(i)    A unit in Cochin Export Processing Zone (CEPZ) was permitted (February 1994) to manufacture and export electronic components with prescribed export obligation of Rs.39.02 crore for five years. Against this the unit could export goods worth Rs.64.85 lakh only. The unit ceased to function from 1995-96 onwards. Audit scrutiny revealed that the unit could achieve export obligation and value addition to the extent of 1.36 and (-)7.71 per cent respectively against the import of duty free capital goods worth Rs.20.49 lakh during 1994-95 and raw materials worth Rs.49.36 lakh during 1995-96. As the unit failed to achieve the prescribed export obligation and value addition, duty forgone on the imports amounting to Rs.31.58 lakh alongwith interest of Rs.29.98 lakh was recoverable.

On being pointed out (October 1998), the department contended that (October 1999) the case has been referred to DGFT to take penal action but there was no provision for recovery of duty forgone for the non fulfilment of export obligation and value addition during the relevant period.

The contention of the department is not tenable as the LUT signed by the firm makes it liable to pay duty and interest on the duty free imported goods in the event of failure to achieve the export obligation and value addition.

(ii)    A 100 per cent EOU obtained Secretariat for Industrial Approval (SIA) permission valid upto October 1993 and extended upto October 1994 to manufacture and export 'Tissue culture plants'. The unit commenced commercial production in September 1995. Against import of capital goods of Rs.7.08 crore, the unit could achieve value addition of minus 1953 per cent as against the minimum target of 81 per cent upto 31 March 1997. As the unit failed to achieve the value addition and export obligation, the duty forgone of Rs.6.60 crore on the import needs to be recovered.

On being pointed out (February 1998), the department stated (May 2000) that a Show Cause Notice has been issued. Final out come of the case is awaited (January 2001).

(c)    EPCG Scheme

Notification No.160/92-Cus. dated 20 April 1992 exempts capital goods from payment of duty imported by specified importers under EPCG scheme subject to certain conditions.

An EPCG licence holder with an export obligation of US $ 156.34 Million, was able to export only to the extent of US $ 73.62 Million till the extended period thereby leaving a short fall of US $ 82.72 Million. No demand as stipulated in the notification dated 20 April 1992 has been raised by the department resulting in non recovery of custom duty of Rs.44.36 crore alongwith interest of Rs.71.46 crore.

On being pointed out (September 1999), the department reported (January 2001) that the demand has since been confirmed.

8.2    Irregular sale in Domestic Tariff Area (DTA)

(a)    Sale in domestic tariff area (DTA) would be permissible only if the value addition achieved by a hundred per cent export oriented unit (EOU) is not less than the minimum value addition specified for the item in the Exim Policy. Further as per Note 3 under para 119 of Exim Policy 1992-97, in the case of projects where the investment in land, building, plant and machinery exceeds Rs.200 crore, the value of goods shall be amortised.

A hundred per cent EOU with an investment of less than Rs.100 crore in Madras Export Processing Zone (MEPZ), Chennai, was engaged in the manufacture and export of yarn and fabric. During the period from January 1993 to March 1994 and April 1994 to March 1995, the unit achieved value addition of (-)127.45 per cent and 20.62 per cent respectively against the prescribed value addition of 30 per cent. The Development Commissioner, MEPZ, permitted (January 1994, July 1994, March 1995) the unit to effect DTA sales for a total value of Rs.5.75 crore during the period January 1993 to December 1994. However, the unit had effected DTA sales for a value of Rs.8.31 crore on payment of concessional customs duty of Rs.3.85 crore.

As the unit could not achieve the prescribed value addition, the DTA sale was irregular. Therefore, full customs duty was recoverable. The differential duty payable worked out to Rs.4.20 crore.

On being pointed out (November 1998 and July 1999), the Development Commissioner justified (May 2000) the value addition adopted on the ground that as per Exim Policy, the value of capital goods should be amortised for calculating value addition.

The reply of the department is not tenable as amortisation is permissible only in case where the investment in land, building, plant and machinery exceeds Rs.200 crore. In the instant case the value of capital investment was less than Rs.100 crore.

(b)    An EOU was permitted (April 1995) advance DTA sale amounting to Rs.3.54 crore. Against this, the unit made DTA sale of Rs.7.44 crore between 1995-96 and 1997-98. For the excess DTA sale of Rs.3.90 crore duty amounting to Rs.1.35 crore was recoverable.

On being pointed out (July 1999) the customs department initiated (August 1999) action to realise the amount.

Final outcome of the case is awaited (January 2001).

8.3    Short surrender of Special import licences (SIL)

In terms of para 128-A(i) of Handbook of Procedure 1992-97, if the Export Obligation is fulfilled in terms of quantity but not value, in respect of a Quantity Based Advance Licence, the licence holder shall, for regularisation, pay to the licensing authority a sum equivalent to the shortfall in export obligation expressed in free foreign exchange. Alternatively, the licensee can surrender to the licensing authority Special Import Licence of value to twice the amount of shortfall in export obligation expressed in free foreign exchange.

