DUTY DRAWBACK UNDER CUSTOMS ACT, 1962

Sustained export growth is crucial for maintaining and accelerating the GDP growth momentum, increasing employment and alleviating poverty. In order to encourage the export of the country the government provides duty drawbacks to exporters to make their products competitive in overseas. In case of goods which were earlier imported on payment of duty and are later sought to be exported within a specified period Customs duty paid at the time of import of the goods with certain cuts can be claimed as Duty Drawback at the time of export of such goods. The return of such duty is called duty drawback. Drawback scheme provides for rebate of the duty chargeable on the imported or excisable materials, components, packing materials etc. used in the manufacture of the export product.

Duty Drawback is the refund of duty on that part of the imported raw material used in the production of the goods and manufactured goods are exported. The drawback refers to the rebate of duty chargeable on any imported or excisable material used in the manufacture of goods exported from India. In order to encourage the export of the country the government provides duty drawbacks to exporters to make their products competitive overseas. In case of goods which were earlier imported on payment of duty and are later sought to be exported within a specified period customs duty paid at the time of import of the goods with certain cuts can be claimed as duty drawback at the time of export of such goods. The return of such duty is called duty drawback. In India duty drawback is governed by the Customs Act, 1962 and Customs, Central Excise Duties and Service Tax Drawback (Amendment) Rules, 2006

 MEANING & DEFINITION OF DUTY DRAWBACK:

Duty Drawback is defined as the refund of duty on that part of the imported raw material used in the production of the goods and manufactured goods are exported.[1]

‘Drawback’[2] in relation to any goods manufactured in India and exported, means the rebate of duty or tax, as the case may be, chargeable on any imported materials[3] or excisable materials[4] used or taxable services used as input services in the manufacture[5] of such goods;

According to Gruen, “Duty Drawbacks can be used to specify a flexible liberalization path and speed up the opening of protected economics.”

CONCEPT OF DUTY DRAWBACK:

Duty drawback scheme was introduced by the Ministry of Finance as a rebate for duty chargeable on any imported materials or excisable materials used in manufacture or processing of goods, manufactured in India and exported. The scheme promotes exports and to ensure that exported products are revenue neutral.

The Central Government is empowered to grant duty drawback under section 74 and 75 of the Customs Act, 1962. Under section 74 of the Customs Act, duty drawback to the extent of 98 percent of the duty paid on imported goods can be claimed for re-export, provided the goods are re-exported within 2 years of payment of import duty. Section 75 of the Act, empowers drawback on export of manufactured articles.

The principal method of encouraging the export of goods has been the drawback of customs and the central excise duties on goods manufactured out of customs duty paid and/or central excise duty paid on inputs or raw materials. Such Duty Drawback is granted in terms of Section 74 of the Customs Act, 1962 read with Central Excise Duties and Service Tax Drawback (Amendment) Rules, 2006. For this purpose, the identity of export goods is cross verified with the particulars furnished at the time of import of such goods.

According to Rule 3 (1) of the Customs, Central Excise Duties and Service Tax Drawback (Amendment) Rules, 2006 ‘Drawback’ is subject to the provision of Customs Act, 1962 and the rules made thereunder. According to Rule 3 (1), a drawback may be allowed on the export of goods at such amount, or at such rates, as may be determined by the Central Government. But where any goods are produced or manufactured from imported materials or excisable materials or by using any taxable services as input services, on some of which only the duty or tax chargeable thereon has been paid and not on the rest, or only a part of the duty or tax chargeable has been paid the drawback admissible on the said goods shall be reduced taking into account the lesser duty or tax paid or the rebate, refund or credit obtained.

CATEGORIES OF DUTY DRAWBACK:

Drawback is basically divided into two categories as per provisions of Section 74 and 75 of the Customs Act, 1962.

1.    Drawback allowable on re-export of duty-paid goods: Section 74 of Customs Act allows drawback on re-export of duty paid imported goods. Where any goods have been imported into India and those same goods entered for re-export or to be exported as a baggage or entered for export by post under section 82, the 98% of such duty shall be re-paid as drawback. But such goods must be identifiable as original imported goods and the goods must be entered for export within two years from the date of payment of duty on the importation.

