DEEMED EXPORTERS

I. INTRODUCTION
In a post -September 11th America, perhaps one of the most critical objectives in promoting
our national security is preventing would-be terrorists and the countries that harbor them from
gaining access to sensitive U.S. technology. One of the best ways in which the U.S. Government
and U.S. companies can achieve this goal is to vigorously monitor the transfer of controlled dualuse technology, software and technical data to foreign nationals. Accordingly, all companies
with foreign national employees should be familiar with the legal implications associated with
the Deemed Export Rule.
Under the Deemed Export Rule, the U.S. Department of Commerce (Commerce) treats the
release of U.S.-origin technology, software and technical data to foreign nationals in the U.S. as
an export to the individuals home country. Consequently, the Deemed Export Rule can have a
considerable legal impact on companies employing foreign nationals. By employing foreign
nationals in positions in which they have access to controlled technology, a company is, for legal
purposes, exporting that technology to another country, even if the transfer occurs within U.S.
borders and the information never leaves the country. Further, depending on the nature of the
technology involved and the country at issue, the Deemed Export Rule can trigger U.S. export
licensing requirements and expose a company to significant legal liability for failure to comply
with those requirements.

II. THE DEEMED EXPORT RULE

The Deemed Export Rule is codified under the Export Administration Regulations (EAR) at
15 C.F.R. 734.2(b)(2)(ii) and administered by Commerce's Bureau of Industry and Security
(BIS). Under the Rule, an export of U.S.-origin technology, software, or technical data is
deemed to take place, for legal purposes, when it is released to a foreign national. Release is
broadly defined and can occur via any of the following methods: (1) visual inspection (including
reading technical specifications, plans, blueprints, etc. or viewing U.S.- origin equipment or
facilities); (2) oral exchange of information in the United States or abroad; or (3) application
abroad of personal knowledge or technical experience acquired in the United States.
For BIS purposes, covered technology includes data required for the design, development or
production of controlled items. Therefore, it is imperative that companies correctly classify their
commodities on Commerces Commodity Control List (CCL) and establish the appropriate
export licensing requirements. The primary concern, of course, is that. companies run the risk of
violating U.S. export controls simply by employing foreign nationals in positions in which they
have access to controlled software, technology or technical information without obtaining
appropriate export licenses. As a general rule, if a companys commodity requires a license to
export to a particular country, then it is highly likely that an export license will be required to
transfer technology to a foreign national from that same country when the technology involves
the design, development or production of that commodity. Note that the Rule does not apply to
publicly available technology, nor does it apply to U.S. citizens, permanent resident visa holders,
refugees or asylumees.

III. LICENSING AND ENFORCEMENT

A. Export Licensing
Deemed export licenses generally are valid for 2 years and comprise nearly 10 percent of all
export licenses approved by BIS. In 2001, for example, BIS approved 822 deemed export
license applications and rejected 3. Most of the approved licenses authorized foreign nationals to
work with advanced computer, electronic, or telecommunication and information security
technologies in the United States. These approvals included foreign nationals from countries of
concern, such as China, Russia, Iran, India, Syria, Iraq and Pakistan.
BIS reviews deemed export licenses in accordance with the same procedures that apply to export
license applications for tangible commodities, software or technical data. Therefore, a company
should identify all potential exposure or access a foreign national employee might have to
controlled technology, software and technical data. Next, the company should determine the
proper CCL category, reasons for control, and whether any license exception applies. For
example, if the Technology and Software Restricted (TSR) exception applies under Part 740.6
of the EAR, then the company need only obtain from the employee a signed non-disclosure
assurance statement that he or she will not disclose, transfer or re-export the information in
violation of U.S. export controls.
Assuming that a license is required, however, a company must apply for a deemed export license
when both of the following conditions are met: (1) the company intends to transfer controlled
technology to the foreign national in the United States; and (2) transfer of the same technology to
the foreign nationals home country would require an export license. The company must file
Form BXA-748P and submit a letter of explanation providing certain information about the
employee and the scope of the proposed transfer. This information includes: (1) basic personal
information about the employee, including his country or countries of nationality, place of
residence and other biographical details; (2) the location of proposed employment; (3) a detailed
job description, including the responsibilities of the position and the scope of the employees
possible contact with other persons with access to controlled technology or information; (4) a
description of the technology, software or technical data involved and the form in which it will
be released to the employee; (5) a description of the commodity to be produced with the

