AN OPEN LETTER TO THE HON’BLE FINANCE MINISTER, GOVERNMENT OF INDIA, NEW DELHI FOR HIS PERUSAL AND IMMEDIATE INTERVENTION.
I am an Advocate, practising in Chennai, mainly on Indirect Issues. I wish to bring it to your knowledge certain contents of the circular F.NO DGEP/SEZ/473/2006/835 DATED 03.04.2008 issued on the subject "Special Economic Zones - Guidelines for field formations - reg"(copy attached) issued by the Director General of Export Promotion, Ministry of Finance, which is against the provisions of SEZ ACT / SEZ Rules / Cenvat Credit rules 2004. Because of this circular, the manufacturers supplying goods to the Developer of SEZ are put into hardship.
Hence, necessity has arisen to bring the following to your kind attention for doing the needful.
a) SEZ Developers are procuring various excisable goods from the manufacturers in Domestic Tariff Area without payment of duty in terms of the provisions of SEZ Act/ SEZ Rules and Board Circular No. 29/2006 dated_27.12.2006 treating the clearance as “EXPORT” and following the procedure set out in Rule 19 of Central Excise Rules and the Notification issued under the relevant Rule.
b) Director General of Export Promotion, Ministry of Finance, New Delhi in his Circular (F No. DGEP/SEZ/473/2006/835 dated 3.4.2008) has stated in para 4(10) that “Cenvat credit is not available for the inputs used in the finished products supplied to “Developer of SEZ” in terms of Rule 6(6) of Cenvat Credit Rules, 2004”
c) Consequently, the Field Officers of the Central Excise Department insist all the manufacturers to reverse the cenvat credit content on the inputs used in the excisable finished products supplied to SEZ Developers.
d) The above circular is not only against the provisions of SEZ Act / SEZ Rules / Cenvat Credit Rules and the Board Circular No. 29/2006 Cus dated 27.12.2006 but also put the manufacturers in huge loss in reversing the credit.
I, on behalf of the manufacturers across the Country, submit that the Circular dated 3.4.2008 is against the Provisions of SEZ Act / SEZ Rules / Cenvat Credit Rules and Board Circular dated 27.12.2006 for the following reasons:
1) SEZ ACT SAYS " Supply from DTA to a developer in SEZ is an "EXPORT"
2) SEZ Rule 30 says " SEZ Developer can procure any material from DTA without payment of duty. The supplier of materials from DTA can follow the procedure prescribed under Rule 18 and Rule 19 of Central Excise Rules.
3) Rule 18 allows Rebate on Excise Duty paid on goods cleared for Export
4) Rule 19 prescribes the procedure for clearance to Export without payment of duty.
5) Cenvat Credit rule 5 says " When any excisable finished goods cleared for Export, the manufacturer can retain the credit and utilize the same for other duties payable on goods cleared for home consumption . If the utilisation is not possible, then the manufacturer can get cash refund of the credit ". This rule clearly indicates that cenvat credit need not be reversed and the same can be retained.
6) Cenvat Credit Rule 6(6) Clause (v) says 'The provisions of sub rule (1), (2), (3) and (4) of Rule 6 shall not be applicable to 'goods cleared for export under Bond in terms of the provisions of Central Excise Rules, 2002". In other words, for goods cleared for export under Bond, the assessee need not reverse the cenvat credit on inputs and instead he can retain the credit.
7) The Department Officers rely on Clause (i) of Rule 6(6) of Cenvat Credit Rule which says “The provisions of sub rule (1), (2), (3) and (4) of Rule 6 shall not be applicable to ‘goods cleared for a unit in a Special Economic Zone”. The Field Officers are quoting this clause and contending that this provision is not applicable to SEZ Developers since the clause does not specifically cover ‘SEZ Developers’.
8) The above view of the Department Officers is not correct for the following reasons:
a)At the time of introducing the new Cenvat Credit Rules in 2002 / 2004, there was no SEZ Act / Rules in force.
b) Before introduction of SEZ Act / Rules, goods supplied to a unit in SEZ were exempted from excise duty by a Tariff Notification as in the case of goods supplied to a 100% EOU, STP, HTP etc.
c) Before introduction of SEZ Act / Rules, supplies to SEZ units were treated as ‘Deemed Export’. Hence, Clause (i) of Rule 6(6) of Cenvat Credit Rules protects the cenvat credit benefit on inputs.
d) Now, as per SEZ Act / SEZ Rules, procurement by SEZ unit / SEZ Developer from Domestic Tariff Area are treated as “Physical Export” and put on par with regular export to other countries.
e) Goods cleared for Export are not covered under any tariff exemption notification but the same are allowed to be cleared without payment of duty in terms of Rule 19 of Central Excise Rules and the procedure set out in the Notification issued under the said rule. So, there is no exemption from excise duty but the duty payment is deferred based on conditions stipulated in the Notification. Clause (i) of Rule 6 (6) of Cenvat Credit Rules is applicable only for goods cleared under a specific exemption notification and not applicable to goods cleared for export . Clause (i) of Rule 6(6) of Cenvat Credit Rule is redundant and the same has to be deleted since the supplies are not based on an exempted Tariff Notification, but the supplies are made by following the procedure set out in Rule 19 of Central Excise Rules and the relevant Notification issued under the said rule.
f) On the other hand, supplies to SEZ are squarely covered under clause (v) of Rule 6(6) of Cenvat Credit Rules which specifically covers ‘goods cleared for export in terms of Rule 19 of Central Excise Rules’
9) On the other hand, if a manufacturer clears the excisable goods to SEZ Developer on payment of duty in terms of Rule 18 of Central Excise Rules, he is eligible to get the duty amount paid as ‘rebate of duty’. In this case, the manufacturer not only get the entire duty paid as rebate but also retain the cenvat credit on inputs since the provisions of Rule 6(6) of Cenvat Credit Rules are not applicable when goods are cleared on payment of duty.
10) The Transaction is revenue neutral when goods are cleared to SEZ Developer without payment of duty in terms of Rule 19 of Central Excise Rules. Hence. Clause (v) of Rule 6(6) of Cenvat Credit Rules allows credit on inputs used on such goods cleared to enable the manufacturer to retain the cenvat credit.
11) In view of the above legal position, the circular dated 3.4.2008 issued by the Director General of Export Promotion, Ministry of Finance, New Delhi directing the field officers not to allow the cenvat credit on inputs used in goods supplied to SEZ Developer is against the Law.
12) It is a settled Law through various decisions of the Hon’ble Apex Court that circulars issued by the Board can not over-ride the Act / Rules.
13) In-spite of the legal right to retain the credit, the manufacturers are put into hardship by the field officers to reverse the credit.
14) If the credit is denied, it is a huge loss to the manufacturer and that is not the intention of the Government. Because of a circular which is issued against the provisions of the ACT / Rules framed by the Government, the manufacturers (also general public) will lose faith on this Government.
In view of the above, I request the Hon’ble Finance Minister to intervene and to instruct the Director General of Export Promotion to withdraw the instruction relating to ‘reversal of credit on inputs used in goods supplied to SEZ Developer’ to avoid unnecessary litigation .
I am very confident that this circular will be set aside by the higher appellate fora . However, I wish to bring it to your notice since you are also an eminent Advocate and also a well wisher of all trade and industries.
An early action in this matter would be highly appreciated.
Thanks and Regards
Manideepam Ground floor
10, Baggiathammal Nagar
PADI, CHENNAI 600 050
PHONE 044 2625 1169
Mobile 98400 87349