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C h a l l e n g e U s SERIVE TAX REGULATIONS Excise

C h a l l e n g e

U s

SERIVE TAX REGULATIONS

Excise and Customs key issues

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8th Interactive workshop on

SUCCESSFUL EPC CONTRACTING IN INDIA

KEY EXCISE AND CUSTOMS DUTY ISSUES

EPC CONTRACTING IN INDIA KEY EXCISE AND CUSTOMS DUTY ISSUES November 30, 2010 | Hotel ITC

November 30, 2010 | Hotel ITC Grand | Mumbai

DUTY ISSUES November 30, 2010 | Hotel ITC Grand | Mumbai Sujit Ghosh | Partner |

Sujit Ghosh | Partner | BMR Legal

DISCLAIMER

This presentation provides general information existing as at the time of preparation. The presentation is meant for general

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guidance and no responsibility for loss arising to any person acting

or refraining from acting as a result of any material contained in this

publication will be accepted by BMR Advisors. It is recommended that professional advice be taken based on the specific facts and

circumstances. This presentation does not substitute the need to

refer to the original pronouncements

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CUSTOM DUTY

CONCESSIONS -

PROJECT IMPORT SCHEME

PROJECT IMPORT SCHEME

To facilitate setting up of/ substantial expansion of a unit of industrial, infrastructure and other
To facilitate setting up of/ substantial expansion of a unit of
industrial, infrastructure and other projects
A project falls qualifies as „substantial expansion‟ if the installed capacity is increased by not
A project falls qualifies as „substantial expansion‟ if the installed
capacity is increased by not less than 25 %
Seeks to achieve simplification of assessment by levy of a flat rate of duty
Seeks to achieve simplification of assessment by levy of a flat rate of duty
Imports classified under tariff heading 9801 of the Customs Tariff
Imports classified under tariff heading 9801 of the Customs Tariff
Duty concessions can be availed by the Project owner or Contractors All rights reserved
Duty concessions can be availed by the
Project owner or Contractors
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PROJECT NOT COVERED UNDER THE SCHEME

Project imports scheme is not available to the following class of projects:All rights reserved PROJECT NOT COVERED UNDER THE SCHEME  Hotels;  Hospitals;  Photographic studios;

Hotels;

Hospitals;

Photographic studios;

Photographic film processing laboratories;

Photocopying studios;

Laundries; and

Garages and workshops

The benefit is also not available to a single or composite machine Photocopying studios;  Laundries; and  Garages and workshops Excise and Customs – key issues

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KEY STEPS

Project Finalization & Refund of Deposit (Customs)

Project Registration

(Customs)

Letter of Recommendation

(Sponsoring Authority)

Plant Site Verification &

Installation Certificate (Central Excise)

Classification of

Imported goods & Clearance (Customs)

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PROJECT IMPORT

SCHEME AUXILIARY

EQUIPMENT

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PROJECT IMPORTS

Initial set-up or substantial expansion of following projects eligible for project import and linked concessions:All rights reserved PROJECT IMPORTS  Industrial plant  Power  Mining  Irrigation

Industrial plant

Power

Mining

Irrigation

Oil and gas exploration

Others

Eligible imports Oil and gas exploration  Others  All items of machinery (required for above) including

All items of machinery (required for above) including prime movers,

instruments, apparatus, appliances, control gear, transmission equipment, auxiliary equipment, equipment required for research and development, equipment for testing and quality control, components,

raw materials for the manufacture of above items and spare parts not

exceeding 10% of the value of the goods specified above

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AUXILIARY EQUIPMENT

No statutory definition/ criterion exists for ‗auxiliary equipmentAll rights reserved AUXILIARY EQUIPMENT Legal meaning of the term ‗auxiliary‘ “aiding or supporting, subsidiary”

Legal meaning of the term ‗auxiliary‘definition/ criterion exists for ‗auxiliary equipment “aiding or supporting, subsidiary” – Black‘s law

“aiding or supporting, subsidiary” – Black‘s law dictionary

“giving additional help; supplemental or subsidiary; an item not directly a part of a specific component or system but required for its functional operation” - Words and Phrases of Excise and Customs by S.B. Sarkar

“one that aids or helps; an assistant; a confederate

Assisting or supporting” Advanced Law Lexicon

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ELIGIBILITY OF AUXILIARY EQUIPMENT FOR PI

SCHEME?

Qualification as ‗auxiliary equipment‘reserved ELIGIBILITY OF AUXILIARY EQUIPMENT FOR PI SCHEME?  Does generic meaning imply that equipment meant

Does generic meaning imply that equipment meant for any supporting

infrastructure for the plant being set up would qualify?

