DGFT must stop malpractice in drawback payments


The Policy Interpretation Committee of the Director General of Foreign Trade (DGFT), in its meeting of March 15, 2011, has taken an important decision that excise duty paid at the terminal stage of supply (last instance of excise duty paid in the chain of manufacture process in the supply) is not to be refunded in any manner including as drawback, in respect of deemed export supplies to non-mega power projects.  Goods imported for setting up mega power projects enjoy full Customs duty exemption, whereas goods imported for setting up non-mega power projects attract five per cent basic Customs duty and additional duty of customs (CVD) equivalent to normal excise duty. Therefore, under the deemed export provisions, domestic producers enjoy full excise duty exemption on supplies to mega power projects but are required to pay excise duty on supplies to non-mega power projects. The terminal excise duty so paid is not available as refund under the deemed export provisions under the Foreign Trade Policy (FTP).  Some non-mega power project owners found a way to get around these provisions. They used to enter into contracts with EPC (engineering, procurement and construction) contractors for supply of power plant. They used to avoid paying excise duty on the power plant, as excise duty is not leviable on immovable property (CBEC Circular number 58/1/2002-CX dated 15.01.2002). However, they claimed entitlement to deemed exports drawback of the duty paid on the inputs used in setting up the non-mega power plant on the grounds that ‘plant’ is included in the definition of capital goods under Para 9.12 of the FTP and that the definition of ‘manufacture’ in Para 9.36 of the FTP covers assembly. Thus, they claimed drawback of all the duties paid on various equipment that were imported or indigenously procured for setting up the non-mega power plant. A curious internal Policy Circular F.No. Misc.8/AM-2001/DBK Cell December 5, 2000, provided necessary support to such claims of deemed exporters and such claims were honoured by various offices of DGFT also although, strangely, the said Circular was not made public.  These clever interpretations and practices eliminated the distinction between supplies to mega power projects and non-mega power projects — not the real intention of FTP. Moreover, the FTP says that Duty Drawback Rules, 1995, will apply to drawback claims and as per the Customs Act under which the said Rules are notified, ‘goods’ do not include immovable property. So, there were serious doubts about the correctness of such drawback claims. Some scrupulous companies, especially public sector companies, refused to make such claims but many others took away the money. In this column of February 28, 2011, I had mentioned that contractors are able to claim drawback through ingenious interpretations that are blessed by the commerce ministry. The latest decision of the Policy Interpretation Committee seems to signal withdrawal of the blessings of the commerce ministry to the patently incorrect practice.  Following the decision of the Policy Interpretation Committee, the DGFT called a meeting of concerned parties on March 18, 2011, which was attended by many consultants who had facilitated such drawback payments. It is now necessary for the DGFT to examine the legal implications and issue proper instructions stopping any further malpractice and also ordering recovery of drawback wrongly paid to select, influential and financially powerful project owners and EPC contractors. – www.business-standard.com