(a)    A bulk drug manufacturer was issued a Quantity Based Advance Licence by Jt.DGFT, Hyderabad in December 1994 with CIF value of Rs.2.55 crore and FOB of Rs.3.39 crore. The licencee achieved the export obligation in terms of quantity but there was shortfall of Rs.76.47 lakh in terms of value. Accordingly, the licensing authority had reduced the CIF value proportionately to actual exports and worked out the value of excess imports as Rs.33.45 lakh. On surrendering of Special import licences worth Rs.66.89 lakh the licence was redeemed (January 1999).

Audit scrutiny revealed that the value of excess imports were computed incorrectly without deducting the commission payable by the licensee from the FOB value of exports. The incorrect computation in regularising the shortfall in export obligation had resulted in short surrender of Special Import Licenses worth Rs.66.39 lakh.

This was pointed out in May 1999. Reply of the department is awaitedss (January 2001).

(b)    A VABAL was issued in June 1994 by Jt. DGFT, Hyderabad with CIF of Rs.1.44 crore and FOB of Rs.2.21 crore. The licensing authority revised the export product and quantities without amending the FOB and CIF value in the licence in March 1997. The licence was redeemed in February 1999 with revised export obligation on prorata basis with reference to actual exports made. For regularisation of shortfall of export obligation, the licencee surrendered Special Import Licence (SIL) for Rs.84.32 lakh being the twice the amount of shortfall.

Non-adoption of amended export quantity for computation had resulted in short realisation of Rs.51.89 lakh towards shortfall in export obligation and excess value of imports.

On being pointed out (May 1999), the licensing authority admitted the objection and demanded the amounts due from the licencee (April 2000). The details of realisation are awaited (January 2001).

8.4    Excess imports

(a)    Inflating the unit price of imports

In terms of Para 109(D) and 110 of Handbook of Procedures 1992-97, an applicant exporter, for a Value Based Advance Licence (VABAL) was required to declare in the application form (Appendix XVII of HBP), the quantity of each item required to be imported and its CIF value based on the prevailing international price. Corrective action was required to be taken by concerned Customs/Licencing authority in terms of Ministry of Finance circular No.23/96 dated 19 April 1996 in such cases where the importer failed to justify variation in prices of actual imports greater than 20 per cent of the amount filed in the application.

Four Value Based Advance Licences were issued to an exporter by Jt. DGFT, Ahmedabad during July 1993 and October 1993. The prices of Naphthalene crude, being an input, as declared in the application varied from 178.25 per cent to 261.81 per cent with respect to actual unit price of import leading to excess import of raw material to the tune of Rs.25.84 lakh. The customs duty of Rs.22.39 lakh on excess import made was recoverable, besides interest of Rs.28.78 lakh upto March 2000.

On being pointed out (January 1998, the Jt.DGFT replied (May 1999) that for two licences out of total four issued, the exporter was declared defaulter and the other two cases are being examined by DGFT, New Delhi. Final reply is awaited (January 2001).

(b)    Non restriction of import of consumables

In terms of Customs notification Nos.204/92 dated 19 May 1992 and 80/95 dated 31 March 1995, the Commissioner of Customs may allow adjustment of individual value of imports within the total value of the licence. However, consumables required for the manufacture of high tensile precision fasteners were allowed to be imported upto 5 per cent of the FOB value of fasteners. Hence in respect of value restricted items such overall adjustment of import as per notification is not possible.

In respect of eight quantity based advance licences issued during 1994-95 and 1995-96 to a Public Limited Company, import of consumables for export of fasteners was allowed to the extent of US $ 7.78,145.32 as against US $ 5,68,572.29 reckoned at 5 per cent of FOB value of exports. This resulted in excess import of US$ 2,09,573.03. The licencee is liable to pay to the customs authority customs duty of Rs.30.90 lakh along with interest thereon and to the licensing authority a sum of Rs.69.52 lakh being the value of excess consumables imported.

On being pointed out (January 1998, April and June 1999), the customs department stated (July 1999) that action is being taken to examine the issue for appropriate action. The licensing authority admitting the objection stated (April 2000) that steps were being taken to effect recovery.

8.5    Other cases

In 11 other cases, non levy of duty due to non fulfilment of export obligation and incorrect levy of duty on DTA sales amounting to Rs.1.09 crore were pointed out as detailed below. Mistakes in seven cases were accepted by the department.

(Rupees in lakh)

Sl. No.

Nature of irregularity

Amount objected

Whether accepted by deptt./Ministry

1.

Irregular DTA sales

44.84

--

2.

Non fulfillment of export obligation

23.79

yes

3.

Irregular DTA sales

8.30

--

4.

Irregular DTA sales

7.55

yes

5.

Irregular DTA sales

5.11

--

6.

Non fulfillment of export obligation

4.96

--

7.

Irregular DTA sales

4.50

yes

8.

Non fulfillment of export obligation

3.61

yes

9.

Non fulfillment of export obligation

2.85

yes

10.

Irregular DTA sales

2.43

yes

11.

Non fulfillment of export obligation

1.02

yes

 

Total

108.96