Benefits advanced under PI Scheme on a selective basisinfrastructure for the plant being set up would qualify?  SC in CCE V. Paradeep Phosphates

SC in CCE V. Paradeep Phosphates [2006 (200) ELT 515] - Mobile Continuous Ship Unloader required for initial setting up of a fertilizer plant is covered by the expression ‗auxiliary equipment‘ and hence is classifiable under CTH 9801

SC in CIMMCO Ltd V. CCE [2002 (139) ELT A308] - Components and raw

material for manufacture of wagons used for transportation of coal from coal mines to thermal plant not ‗auxiliary equipment‘

AAR in AES Chattisgarh Energy Pvt Ltd [2009 (246) ELT 801] goods required for setting up captive coal mine, dedicated coal transportation facility,

dedicated water intake and pumping system, all as part of integrated power

project, not eligible; dedicated power evacuation system eligible

Tribunal in K M Sugar Mills V. CCE [2000 (119) ELT 170] - Empty gas cylinders being auxiliary equipment for manufacture of gas directly connected with initial setting up of plant hence entitled to benefit of project import under heading 9801

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ELIGIBILITY OF AUXILIARY EQUIPMENT FOR PI

SCHEME? (CONT)

ELIGIBILITY OF AUXILIARY EQUIPMENT FOR PI SCHEME? (CONT) Treatment of construction equipments as auxiliary equipment

Treatment of construction equipments as auxiliary equipment

Whether ownership of equipments so imported necessarily needs to be

passed on to the ‗Project Authority‘ for falling within ‗realm‘ of ‗auxiliary

equipments‘?

Diversion of auxiliary equipment possible, if to be imported under the PI scheme?

SC in CC V. Toyo Engineering India Ltd [2006 (201) ELT 513] concluded in favour of the taxpayer holding that mere possibility of its being used subsequently for other project would not be a bar from availing facility of project import

Also held that it is not essential that title in the imported equipment has to transfer to the project owner

RELEVANCE IN PROJECT PLANNING

Shifting focus, beyond machinery/ equipments that actually form part of the plant/ main plant, for PI benefitsRELEVANCE IN PROJECT PLANNING Larger relevance for rail, road, bridge projects Contractor‘s ability to import high

Larger relevance for rail, road, bridge projectsactually form part of the plant/ main plant, for PI benefits Contractor‘s ability to import high

Contractor‘s ability to import high end equipment in India at concessional rate of duty and
Contractor‘s ability to import high end equipment in India at
concessional rate of duty and servicing multiple projects thereafter
Given varying positions, prior or advance ruling may
be sought in complicated cases, for upfront clarity
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BENEFIT OF

PROJECT IMPORTS

FOR CIVIL MATERIALS

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PROJECT IMPORTS FOR CIVIL MATERIALS

Projects like mega power projects, drinking water supply projects, coal mining projects and fertilizer projects entitled toAll rights reserved PROJECT IMPORTS FOR CIVIL MATERIALS customs duty exemption/concession Covers all items of machinery

customs duty exemption/concession

Covers all items of machinery includingprojects entitled to customs duty exemption/concession  Prime movers, instruments, apparatus and appliances,

Prime movers, instruments, apparatus and appliances,

Control gear and transmission equipment,

Auxiliary equipment (including those required for R & D testing and quality control)

All components (whether finished or not) or raw materials for the manufacture of the aforesaid items and their components

required for setting up & substantial expansion of the project

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PROJECT IMPORTS FOR CIVIL MATERIALS (CONT)

rights reserved PROJECT IMPORTS FOR CIVIL MATERIALS (CONT) Availability of exemption for steel and cement used

Availability of exemption for steel and cement used for civil construction?

Coverage of 9801 machinery, equipment and raw materials

and components for their manufacture

Definitions under Black‘s Law Dictionary:

- „Machinery‟ - “A device or apparatus consisting of fixed and moving parts that work together to perform some function Also termed as apparatus; device”

- „Equipment‟ - ““The article or implements used for a specific

purpose or activity” ”

The Supreme Court, in the case of Commissioner of Income Tax v. Mir Mohd. Ali (AIR 1964 SC 1693) relied upon the following definition of ‗machinery‘:

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PROJECT IMPORTS FOR CIVIL MATERIALS (CONT)

The word „machinery‟ when used in ordinary language prima facie, means some mechanical contrivances which by themselves or in combination with one or more other mechanical contrivances, by the combined movement and interdependent operation of their respective parts generate power, or evoke, modify, apply or direct natural forces with the object in each case of effecting so definite or specific a result”

Civil material like cement and steel may not qualify as machinery

or equipments

The phrase - Components or raw material‘ also used in 9801

Components or raw material qualify only when the same is used in the manufacture of machinery and equipments not applicable for Cement and Steel to be used for civil construction

