Deemed exports hit a road block in court

EXIM MATTERS

Deemed exporters have a new problem. The Supreme Court says surrender of duty-free import facility by advance licence holders for the purpose of getting invalidation letters favouring domestic suppliers would amount to additional consideration.

And, under the excise law, the value of additional consideration must be loaded while reckoning the assessable value of the goods supplied to advance licence holders.

An advance licence holder can import inputs required for export production without paying duty. Instead of importing, he may source the goods from a domestic producer. However, he will do so only if the domestic supplier can compete at near international prices.

The commerce ministry understands this point and gives deemed-export benefit to the domestic producer so he can compete with duty-free imports.

The procedure requires the advance licence holder, ie the ultimate exporter, to get the licence invalidated for direct import by the licensing authority on the basis of the agreement between him and the domestic supplier, ie intermediate manufacturer. Based on the agreement and the invalidation letter, intermediate supplier can obtain an advance intermediate licence.

The domestic supplier can import raw materials under the advance intermediate licence without paying duty and thus his input costs get reduced to near international levels and he is able to price his end product at near international prices and bag the order from the advance licence holder.

This well-established scheme has been effected by the finance ministry through exemption notifications. The commerce ministry has fine-tuned the scheme by granting duty drawback to cover the situations where the domestic supplier uses duty-paid inputs.

The excise department, however, contends the duty exemption that the local supplier gets through advance intermediate licence is on account of additional consideration from the buyer.

In several cases, the tribunals have held that duty exemption or duty drawback are additional considerations that flow from the government to the intermediate suppliers and not from the buyer to seller.

The Supreme Court now says that it is the sales contract or the agreement in terms which the buyer foregoes his duty-free import benefits and arranges an invalidation letter based on which the advance intermediate license is issued.

So, there is additional consideration that flows from buyer to seller. This additional consideration should be equal to the price reduction that the seller offers to the buyer in lieu of getting the necessary documents that will enable him get the advance intermediate licence, says the apex court.

In all cases of deemed exports, the buyer is required to give the seller the prescribed document, ie project authority certificate, invalidation letter or advance release order on the basis of which, the seller can claim duty-free licences or duty drawback.

If such documents are considered as additional consideration, the sellers have to increase the price for the purpose of excise duty payment "" that is the consequence of the Supreme Court judgment [IFGL Refractories 2005-TIOL-10-SC-CX], which disturbs a well-settled position that benefits being given by the government cannot be termed as additional consideration flowing from buyer to seller.

The judgment will lead to litigations on excise valuation issues in respect of all deemed export supplies.

tncr@sify.com