controlled technology, including a description of the manufacturing process and the companys
output capacity; and (6) an explanation of how the company will benefit from employing the
foreign national (i.e., how the employee will affect product improvement, technical processes or
other services).
In all circumstances where a company believes that a deemed export license may be required, the
company should take special precautions to ensure that the foreign national employee involved
does not access controlled technology, software or technical data unless and until BIS issues
license approval. As discussed below, failure to obtain BIS approval prior to releasing
controlled technology, software or technical data to a foreign national can result in serious
criminal, civil and administrative penalties, both for the individuals involved and for the
company itself.
B. Enforcement
As a result of the national security concerns stemming from countries upgrading their military
capabilities with U.S. civilian technology, Commerce has begun to increase its enforcement of
the Deemed Export Rule in recent years. Prior to 2000, Commerce treated violations of the Rule
as civil enforcement matters. However, in October 2000, a U.S. grand jury in San Jose,
California indicted two executives and their companies for illegally transferring sensitive
software and technology to China in violation of the Deemed Export Rule. The indictments
against Silicon Telecom Industries, Inc., Suntek Microwave, Charlie Kuan and Jason Liao mark
the first time that Commerce has prosecuted companies and individuals for violating the Rule.
As of December 2002, a trial setting hearing had been scheduled for the two companies and
Jason Liao. Charlie Kuan entered guilty pleas on the counts against him and was awaiting
sentencing.
The criminal indictments suggest that Commerce is beginning to focus more aggressively on
enforcing the Deemed Export Rule. Given the events of September 11, 2001, it is highly likely
that this effort will only intensify. Therefore, companies should be aware of the various penalties
associated with violating the Rule, including the criminal, civil and administrative penalties that
can be assessed against a company and/or individual involved with a violation.

Under the EAR, criminal penalties for knowing violations include: (1) fines of five times the
value of the exports involved or $50,000, whichever is greater; (2) imprisonment for up to five
years, or (3) both. By comparison, the criminal penalties for willful violations are even more
severe. Willful violations are those violations that occur with the knowledge that the exports
involved are intended for or will be used to benefit a controlled country or any country to which
exports are controlled for foreign policy or military intelligence gathering purposes. The
penalties for willful violations include fines of up to $1 million per violation for corporations;
for individuals, the penalties include fines of up to $250,000 per violation and up to 10 years
imprisonment, or both.
The civil and administrative penalties for violating the Deemed Export Rule are equally harsh.
Companies and individuals can be assessed civil penalties of up to $10,000 per violation, or up to
$100,000 per violation for violations involving national security controls. On the administrative
side, violations also may result in the revocation of export licenses, denial of export privileges
and/or exclusion from practice before BIS.
As these penalties suggest, violations of the Deemed Export Rule can have severe consequences
for the company and individuals involved. Therefore, as a practical matter,
companies should be vigilant in ensuring compliance with the Rule and obtaining appropriate
export licenses before transferring any controlled technology, software or technical data to
foreign nationals.

BENEFITS OF DEEMED EXPORT:

The Foreign Trade Policy, 2009-14 (For short 'FTP') deals with 'deemed exports'. Paragraph 8.2
of the FTP specifies the various categories of supply of goods which are considered to be
'deemed exports'. Such categories includes the goods supplied to an Advance Authorisation
Holder, EOU, EPCG Authorisation Holder, the projects funded by multilateral agency or mega
power projects etc.
FTP deals with various benefits available to deemed exports. These benefits include Advance
Authorisation, Deemed Export Drawback, and Refund/Exemption from Terminal Excise Duty
etc. In the past the DGFT Office has tried to clarify the ambiguities relating to the deemed export
benefits by way of Circulars or modifications in the FTP/Handbook of Procedures. However,
unfortunately the said clarifications/notifications have resulted in complete anarchy and the
various suppliers/recipients of goods as 'deemed exports' find themselves in a very messy
situation when they try to get these benefits. This is for the reason that the various benefits
enshrined in the FTP have not been properly synchronised with the Customs / Central Excise
provisions. Even on vital issues the understanding of the DGFT Office itself is totally erratic and
irrational and without any justification.

Benefits to the supplier

8.2 In respect of supplies made in terms of paragraphs 8.2(a) of the Policy, the supplier shall be
entitled to Advance Licence for intermediate supply.
8.2.1 If the supplies has made the against Advance Release Order (ARO) or Back to Back Letter
of Credit issued against Advance Licence, in terms of paragraphs 4.18 and 4.19 of the Policy,
supplier shall be entitled to the benefits listed in paragraphs 8.3(b) and (c) of the Policy,
whichever is applicable.
8.2.2 However, in such cases where Advance Release Order (ARO) or Back to Back Letter of
Credit has been issued against DFRC, in terms of paragraphs 4.18 and 4.19 of the Policy,
supplier shall be entitled only to the benefit listed in paragraph 8.3(b) of the Policy.

8.2.3 In respect of supply of goods to EOU/EPZ/SEZ/ EHTP/ STP in terms of paragraphs 8.2 (b)
of the Policy, the supplier shall be entitled to the benefits listed in paragraph 8.3(a),(b)and (c) of
the Policy, whichever is applicable.
8.2.4 In respect of supplies made under paragraphs 8.2 (c) (d)(f), (g) and (j) of the Policy, the
supplier shall be entitled to the benefits enumerated in paragraphs 8.3(a),(b) and (c),whichever is
applicable.
8.3 In all cases of deemed exports, supplies shall be made directly to the designated Projects/
Agencies/ Units/ Advance Licence/EPCG licence holders. The sub-contractor may, however,
make the supplies to the main contractor as per paragraph 8.7 instead of designated projects/
agencies.