Thus, customs duty exemption/concessions may not be

available for Cement and Steel to be used for civil construction

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PROJECT IMPORTS FOR CIVIL MATERIALS (CONT)

rights reserved PROJECT IMPORTS FOR CIVIL MATERIALS (CONT) Pertinent to note how this issue manifests itself

Pertinent to note how this issue manifests itself under Excise for Mega and Ultra-Mega Power Projects (―UMPPs‖)

Excise exemption for a Mega and Ultra Mega Power Project is

subject to customs duty exemption

As discussed, customs duty exemption doubtful for steel and

cement for civil works

Accordingly, even excise exemption for steel and cement for civil works jeopardized

It is pertinent to note that for UMPPs, format of certification from

Chief Engineer in the Central Electricity Authority specifically

includes Cement and Steel for civil works greater clarity required

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PROJECT IMPORTS FOR CIVIL MATERIALS (CONT)

Possible to say that a civil structure is an integral part of plant and therefore eligible for PI benefits?rights reserved PROJECT IMPORTS FOR CIVIL MATERIALS (CONT)  What if sponsoring authority approves essentiality of

What if sponsoring authority approves essentiality of civil materials for completion of the respective plant?

Though not in context of civil materials, SC in CCE V. Paradeep Phosphates [2006 (200) ELT 515] approved the principle that once goods approved as essential requirement for completion of the plant by the

sponsoring ministry, the PI benefits would be available

Eligibility for importing micro-silica (sand), under the PI Scheme, for construction of spillway structure of the dam prima facie merits seen in the case and matter remanded de novo Tehri Hydo Development Corpn Ltd V. CCE [ 2007 (212) ELT 366]

Test of functionality to be proved - SC in CIT V. Taj Mahal Hotel [1971 (82) ITR

44] reasonable level of complexity

Difficulty in importing civil materials against advance licence also, as arguably not used in manufacture of goodsV. Taj Mahal Hotel [1971 (82) ITR 44] – reasonable level of complexity Excise and Customs

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RECENT

EXTENSION OF CONCESSIONS

BROWNFIELD

EXPANSION OF MEGA POWER

PROJECTS

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BROWNFIELD EXPANSION OF MPPs

A concessional basic customs duty of 2.5 percent to be applicable on imports for brown field expansion of existing mega projects underAll rights reserved BROWNFIELD EXPANSION OF MPPs the PI scheme. All other benefits under mega power

the PI scheme.

All other benefits under mega power policy available to greenfield projects would also be available to an expansion unit provided the size of expansion units is not less than that provided in the earlierexpansion of existing mega projects under the PI scheme. phase No excise exemption for indigenous supplies

phase

No excise exemption for indigenous supplies to the project but deemed export benefits availablesize of expansion units is not less than that provided in the earlier phase Excise and

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BROWNFIELD EXPANSION ISSUES

All rights reserved BROWNFIELD EXPANSION – ISSUES The expression ‗brown - field expansion‘ not defined either

The expression ‗brown-field expansion‘ not defined either through the Mega Power Policy or under the customs law resulting in lack of clarity on following issues:

What qualifies as expansion? Essential for the new facility to be dependent on existing capacity or can it be a standalone unit and still qualify as a brown-field expansion?

Mere co-location sufficient? Very commonly seen since due to availability of

large tracts of land

As per MPP, size of expansion units not to be less than the size of existing units. PI Scheme also states that project will qualify as expansion only if capacity enhancement more than 25 percent both conditions to be fulfilled?

Treatment of brown-field project of 1000 MW or more ?

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DEEMED EXPORTS

Concept & Benefits

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DEEMED EXPORTS CONCEPT

‗Deemed Exports‘All rights reserved DEEMED EXPORTS – CONCEPT  goods supplied do not leave the country; and

goods supplied do not leave the country; and

goods must be manufactured in India

payment received either in INR or in free foreign exchange

‗Deemed Exports‘ eligible for certain export related facilities and benefits and benefits

Ten categories of supply of goods by main /sub- contractorseligible for certain export related facilities and benefits which qualify as ‗Deemed Exports‘ (a) Supply of

which qualify as ‗Deemed Exports‘

(a)

Supply of goods against Advance Authorization

(b)

Supply of goods to EOUs/ STPs/ EHTPs/ BTPs

(c)

Supply of capital goods to holder of EPCG Authorization

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DEEMED EXPORTS CONCEPT (CONT)

(d) Supply of goods to projects financed by multilateral or bilateral agencies/ funds typically covers infrastructural projects

(e) Supply of capital goods, … to fertilizer plants

(f)

Supply of goods to any project or purpose in respect of which the MOF, by a notification , permits import of such goods at zero customs duty covers mega power projects and UMPPs

(g)

Supply of goods to power projects and refineries not covered by above category covers non-mega power and MPP expansion projects

(h)

Supply of marine freight containers by 100% EOUs

(i)

