Introduction

1. In September 2014 as part of a wider set of nation-building initiatives, the Central Government had launched a programme called as 'Make in India', to market India's image as a global manufacturing and export hub. For the said goal to be achieved, the first and foremost important thing would be to have Economic, Tax, etc., policies guiding and motivating the interests of business organizations. It is further an endeavour of all the Ministries of the Central Government that their policy framework shall be in complete synchronization with one another towards achieving the common goal and to ensure "Ease of Doing Business" in India. In present article, we will address one such issue wherein there appears to be conflict of policy and a tussle between two Ministries of the Central Government.

Chapter 7 of the Foreign Trade Policy, 2015-20 ('FTP') issued by the Ministry of Commerce enlists various supplies which are considered as deemed exports and prescribes incentives for the domestic manufacturers carrying out such deemed exports. One of such supplier is supplying intermediate goods against an Advance Authorization. The benefits available for effecting such deemed export as enlisted in Para 7.03 of FTP are as under:

(a)		Refund of Terminal Excise Duty, if exemption is not available
(b)		Refund of duty by way of Deemed Export Drawback
(c)		Availing of the benefit of Advance Intermediate Authorization.

Similar provisions also existed in the erstwhile Foreign Trade Policy, 2009-14. However, videPolicy Circular No. 16, dated 15-3-2013, the DGFT had clarified that the benefit of deemed export in the form of "Terminal Excise Duty" shall not be available in respect of supplies which are entitled to an ab-initio exemption. It is to be noted that the above referred to Public Notice was challenged before various High Courts on ground of being unconstitutional and was later on was quashed for being unconstitutional and in contradiction to the Foreign Trade Policy, 2009-14.

The intent behind the Policy Circular dated 15-3-2013, was to ensure that the refund of excise duty collected by the Ministry of Finance, shall not be granted by DGFT. Hence, the aforesaid policy circular was specifically incorporated in the FTP by introducing Para 7.05 which had specifically denied the benefit of "Terminal Excise Duty" in respect of supplies entitled to an ab initio exemption.

An example

2. Now let us assume a situation where the supplies against an Advance Authorization are entitled to ab inito exemption under Notification No. 44/01-C.E-(N.T). As per Para 7.05 of FTP, a domestic supplier carrying out deemed exports cannot opt for availing of the benefit of Terminal Excise Duty for supplying of goods against an Advance Authorization and has to compulsorily clear the goods without payment of duty by availing of the benefit of exemption notification in force.

However, considering the fact that the domestic supplier is availing of the benefit of Notification No. 44/2001-C.E-(N.T) for effecting the exempted clearances, it is also required to reverse the proportionate CENVAT credit as per rule 6(3) of the CENVAT Credit Rules, 2004 inasmuch as the inputs/input services commonly received are also used in the manufacture of exempted goods which are cleared by availing of the benefit of Notification No. 44/01-C.E-(N.T). Moreover, the domestic supplier would also not be entitled for availing of the CENVAT credit of duty suffered on the inputs exclusively used in the manufacture of exempted goods which are supplied against an Advance Authorization as per provisions of rule 6(1).

Rule 6 issues under the Cenvat Credit Rules, 2004

3. In the above regard, the attention is invited to rule 6(6) of the CENVAT Credit Rules, 2004 which has an overriding effect over the provisions of sub-rules (1), (2), (3), & (4) of rule 6 of the CENVAT Credit Rules, 2004. Rule 6(6) has prescribed certain supplies, wherein reversal of the CENVAT credit will not apply even if the goods are cleared without payment of duty. Rule 6(6) of the CENVAT Credit Rules, 2004 covers all such supplies which are qualifying as deemed exports and also entitled to avail of the benefit of ab initio exemption, viz., supply to an EOU, supply to an ICB, etc., which are also covered by Para 7.05 of FTP, except supplies against an Advance Authorization.

Therefore, effectively a domestic supplier supplying goods against an Advance Authorization would be liable to reverse the CENVAT credit in accordance with the rule 6(3) of the CENVAT Credit Rules, 2004, with respect to inputs and input services consumed commonly in the manufacture of dutiable and exempted goods which was/is never the intention of the Legislature. Further, said intention can also be evidenced from the provisions of rule 6(6) of the CENVAT Credit Rules, 2004 and, hence, the corresponding rule has not been taken to logical conclusion by the Legislature.

Having said above, now the supplier is left with no economically viable option but to avail of the benefit of "Deemed Export Drawback" and avail of the refund of duties suffered on the input and input services used in relation to manufacture of goods supplied against Advance Authorization. Further, the process of deemed export drawback is complicated inasmuch as the supplier has to produce all the duty paying documents to the satisfaction of DGFT for fixation of Brand Rate of duty drawback.

Alternatively, an assessee may prefer to avail of the benefit of "Advance Intermediate Authorization" for procuring inputs without payment of duty. However, in such situation, it will have to carry out double compliance in the form of "Deemed Export Drawback" in respect of the service tax paid on the input services which are used in manufacture of goods supplied against Advance Authorization and also the compliance for obtaining and closure of "Advance Intermediate Authorization".

Therefore, effectively on account of lack of clarity in policies between the two Ministries of the Central Government, a manufacturer in India would have to unnecessarily carry out either double compliances or incur excessive cost to avail of the refund of duties, which could have been easily granted exemption from reversal under rule 6(6) of the CENVAT Credit Rules, 2004. Further, such escalated cost and tiresome compliance would also effect the interest and efficiency of the business and pose a direct contradiction to the very intention of the Central Governments programme of 'Make in India' or 'Ease of Doing Business'.

Conclusion

4. In order to promote the "Make in India" initiative a uniform, unambiguous, stable and effective policy framework has to be established which will reduce the unwarranted cost of business in relation to compliances and ensure seamless benefit to the assessee as outlined in the respective policy. Eventually, making the manufacturing in India a profitable venture.

In the present case, considering the issue faced by the industry at large in respect of supplies against an Advance Authorization discussed hereinabove, it is expected that an appropriate amendment to rule 6(6) of the CENVAT Credit Rules, 2004 should be carried out to incorporate another sub-clause to cover supply against an Advance Authorization which would simplify the process for the domestic manufacturer. Alternatively, supply against an Advance Authorization shall be allowed to avail of the benefit of Terminal Excise Duty under the erstwhile FTP, 2009-14.