Aspects of exports

SME CHATROOM/ Inter-unit transfers of raw materials among SEZs are not exports

(iii) supplying goods, or providing services, from one unit to another unit or developer, in the same or different Special Economic Zone"

We would like to know whether inter unit transfer of raw materials or finished goods among SEZ units can qualify as exports for purposes of section 10A of Income Tax Act 1961 (IT Act), in view of above definition.

The SEZ Act is to come into force from a date to be notified later. The Act seeks to insert Section 10AA in the IT Act. It also seeks to insert sub-section (7B) to Section 10A of the IT Act.

Sub-section (3) of Section 10A of the IT Act stipulates a condition that sale proceeds of articles or things exported out of India are received in or brought into India by the assessee in convertible foreign exchange. The words 'out of India' obviously refer to situations when the goods leave the country.

Explanation I (ii) to Section 10AA is quite explicit that export means taking goods out of India from a SEZ by land, sea air or any other mode. So, here again, the position is quite clear that goods must leave the country.

So, in my opinion, for the purposes of claiming deductions under the IT Act, either under Section 10 A or Section 10AA, inter-unit transfer of raw materials or finished goods among SEZ units cannot qualify as exports.

We are SSI working under exemption limit of Rest. 1 crore. We have an export order for which we have to purchase raw material on payment of excise duty. We want to avail Duty Entitlement Passbook (DEPB) at the notified rate of 7% against our product. Is there any way to avoid payment of excise duty on the raw materials?

Under Rule 19 of (2) Central Excise Rules, 2002, the Central Government has issued notification no. 43/2001-CE(NT) dated 26.6.2001 specifying the conditions, safeguards and procedures for procurement of excisable goods without payment of duty for the purpose of use in the manufacture or processing of export goods and their export out of India.

This notification mandates that the provisions of the Central Excise (Removal of goods at concessional rate of duty for manufacture of excisable goods) Rules, 2001 shall be followed. The said Rules are notified through notification no. 34/2001-CE(NT) dated 21.6.2001. The detailed procedures are also covered under Part VI of Chapter 7 of the Manual of Supplementary Instructions, 2001.

In brief, the provisions require you to obtain Central Excise registration and furnish details such as process of manufacture, input-output ratio, the details of the inputs to be procured, the particulars of the supplier, bond covering the duty involved on the inputs to be procured without duty payment and a declaration [Annexure 1 to notification 34/2001-CE(NT)] to the jurisdictional Assistant/Deputy Commissioner (AC/DC).

After necessary verification, the AC/DC can grant permission by endorsement of Annexure 1, which becomes the authorization to procurement of the inputs without duty payment from the supplier. You can send the Annexure 1 to the supplier, who may send the goods to you under cover of ARE3 form, which should be used to send back the re-warehousing certificate to the supplier.

After you have used the inputs so procured for export production, you should clear the export goods without duty payment under cover of ARE2 form. You should obtain the ARE2 forms duly endorsed by the Customs to show the fact of exports and submit it as proof of exports to your AC/DC. Upon being satisfied that the inputs procured duty free have been used in the manufacture of goods that have been actually exported, the AC/DC can discharge the bond that you had furnished.

In one of our documents under LC, we have made an inconsequential spelling mistake in the description of goods. Does it make our document discrepant?

The International Chamber of Commerce (ICC) has approved International Standard Banking Practices, ICC Publication no. 645 (ISBP 645) as a practical complement to Uniform Customs and Practices for Documentary Credits, ICC Publication no. 500 (UCP 500) with a view to enable documents checkers bring their practices in line with those followed by their colleagues worldwide.

As per Article 26 of ISBP 645, misspellings or typing errors that do not affect the meaning of a word or the sentence in which it occurs do not make a document discrepant.

For example, a description of merchandise as 'maschine' instead of 'machine', 'fountan pen' instead of 'fountain pen' or 'modle' instead of 'model' would not make the document discrepant. However, a description as 'model 123' instead of 'model 321' would not be regarded as a typing error and would constitute a discrepancy.

Is service tax leviable on charges for maintenance of software?

The latest circular no. 81/02/2005- ST, DT. 07/10/2005 issued by Central Board of Excise and Customs (CBEC), issued in supersession of all its earlier circulars, says that software, being goods, any service in relation to maintenance or repair or servicing of software is leviable to service tax under section 65(105)(zzg) read with section 65 (64) of the Finance Act, 1994.

The CBEC circular is based on Supreme Court decision in the case of Tata Consultancy Services Vs State of Andhra Pradesh [2004 (178) ELT 22 SC] that all the tests required to satisfy the definition of goods are possible in the case of software, where the intellectual property has been incorporated on media for the purpose of transfer and that software and media cannot be split up; therefore, sale of computer software, whether branded or unbranded, falls within the scope of sale of goods.

Is it necessary to load minimum 2% on the value of goods in case of 'high seas sales' for the purpose of customs duty payment?

No. The CBEC circular no. 32/2004 dated 11th May 2004 says that if the importer can demonstrate that the immediate sale under consideration took place with a view to export the goods to the country of importation, then such transaction would constitute an international transfer of goods. The later transaction, which led to the import, would be the relevant transaction for assessment and Rule 4 of Customs Valuation Rules, 1988 would apply.

The circular clarifies that the actual high-seas-sale-contract price paid by the last buyer would constitute the transaction value under Rule 4 of Customs Valuation Rules, 1988 and inclusion of commission on notional basis may not be appropriate.

However, the responsibility to prove that the high-seas-sales-transaction constituted an international transfer of goods lies with the importer.

The importer would be required to furnish the entire chain of documents, such as original invoice, high-seas-sales-contract, details of service charges/commission paid etc., to establish a link between the first international transfer of goods to the last transaction.

In case of doubt regarding the truth or accuracy of the declared value, the department may reject the declared transaction value and follow the sequential methods of valuation under Customs Valuation Rules, 1988.

This is the sixth column on SME-related queries. TNC Rajagopalan will answer questions from readers on SME-related issues pertaining on taxes, exim policies or registrations/reservations, etc. This will be a fortnightly column to be run every alternate Wednesday on the Accent page. Due to a technical glitch, the ID smequeries@business-standard.com was not receiving mails. The error has been rectified and readers can now send mails.