Supply to projects funded by UN Agencies

(j)

Supply of goods to Nuclear Power Projects through competitive bidding as opposed to ICB

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DEEMED EXPORTS CONCEPT (CONT)

Essential for the goods supplied to be manufactured in India manufactured in India

Benefits of deemed exports under paras (d), (e), (f) and (g) only if the supply is made under procedure of ICB under procedure of ICB

Exception for Mega Power Projects

Following lines added

However, in regard to mega power projects, the requirement of

ICB would not be mandatory, if the requisite quantum of power

has been tied up through tariff based competitive bidding or if the project has been awarded through tariff based competitive bidding

Deemed exports governed by chapters 8 of the Foreign Trade Policy (―FTP‖) and the corresponding Handbook of Procedures (―HoP‖) Trade Policy (―FTP‖) and the corresponding Handbook of Procedures (―HoP‖)

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DEEMED EXPORTS BENEFITS

Benefits under Deemed Exports Summing up

– BENEFITS Benefits under Deemed Exports – Summing up Deemed Export Drawback • Enables draw back

Deemed Export Drawback

Enables draw back of excise, customs and

service tax paid on inputs

used in manufacture of goods meant for deemed exports

Benefit can be claimed

only if CENVAT

credit/rebate has not been availed by the applicant

Advance Authorization/ Advance Authorisation for annual requirement/ Duty free import Authorisation (“DFIA”)

Pre-export benefit

Allows duty free import

of inputs for manufacture

of the goods to be exported

Fuel, oil, energy, catalysts and mandatory

spares upto 10%,

oil, energy, catalysts and mandatory spares upto 10%, Benefit on input leg – mutually exclusive Exemption

Benefit on input leg mutually exclusive

Exemption / Refund from terminal excise duty

Enables manufacturers to supply goods free of output excise duty

Supplies should be made against ICB

In other cases, refund of terminal excise duty will be given

Benefit can be claimed only if CENVAT credit/rebate has not been availed by the applicant

CENVAT credit/rebate has not been availed by the applicant Benefit on output leg Excise and Customs

Benefit on output leg

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DEEMED EXPORTS BENEFITS TO SUB CONTRACTOR

Thus, for deemed exports, the OEM can claim benefits on both input as well as output sidereserved DEEMED EXPORTS BENEFITS TO SUB – CONTRACTOR The above benefits are available to the OEM

The above benefits are available to the OEM as well as his sub- contractors subject to conditions under para 8.6.2 of the FTP as well as his sub- contractors subject to conditions under para 8.6.2 of the FTP as under:

being mentioned specifically as a sub-contractor (either initially or

subsequently) in the contract between project owner and the EPC

contactor;

the sub-contractor ships the goods directly to the project site; and

Project authority certificate and payment certificate is issued by

project owner to the main contractor and by the main contractor to

the sub-contractor

Thus the deemed export benefits can flow down through the supply chain and proper planning through out the supply chain would significantly reduce the costs of the projectowner to the main contractor and by the main contractor to the sub-contractor Excise and Customs

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DEEMED EXPORTS BENEFITS TO SUB CONTRACTOR

(CONT)

HC in Dee Development Engineers Ltd V. UOI [2010-TIOL-491- HC], was appraising the issue to extending benefits Dee Development Engineers Ltd V. UOI [2010-TIOL-491- HC], was appraising the issue to extending benefits to sub-contractor for goods supplied to a project funded by notified agencies

Facts

The eligible project awarded supply contract to M/s Thermaxsupplied to a project funded by notified agencies Facts Babcock & Wilcox Ltd, Pune and issued

Babcock & Wilcox Ltd, Pune and issued necessary certificate in its

favour so as to enable availment of duty benefits

Thermax Babcock & Wilcox Ltd in turn sub-contracted part of supplies to the Assesseein its favour so as to enable availment of duty benefits Assessee supplied the goods directly

Assessee supplied the goods directly to the project site under exciseLtd in turn sub-contracted part of supplies to the Assessee exemption on grounds that valid certificate

exemption on grounds that valid certificate in favour of Thermax Babcock & Wilcox Ltd existed at material times, who has placed supply orders on the Assessee

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DEEMED EXPORTS BENEFITS TO SUB CONTRACTOR

(CONT)

Revenue‟s case

BENEFITS TO SUB – CONTRACTOR (CONT) Revenue‟s case Exemption benefits extends to only those parties in

Exemption benefits extends to only those parties in whose favour a

valid certificate has been issued and not otherwise

HC Decision

The court held that:certificate has been issued and not otherwise HC Decision “as no certificate was issued by the

“as no certificate was issued by the Project Implementing Authority approved

by the Government of India in favour of the assessee, therefore, it (assessee) cannot claim exemption from duty on the basis of certificate (Annexure A2) issued in favour of the supplier M/s Thermax Babcock &