2.   Drawback on imported materials used in the manufacture of goods which are exported: Section 75 of customs Act allows drawback on physical exports (other than re-exports) of finished products wherein duty has been paid, a drawback should be allowed on any imported materials of a class or description used in the manufacture or processing of such goods on which any operation has been carried out in India 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 section 51 by the proper officer.

GOODS ELIGIBLE FOR DRAWBACK:

This scheme applies[6]:

·   To export goods imported into India

·   To export goods imported into India after having been taken for use.

·   To export goods manufactured/produced out of imported materials.

·   To export goods manufactured/produced out of indigenous materials.

·   To export goods manufactured/produced out of imported or indigenous materials.

NECESSARY ELEMENTS FOR DRAWBACK:

The necessary elements to claim drawback are:

1. The goods on which drawback is claimed must have been previously imported;
2. Import duty must have been paid on these goods when they were imported;
3. The goods should be entered for export within two years from the date of payment of duty on their importation. The period can be further extended to three years by the Commissioner of Customs on sufficient cause being shown.
4. The goods must be capable of being identified as imported goods.
5. The goods must actually be re-exported to any place outside India.

Here export is defined as taking out to a place outside India to a place of India. And India includes Indian territorial waters. In case of Union of India v. Rajindra Dyeing & Printing Mills[7], it was held that export is complete when goods leave territorial waters of India. Drawback is available once ‘export’ is complete i.e. the goods cross the territorial waters even if they do not reach the destination or they are destroyed. However, if the goods are destroyed in territorial waters of India, drawback will not be available as the export is not complete.

In case of Custom Collector, Calcutta v. Sun Industries[8] the Supreme Court held that the expression “taking out to a place outside India” would also mean a place in high seas, if that place is beyond territorial waters of India. Therefore, the goods taken out to the high seas outside territorial waters of India would come within the ambit of expression “taking out to a place outside India”.

6. The market price of such goods must not be less than the amount of drawback claimed.
7. The amount of drawback should not be less than Rs. 50/- as per section 76 (1)(c) of the Customs Act.

DRAWBACK CLAIM PROCEDURE:

At the time of the export, exporter shall endorse the ‘shipping bill’ with description, quantity and other details to proper officer of Customs to decide whether goods are eligible for duty drawback. Customs officer makes an order permitting clearance and loading of goods for exportation under section 51 of Customs Act and said claim for drawback shall be retained by the proper officer making such order.[9] If the shipping bill under drawback is submitted electronically, that itself will be treated as claim for drawback[10].

SUPPLEMENTARY CLAIM OF DUTY DRAWBACK:

An exporter can file supplementary claim for drawback, if he is entitled to get additional amount. Such claim should be filed within three months. This period can be further extended by nine months by Assistant/Deputy Commissioner of Customs for sufficient cause[11].

PAYMENT OF DUTY DRAWBACK:

The drawback under these rules shall be paid by the proper officer of Customs to the exporter or to the agent specially authorized by the exporter to receive the said amount of drawback and interest.[12] The officer of Customs may combine one or more claims for the purpose of payment of drawback and interest, if any, as well as adjustment of any amount of drawback and interest already paid and may issue a consolidated order for payment.[13]

RECOVERY OF DUTY DRAWBACK:

Where an amount of drawback and interest has been paid erroneously or the amount so paid is in excess of what the claimant is entitled to, the claimant shall, on demand by a proper officer of Customs repay the amount so paid erroneously or in excess and where the claimant fails to repay the amount it shall be recovered by the Customs Officer.[14] Where an amount of drawback has been paid to an exporter but the sale proceeds in respect of such export goods have not been realized by the exporter in India within the period allowed under the Foreign Exchange Management Act, 1999, such drawback shall be recovered.[15]

RATE OF DUTY DRAWBACK:

