According to para 6.11 (c) (i) of the Foreign Trade Policy (FTP), EOUs are entitled to reimbursement of Central Sales Tax on goods manufactured in India. Thus, the only condition in FTP is that the goods must have been manufactured in India.
Before September 16, 2008, condition for grant of CST refund, in para 2(a) of Appendix-14-I-I of the Handbook of Procedures, Vol. 1 (HB-1), said that the supplies from the Domestic Tariff Area (DTA) to EOU/EHTP/STP units must be utilised by them for production of goods meant for export and/or utilised for export production. Based on these wordings, the CRA alleged that the CST refunds granted in respect of inputs procured from the DTA used in the manufacture of goods cleared into the DTA are improper, and that even the CST refunds granted in respect of inputs procured by any EOU from another EOU are incorrect.
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On September 16, 2008, the said condition was amended through Public Notice no. 81/2008, stating that the supplies from the DTA to EOU/EHTP/STP units must be utilised by them for production of goods/services. Apparently, the DGFT realised that restrictions regarding use of inputs procured from DTA only for export production was inconsistent with the provisions of FTP and so amended the said condition to prescribe only utilisation in the EOU, whether for exports or for clearances into DTA. However, the said amendment was not explicitly given retrospective effect.
It is a well settled law that clarificatory or beneficial amendments have retrospective effect [Supreme Court in Mysore Electrical Industries Ltd [2006 (204) E.L.T. 517 (SC)].
The CRA cannot be faulted because the wordings of the condition do restrict the CST facility to supplies from DTA only and before September 16, 2008, the goods procured on CST payment had to be used for export production only. It is for the Director General of Foreign Trade (DGFT) to sort out the mess caused by faulty drafting of the conditions for grant of CST refund.
The best way forward is to issue a clarification or a public notice recognising retrospective effect to the beneficial and clarificatory public notice no. 81/2008 dated September 16, 2008. He should also issue another public notice stating that the CST refund will be granted for procurement by an EOU from another EOU also and conceding retrospective effect to that public notice also. Such actions will help avoid unnecessary litigations.
Meanwhile, EOUs can contest the directive of DC to return the CST refunded on grounds that the restrictions prescribed by the DGFT cannot override the FTP provisions that allow CST refund on all goods manufactured in India, without any distinction between goods procured from any other EOU and DTA. They can also contend that reading the conditions prescribed by DGFT harmoniously with the FTP and based on the principles upheld by the courts that beneficial amendments must be given retrospective effect, the Public Notice no. 81/2008 dated September 16, 2008, should apply for procurements before the date of that public notice. They can also say all goods manufactured in EOU are meant for export, even if they are not exported physically.
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