Wilcox Limited, Pune”

Comments

M/s Thermax Babcock & Wilcox Limited, Pune” Comments Evidently, the denial of benefits by the court

Evidently, the denial of benefits by the court were preceded by lack

of planning in the whole arrangement

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PROCEDURAL ISSUES IN CERTAIN CASES

Period of limitation for claiming duty drawback or TED refund in case of supplies under para 8.2 (d), (e), (f), (g), (h), (i) and (j)All rights reserved PROCEDURAL ISSUES IN CERTAIN CASES  Claims should be filed within a period

Claims should be filed within a period of twelve months from date of

receipt of supplies by project authority or from date of receipt of the payment as per the option of applicant, either against a particular project or all the projects

No clarity of construction of the expression ‗a particular project or all the projects

Claims may also be filed where part payments have been received. 100 percent TED refund may be allowed after 100 percent supplies have been made physically and payment received at least up to 90expression ‗ a particular project or all the projects ‘ percent  Implication whether refund would

percent

Implication whether refund would not be forthcoming before completion of project and 90 percent payment?

Potential impact on reserve payments in some cases

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ICB AND LINKED

EXCISE DUTY

BENEFITS

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CONTROVERSIES SURROUNDING ICB

Many projects brought into existence through EPC contracts have no output excise/ service tax liability – like power projects like power projects

Hence, excise duty on the procurement side becomes a cost

Notification 6/ 2006 – CE, vide entry 91, provides for an exemption from excise duty to ―goods supplied CE, vide entry 91, provides for an exemption from excise duty to ―goods supplied against International Competitive Bidding (ICB)

Above exemption subject to Customs Duty exemption

The phrase ―goods supplied under ICB‖ however is not defined – ie ICB to be undertaken at what stage – IPP or Concession/ EPC/ OEM? – ie ICB to be undertaken at what stage IPP or Concession/ EPC/ OEM? reasonable clarity that at IPP\EPC\PPA level should suffice

Resultant ambiguities best exemplified by power projects till recentlyreasonable clarity that at IPP\EPC\PPA level should suffice – issue resolved for Mega Power projects vide

issue resolved for Mega Power projects vide introduction of entry 91B in Budget 2010?

―Goods supplied to mega power projects from which the supply of power has

been tied up through tariff based competitive bidding or a mega power project

awarded to a developer on the basis of such bidding‖

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MEGA POWER PROJECT ICB WHETHER STILL

NEEDED?

Application for MPP status typically disposed off in two stages ie the ―in - principle‖ approval and the ―final clearance‖ ―in-principle‖ approval and the ―final clearance‖

All notified/ prescribed benefits to MPPs available only after final clearance―in - principle‖ approval and the ―final clearance‖ Alternative for the interim period?  Advance

Alternative for the interim period?benefits to MPPs available only after final clearance  Advance Authorization could be used in interim

Advance Authorization could be used in interim period to minimize the temporary outflows on customs and excise duty on procurements by the contractor (subject to ICB)

Such benefit available irrespective of project having been accorded MPP

status

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MEGA POWER PROJECT ICB WHETHER STILL NEEDED?

(CONT)

Key conditions (amongst others) for grant of the Mega Power Project status?MEGA POWER PROJECT – ICB WHETHER STILL NEEDED? (CONT)  Either project should have been awarded

Either project should have been awarded on basis of competitive bidding; or

supply of power has been tied up through tariff based competitive bidding

Hence most times, ICB may not be critical

Exceptions to above – State Utilities State Utilities

Typically the IPP or the project award stage does not arise as generation utility of the state responsible to undertake the project

As per the Tariff Policy, state utilities need not tie up sale of power on a competitive bidding basis

Given the above, a state utility may undertake a project without following both the attendant conditions – fate of deemed export benefits (especially excise duty exemption)? fate of deemed export benefits (especially excise duty exemption)?

If ICB followed to award the EPC contract, for corresponding supplies/ works,

benefits will still be available

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DEEMED EXPORTS

- OTHER ISSUES

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DEEMED V. PHYSICAL EXPORTS CENVAT

IMPLICATIONS

Reasonable degree of debate on whether deemed export supplies trigger restrictive implications under Rule 6 of the Cenvat CreditDEEMED V. PHYSICAL EXPORTS – CENVAT IMPLICATIONS Rules, 2004 (Credit Rules) in hands of the local

Rules, 2004 (Credit Rules) in hands of the local manufacturer-

supplier

Ie cenvatability of corresponding input credits (excise duty/ service tax)

in such cases?