In determining the amount or rate of drawback under this rule, the Central Government shall have regard to:

           ·      the average quantity or value of each class or description of the materials from which a particular class of goods is ordinarily produced or manufactured in India;

          ·      the average quantity or value of the imported materials or excisable materials used for production or manufacture in India of a particular class of goods;

      ·         the average amount of duties paid on imported materials or excisable materials used in the manufacture of semis, components and intermediate products which are used in the manufacture of goods;

           ·          the average amount of duties paid on materials wasted in the process of manufacture and catalytic agents:

           ·          the average amount of duties paid on imported materials or excisable materials used for containing or, packing the export goods;

          ·          any other information which the Central Government may consider relevant or useful for the purpose.

Under Duty Drawback Scheme, an exporter can opt for either All Industry Rate (AIR) of Duty Drawback Scheme or Brand Rate of Duty Drawback. The Duty Drawback Rate shall not exceed 33% of market price of export goods in any case.[16] The Central Government may revise amount or rates determined under rule 3.[17]

ALL INDUSTRY DRAWBACK RATE:

All Industry Drawback Rate are fixed by Directorate of Drawback, Dept. of Revenue, Ministry of Finance, Govt. of India. The rates are periodically revised – normally on 1^st June every year. Data from industry is collected for this purpose. The All Industry Drawback Rate is fixed under Rule 3 of Drawback Rules by considering average quantity and the value of each class of inputs imported or manufactured in India.

BRAND RATE OF DRAWBACK:

It is not possible to fix All Industry Rate for all the products. It cannot be fixed for special type of products. In such cases, Brand Rate is fixed.[18] The manufacturer has to submit application with all details to Commissioner, Central Excise. Such application must be made within 60 days of export.

SPECIAL BRAND RATE OF DRAWBACK:

All Industry Rate is fixed on average basis. Thus, a particular manufacture or exporter may find that the actual custom duty paid 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 for eligibility are:

             ·          The All Industry Rate should be less than 80% of the duties paid by him.

             ·          Rate should not be less than 1% of FOB value of product except when amount of drawback per shipment is more than Rs. 500.

             ·          Export value is not less than the value of imported material used in them i.e. there should not be ‘negative value addition’.

The provisions of section 16, or sub-section (2) of section 83, of the Customs Act, 1962 shall determine the amount or rate of drawback applicable to any goods exported under these rules.[19] Where the amount or rate of drawback is allowed with retrospective effect, such amount or rate shall be allowed from such date as may be specified by the Central Government by notification in the Official Gazette which shall not be earlier than the date of changes in the rates of duty on inputs or tax on input services used in the export goods.[20]

Where no amount or rate of drawback has been determined in respect of any goods, any manufacturer or exporter of such goods may, within sixty days from the date relevant for the applicability of the amount or rate of drawback in terms of sub-rule (3) of rule (5), apply in writing to the Commissioner of Central Excise or the Commissioner of Customs and Central Excise for determination of the amount or rate of drawback.[21] On receipt of such application the Commissioner of Central Excise or the Commissioner of Customs and Central Excise determine the amount or rate of drawback in respect of such goods.[22]

Where the manufacturer or exporter finds that the amount or rate of drawback determined for the class of goods is less than four-fifth of the duties or taxes paid on the materials, he may within sixty days from the date relevant for the applicability of the amount or rate of drawback, make an application in writing to the Commissioner of Customs and Central Excise for determination of the amount or rate of drawback stating all relevant facts.[23]

INTEREST ON DUTY DRAWBACK:

Duty drawback must be paid within one month. If not so paid, interest is payable to the claimant at the rate fixed under section 27A from the date after the expiry of such period.[24]The interest rate will be between 10% to 30% as may be fixed by Board from time to time.[25] If the drawback claim is deficient, the interest will commence only after all required papers are submitted.