Benefits to sub- contractor

8.7 Supplies made by an Indian sub-contractor of an Indian or foreign main contractor, shall also
be eligible for deemed export benefits provided the name of the sub-contractor is indicated either
originally or subsequently in the contract, and payment certificate is issued by the project
authority in the name of the sub-contractor in the form given in Appendix 12A.
In respect of supplies made by sub-contractor to the main contractor under paragraph 8.2 (d)(e)
(f) (g)(i) and (j), the main contractor may make payment to the sub-contractor and issue payment
certificate in the form given in Appendix-12A as Form 1-C. However, for supplies under
paragraph 8.2(d) (e) (f) (g) and (j), the payment certificate from main contractor shall not be
insisted for refund of Terminal Excise duty. The deemed exports benefits to the sub-contractor
would be available to the extent of goods that are manufactured and supplied by him or
outsourced from other manufacturers.

DRAWBACKS OF DEEMED EXPORT:

9. A person instead of taking the benefit of advance authorisation may opt to get deemed export
drawback against the goods supplied as deemed export. Paragraph 8.3.6 of the Handbook of
procedures provides that the Drawback Rules,1995specified by the Ministry of Finance mutatis
mutandis will apply to the deemed export drawback.
10. Under the Duty Drawback Rules, 1995specified by the Ministry of Finance, an exporter is
eligible to get either the brand rate of duty drawback or 'All industry rate of duty drawback'. In
case he chooses to get the brand rate of duty drawback then he has to make
the application to the Jurisdictional Excise Authority with documentary evidence of the duty
suffered on the export goods. But in case where an exporter chooses to claim all industry rate of
duty drawback either on the higher side (Where no cenvat credit is availed) or lower side/custom
portion(where the cenvat credit has been availed) he is not required to prove the actual duty
incidence suffered on the goods exported. This is for the reason that All Industry rate of
drawback is fixed on the concept of 'average duties suffered'. The duty drawback is automatically
given to an exporter based on the rate of duty drawback prescribed under the schedule of 'All
industry rate of duty drawback'.
11. Since the provisions of the Drawback Rules are mutatis mutandis applicable to the 'deemed
export drawback' the deemed exporter should also be eligible to get the same in the same manner
to get the deemed export duty drawback as they are given to an exporter in the case of physical
export of goods.
12. In the case of deemed exports, if a person has supplied the goods as deemed exports and has
not availed the cenvat credit on the inputs or input services then the Licensing Authority working
under the aegis of the Office of the DGFT grants a deemed export drawback at all industry rate
of duty drawback without asking any proof of customs duty on such supplies. However, when a
deemed exporter claims a lower amount of duty drawback (also called the custom portion) on the
ground that he has taken the cenvat credit then the said benefit is being denied to him on the
ground that he has to prove the payment of customs duty on the imported inputs.

13. In fact paragraph 8.5 of the FTP clearly provides that the customs portion of the duty
drawback shall be admissible to such supplier in case he has availed the cenvat credit. The DGFT
Office has issued a Circular No. 9(RE-2013)/2009-14 dated 30.10.2013 in which it has been
clarified that the customs portion of the duty drawback by way of brand rate will be allowed only
if a supplier has actually paid the customs duty on the imported inputs/components. The said
understanding of the DGFT is incorrect, illogical and contrary to paragraph 8.3.6 of the
handbook of procedures and Duty Drawback Rules enshrined by the Ministry of Finance.The
issue is why the brand rate alone will be allowed and why not custom portion of 'AIR' will not be
allowed when all provisions of duty drawback are applicable to 'deemed export drawback'.
14. The entire idea behind the deemed export drawback is that it has to be assumed as if the
goods have been exported outside India and accordingly the drawback has to be given to such
supplier. When in case of physical exports customs portion of the AIR duty drawback is given by
the customs department without insisting on brand rate (any collateral evidence with regard to
the actual payment of customs duty), there is no reason as to why the DGFT Office should ask
for the evidence of payment of customs duty in the case of imported inputs.

. CONCLUSION
Following the events of September 11th, the Deemed Export Rule no doubt will continue to have
a significant impact on companies engaged in developing and manufacturing high- technology
commodities. As discussed above, the Rule imposes stringent regulatory requirements affecting
a companys ability to transfer technology, software and technical data to its foreign national
employees. BIS increasing focus on enforcement does not suggest that companies will
encounter more difficulty in hiring foreign nationals indeed, BIS denied only three deemed

export license applications last year. However, it does indicate that companies that ignore or
otherwise fail to comply with the Rules requirements can and likely will face serious liabilities,
including criminal prosecution. Accordingly, affected companies should carefully evaluate their
compliance with current export licensing requirements and take appropriate steps to comply fully
with any obligations they have under the EAR.
An associate in the Export/Import Group at Kirkpatrick & Lockhart, L.L.P., where she counsels
clients on compliance with U.S. export controls, including the Export Administration
Regulations. The above article is meant to inform companies about the impact of the Deemed
Export Rule and does not constitute legal advice. Individuals seeking further information on the
Deemed Export Rule or other export matters should consult with their companys legal counsel
and personnel responsible for export compliance prior to addressing any export concerns.