The Revenue contentionsinput credits (excise duty/ service tax) in such cases?  Distinction between physical and deemed exports

Distinction between physical and deemed exports

Benefits (by way of cenvat credit) advanced in case of physical exports cannot be made available to deemed exports

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DEEMED V. PHYSICAL EXPORTS CENVAT

IMPLICATIONS (CONT)

Recent Development

Credit Rule 6(6) amended to include the following:EXPORTS – CENVAT IMPLICATIONS (CONT) Recent Development all goods which are exempt from the duties of

all goods which are exempt from the duties of customs leviable under the

First Schedule to the Customs Tariff Act, 1975 (51 of 1975) and the additional duty leviable under sub-section (1) of section 3 of the said Customs Tariff Act when imported into India and are supplied,

(a)

against International Competitive Bidding; or

(b)

to a power project from which power supply has been tied up through tariff based competitive bidding; or

(c)

to a power project awarded to a developer through tariff based competitive bidding,

in terms of notification No. 6/2006-Central Excise

Implication

Legislative intent to provided tax benefits to deemed exports ratifiedterms of notification No. 6/2006-Central Excise Implication  Welcome amendment – amicable resolution of the

Welcome amendment amicable resolution of the dispute!!

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TED EXEMPTION OR REFUND?

Para 8.3 (c) of FTP provides as under:All rights reserved TED EXEMPTION OR REFUND? “Exemption from terminal excise duty where supplies are made

“Exemption from terminal excise duty where supplies are made against ICB.

In other cases, refund of terminal excise duty will be given”

“In other cases” – connotation? connotation?

Cases in which ICB has not been followed; and / or

Cases in which no central excise exemption notification (for eg supply to Advance Authorization or EPCG authorization holder)

Doctrine of unjust enrichment applicable [Sahakari Khand Udyog [Sahakari Khand Udyog

Mandal Ltd vs CCE, 2005 - TIOL- 48 SC LB]

duty payments to be reflected as ‗Receivables‘; and

Ability to satisfactorily prove that the amounts being claimed as refund have not been passed on to the ultimate consumers

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TED EXEMPTION OR REFUND? (CONT)

Refund of Excise duty technically unavailable for non-mega power projects – unlike mega power projects and UMPPs unlike mega power projects and UMPPs

Para 8.4.4 (iv) reads as under:power projects – unlike mega power projects and UMPPs “Supply of Capital goods and spares upto

“Supply of Capital goods and spares upto 10% of FOR value of capital goods to power projects in terms of paragraph 8.2(g) shall be entitled for deemed export

benefits …

FTP, whichever is applicable.

However, supply of goods required for setting up of any mega power projects …., shall be eligible for deemed exports benefits as mentioned in paragraph 8.3(a), (b) and (c) of FTP, whichever is applicable

Supplier shall be eligible for benefits listed in paragraph 8.3(a) and (b) of

Further, supply of goods required for the expansion of existing mega power

shall also be eligible for deemed export benefits as mentioned in

project …

paragraph 8.3 ( a), (b) and (c) of FTP, whichever is applicable.,….”

Attempts at refund still made basis paragraph 8.4.4 (i) of FTP read( a), (b) and (c) of FTP, whichever is applicable.,….” with 8.3.1 (iv) of the HOP

with 8.3.1 (iv) of the HOP interpretative issue

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TED EXEMPTION OR REFUND? (CONT)

Paragraph 8.4.4 (i) of FTPAll rights reserved TED EXEMPTION OR REFUND? (CONT) “In respect of supplies made under paragraphs 8.2(d),

“In respect of supplies made under paragraphs 8.2(d), (f) and (g) of FTP, supplier

shall be entitled to benefits listed in paragraphs 8.3(a), (b) and (c), whichever is

applicable”

Thus as per the above paragraph, all the deemed export benefits will be available for supplies to mega as well as non-paragraphs 8.3(a), (b) and (c), whichever is applicable” mega power plants – contradiction with Para 8.4.4

mega power plants contradiction with Para 8.4.4 (iv)

Paragraph 8.3.1 (iv) of HOPmega power plants – contradiction with Para 8.4.4 (iv) In respect of supplies under categories mentioned

In respect of supplies under categories mentioned in paragraphs 8.2(d), (e), (f), (g), (h), (i) and (j) of FTP, claim may be filed either on the basis of proof of supplies

effected or payment received……100% TED refund may be allowed after 100%

supplies have been made physically and payment received at least upto 90%.

However, paragraph 8.4.4 (iv) being more specific to power projects appears to be the more appropriate paragraph – in in

which paragraph excise exemption / refund is not available for

non-mega power projects

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ONSITE ACTIVITIES – „MANUFACTURE‟?