Where any drawback has been paid to the claimant erroneously or it becomes otherwise recoverable under this Act, the claimant shall, within a period of two months from the date of demand, pay in addition to the said amount of drawback, interest at the rate fixed under section 28AA and the amount of interest shall be calculated for the period beginning from the date of payment of such drawback to the claimant till the date of recovery of such drawback.[26]

PROHIBITION OF DUTY DRAWBACK IN CERTAIN CASES:

As per Section 76 no drawback shall be allowed in respect of any goods the market-price of the goods is less than the amount of drawback; or where the drawback due in respect of any goods is less than fifty rupees.

In case of Om Prakash Bhatia v. Commissioner of Customs, Delhi[27] the Division Bench of the Court observed that for the purpose of getting drawback, the relevant consideration is the market price of the goods. But here market price is a price prevailing in the country and not the price of the goods which the exporter expects to receive from the overseas purchaser.

No amount or rate of drawback shall be determined in respect of any of the goods falling within Chapter 72 or heading 1006 or 2523 of the First Schedule to the Customs Tariff Act, 1975.[28] No amount or rate of drawback shall be determined in respect of any goods under rule 6 or rule 7, if the export value of each of such goods in the bill of export or shipping bill is less than the value of the imported materials used in the manufacture of such goods.[29]

In case of Commissioner of Central Excise & Customs, A.P. v. Suresh Jhunjhunwala & Others[30], Court opined that the exporters were obliged to declare the value of the goods. In a detailed judgment, the Court not only took into consideration the provisions of the Customs Act, but also Section 15 of the Foreign Exchange Regulation Act and the rules framed thereunder, as also the notifications issued by the Central  Government from time to time. The Court opined that for determining the export value of the goods, it is necessary to refer to the meaning of the word "value" as defined in section 2 (41) of the Act, and the same must be determined in accordance with the provision of sub-section (1) of section 14. Section 14 specifically provides that in case of assessing the value for the purpose of export, value is to be determined at the price at which such or like goods are ordinarily sold or offered for sale at the place of exportation in the course of international trade, where the seller and the buyer have no interest in the business of each other and the price is the sole consideration for sale.

No drawback shall be allowed[31]:

           ·          if the said goods except tea chests used as packing material for export of blended tea, have been taken into use after manufacture.

           ·          if the said goods are produced or manufactured, using imported materials or excisable materials or taxable services in respect of which duties or taxes have not been paid;

In Rubfila International Ltd. v. CCus. Cochin[32], there was no duty incidence on 97% of the inputs of the export product except the duty incidence on remaining 3% of the inputs, which was insignificant. All Industry Rates fixed for particular export products are applicable to all exporters who export the same. Where there is clear evidence that the inputs of such export products have not suffered any duty, no drawback can be claimed.

           ·          on jute batching oil used in the manufacture of export goods, namely, jute, yarn, twist, twine, thread, cords and ropes;

           ·          if the said goods being packing materials have been used in or in relation to the export of jute yarn, jute fabrics, jute manufactures not elsewhere specified.

CONCLUSION

Duty Drawback enables exporting companies to obtain a refund of customs duty paid on imported goods where those goods will be treated, processed or incorporated into other goods for export. The duty drawback scheme is made because there is no need to levy custom duty on import if the goods are imported for re-export or imported materials are used in the manufacture of goods which are then exported. Neutralizing the tax element in export products is an internationally accepted methodology to encourage exports. However, there are multiple schemes apart from Drawback such as DEPB, Advance Licence/DEEC, DFRS, EPCG and EOU/SEZ.

Duty Drawback can only be claimed by the exporter of any product when he had already been paid the duty on the imported goods. And such goods are re-exported to any other country as the identifiable goods or any final product is exported which are made by using the imported goods on which duty has already been paid. This duty drawback scheme is helpful to maintain and accelerate the GDP growth. It helps to encourage the export and to make the foreign exchange though export.

There are some loopholes in this scheme also. Sometimes, the exporters show the fraudulent invoice or shipment details to earn profit by using this scheme by showing the transaction value more than the original. Many times exporter succeeded to defraud the custom officer. Then those issues are challenged in the Tribunal and Court by the authority.

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