Nil input and output indirect tax cost for a deemed exporter who is eligible for all three deemed export benefitsAll rights reserved ONSITE ACTIVITIES – „MANUFACTURE‟?  Viz. advance authorization or deemed export drawback on

Viz. advance authorization or deemed export drawback on the input side and excise duty exemption or refund on the output side)

For those ineligible for excise duty exemption or refund on the output side, output excise duty becomes a costside and excise duty exemption or refund on the output side) ‗Manufacture‘ in India – key

‗Manufacture‘ in India – key requirement for deemed export benefits key requirement for deemed export benefits

‗Manufacture‘ under FTP wider than under Central Excise lawsin India – key requirement for deemed export benefits Certain activities may amount to ‗Manufacture‘ under

Certain activities may amount to ‗Manufacture‘ under FTP (and enjoy deemed export benefits) but not amount to ‗Manufacture of excisable goods‘ under Central Excise laws (and not suffer Excise duty)benefits ‗Manufacture‘ under FTP wider than under Central Excise laws Excise and Customs – key issues

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ONSITE ACTIVITIES – „MANUFACTURE‟? (CONT)

‗Manufacture‘ under FTP:reserved ONSITE ACTIVITIES – „MANUFACTURE‟? (CONT) “Manufacture” means to make, produce, fabricate,

“Manufacture” means to make, produce, fabricate, assemble, process or

bring into existence, by hand or by machine, a new product having a

distinctive name, character or use and shall include processes such as refrigeration, re-packing, polishing, labelling, Re-conditioning repair, remaking, refurbishing, testing, calibration, re-engineering. Manufacture, for the purpose of FTP, shall also include agriculture, aquaculture, animal

husbandry, floriculture, horticulture, pisciculture, poultry, sericulture, viticulture and mining”

Bringing into existence immoveable property through onsitepoultry, sericulture, viticulture and mining” fabrication or assembly = ‗manufacture‘ under FTP?

fabrication or assembly = ‗manufacture‘ under FTP?

Circular F. No. Misc.8/AM-2001/DBK Cell, dated December 5, 2000 issued by the Directorate General of Foreign Trade (―DGFT‖) - pertinent issued by the Directorate General of Foreign Trade (―DGFT‖) - pertinent

All rights reserved

ONSITE ACTIVITIES – „MANUFACTURE‟? (CONT)

The circular: relevant excerptreserved ONSITE ACTIVITIES – „MANUFACTURE‟? (CONT) “It is noted that it is not possible for a

“It is noted that it is not possible for a single contractor to manufacture

himself all the items required for completion of such projects and hence

certain items…have necessarily to be procured from other sources. These items are often directly supplied to the project for assembly, commissioning, erection, testing etc at site. It is, therefore, clarified that for all such directly supplied items whether imported or indigenous as are used in the project,

the condition of „manufacture in India‟, a pre-requisite for grant of deemed export benefits, is satisfied in view of the fact that the aforesaid activities being undertaken at the project site constitute „manufacture‟…”

Bringing into existence a project (a power project, for example) or part thereof constitutes ‗manufacture‘ under FTP? part thereof constitutes ‗manufacture‘ under FTP?

If yes, handing over the project to owner = deemed export?for example) or part thereof constitutes ‗manufacture‘ under FTP? Excise and Customs – key issues |

All rights reserved

ONSITE ACTIVITIES – „MANUFACTURE‟? (CONT)

If yes, entitled for deemed export benefits on the input side and no excise duty on the output side?reserved ONSITE ACTIVITIES – „MANUFACTURE‟? (CONT) May be explored by those ineligible for excise duty

May be explored by those ineligible for excise duty exemption oron the input side and no excise duty on the output side? refund on the output

refund on the output side

Technical issues:for excise duty exemption or refund on the output side  All deemed export categories require

All deemed export categories require ‗supply of goods

Such interpretation will equalize indirect tax benefits for mega and non- mega power projects against policy framework

All rights reserved

MINOR PROCESSING – „MANUFACTURE‟?

As discussed earlier, for those ineligible for excise duty exemption or refund on the output side, output excise duty becomes a costAll rights reserved MINOR PROCESSING – „MANUFACTURE‟? Broad definition of ‗Manufacture‘ under FTP:

Broad definition of ‗Manufacture‘ under FTP:refund on the output side, output excise duty becomes a cost “Manufacture” means to make, produce,

“Manufacture” means to make, produce, fabricate, assemble, process or bring into existence, by hand or by machine, a new product having a distinctive name, character or use and shall include processes such as refrigeration, re-packing, polishing, labelling, Re-conditioning repair, remaking, refurbishing, testing, calibration, re-engineering. Manufacture, for the purpose of FTP, shall also include agriculture, aquaculture, animal husbandry, floriculture, horticulture, pisciculture, poultry, sericulture, viticulture and mining”

Minor processing may amount to ‗Manufacture‘ under FTP but not under Central Excise laws under Central Excise laws

All rights reserved

MINOR PROCESSING – „MANUFACTURE‟? (CONT)

Importing equipments and polishing or labeling or repacking them constitutes ‗manufacture‘ under FTP? constitutes ‗manufacture‘ under FTP?

If yes, supply of such polished/ labeled/ repacked equipments toor repacking them constitutes ‗manufacture‘ under FTP? owner = deemed export? If yes, entitled for deemed

owner = deemed export?

If yes, entitled for deemed export benefits on the input side and no excise duty on the output side?labeled/ repacked equipments to owner = deemed export? May be explored by those ineligible for excise

May be explored by those ineligible for excise duty exemption or refund on the output sideon the input side and no excise duty on the output side? Technical issues:  ‗manufacture‘

Technical issues:for excise duty exemption or refund on the output side  ‗manufacture‘ = new, marketable product/good

‗manufacture‘ = new, marketable product/good must emerge

Such interpretation will equalize indirect tax benefits for mega and non- mega power projects against policy framework

All rights reserved

PROJECT IMPORTS & DEEMED EXPORT

BENEFITS TO

POWER PROJECTS

All rights reserved

NON-MEGA POWER PROJECT

Benefit

Initial Set Up

Expansion

Project Import linked customs

Project Import linked customs
Project Import linked customs

duty concession*

Excise Duty Exemption

Excise Duty Exemption
Excise Duty Exemption

Advance Authorization* #

Advance Authorization* #
Advance Authorization* #

Deemed Export Drawback #

Deemed Export Drawback #
Deemed Export Drawback #

Terminal Excise Duty Refund # ^

Terminal Excise Duty Refund # ^
Terminal Excise Duty Refund # ^

* In-principle availability indicated, may not be available for certain supplies

# ICB pre-condition for advancement of benefit

^ Also, refer the earlier discussions in this regard

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MEGA POWER PROJECT

Benefit

Initial Set Up

Expansion

Project Import linked customs

Project Import linked customs
Project Import linked customs

duty exemption/ Concession*

Excise Duty Exemption

Excise Duty Exemption
Excise Duty Exemption

Advance Authorization* #

Advance Authorization* #
Advance Authorization* #

Deemed Export Drawback #

Deemed Export Drawback #
Deemed Export Drawback #

Terminal Excise Duty Refund #

Terminal Excise Duty Refund #
Terminal Excise Duty Refund #

* In-principle availability indicated, may not be available for certain supplies

# ICB pre-condition for advancement of benefit or if supply of power, there from, tied or project itself awarded on a tariff based competitive bidding (only in case of initial set up)

All rights reserved

ULTRA MEGA POWER PROJECT

Benefit

Initial Set Up

Expansion

Project Import linked customs

Project Import linked customs
Project Import linked customs

duty exemption/ Concession*

Excise Duty Exemption^

Excise Duty Exemption^
Excise Duty Exemption^

Advance Authorization* #

Advance Authorization* #
Advance Authorization* #

Deemed Export Drawback #

Deemed Export Drawback #
Deemed Export Drawback #

Terminal Excise Duty Refund #

Terminal Excise Duty Refund #
Terminal Excise Duty Refund #

* In-principle availability indicated, may not be available for certain supplies

^ If supply of power tied, there from, through a tariff based competitive bidding

# ICB pre-condition for advancement of benefit or supply of power tied, there from, through a tariff based competitive bidding (only in case of initial set up)

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All rights reserved C h a l l e n g e U s Excise and

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All rights reserved

ANNEXURES

All rights reserved

PROJECT IMPORT SCHEME

All rights reserved PROJECT IMPORT SCHEME 9801 00  All items of machinery including prime movers,

9801 00

All items of machinery including prime movers, Instruments,

Apparatus, Appliances, Control gear, Transmission equipment,

Auxiliary equipment, Equipment required for research and development, Equipment for testing and quality control, Components, raw materials for the manufacture of above items

and Spare parts not exceeding 10% of the value of the goods

specified above

Required for initial setting up of a plant or substantial expansion (installed capacity increases by at least 25%) of a

unit of an existing unit , of a specified Industrial plant, irrigation

project, power project, mining project, project for oil & mineral exploration or such other projects which the Central Government may notify

All rights reserved

CUSTOMS TARIFF CLASSIFICATION

 

---

Machinery :

9801

00 11

----

For industrial plant project

9801

00 12

----

For irrigation plant

9801

00 13

----

For power project

9801

00 14

----

For mining project

9801 00 15 ----

Project for exploration of oil or other minerals

9801

00 19

----

For other projects

9801

00 20

---

Components (whether or not finished or not) or raw materials for the manufacture of aforesaid items required for the initial setting up of a unit or the substantial expansion of a unit

9801

00 30

---

Spare parts and other raw materials (including

semi-finished materials or consumable stores for

the maintenance of plant or project

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All rights reserved C h a l l e n g e U s Excise and

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