EXPORT ORIENTED UNITS - Central Excise and Service Tax Audit Manual - CBEC - Service Tax

CHAPTER 7 EXPORT ORIENTED UNITS 7.1 SERVICE TAX: There is no general exemption to EOU / EHTP /STP / BTP units from payment of service tax. There are no special provisions governing payment of service tax by these units either. 7.2 CENTRAL EXCISE: Section 3 of the Central Excise Act makes a special dispensation for EOUs and provides that goods manufactured in such units are liable to excise duty equivalent to the aggregate of all customs duties, when cleared into domestic tariff area (DTA). They are also eligible for a number of exemptions both from customs and excise duties. These exemptions apply to goods procured by such units such as capital goods, raw materials, intermediates and inputs. In order to avail of these exemptions, however, these units need to fulfil the conditions prescribed in the relevant notifications. Auditors need to be mindful of these conditions and to clearly distinguish between violations calling for issuance of demands of customs duty and those that involve recovery of central excise duty. 7.3 Owing to options available to such units under the Foreign Trade Policy and the nature of goods manufactured, each unit is likely to have a unique pattern of inflow (of duty free or exempted goods) and outflow (of exempted or dutiable goods). To give an example, some units may procure capital goods indigenously claiming excise duty exemption while others may import them free of customs duty. In addition, EOUs are also permitted to send goods out for job work as well as to receive goods from units in the DTA for job work. As a general principle, it may be useful to begin audit of a unit by creating a flow chart that would clearly show these movements so that the nature and extent of duty liability for each movement is clearly identifiable. 7.3.1 Evaluation of Internal Controls would be particularly useful in identifying potential risks to revenue for each of these movements. Such evaluation would also throw up risks owing to substitution of imported raw materials, their diversion into DTA and inflation of wastages and rejects factors unique to EOUs. Depending on the nature of goods being manufactured, auditors may have to use suitable indicators of risk on account of such factors. 7.4 The auditor has to lay special emphasis on verification of documents, registers and returns that are mentioned or filed either to the Customs authorities or to the any other authority. Sales to DTA also constitute a sensitive area. The auditor should scrutinise the records and returns pertaining to these schemes for verification of fulfilment of such conditions. 7.5 The auditors should examine the following issues in addition to the usual checks: i. Whether approval of Board of Approval/Development Commissioner /prescribed authority has been obtained; whether the unit has become operational during validity of the letter of the approval; whether the items of manufacture and rejects conform to such approval; ii. Whether the unit has the capacity to achieve the volume of production indicated in the LOP or whether a LOP has been obtained for quantities far in excess. iii. Whether benefits of Customs/ Central Excise exemptions have been availed only on admissible items as listed in the notifications; whether the goods imported/ indigenously procured duty free are required and conform to the declaration submitted to the Development Commissioner and are actually used for the manufacture /processing of export goods; whether such goods are available in the factory or otherwise accounted for; iv. Whether goods covered under all the CT-3 forms issued during the period of Audit have been received and duly accounted for; whether such duty free goods are properly declared in terms of description, value and quantity; and whether the capital goods, raw materials, components, etc. have been used within the prescribed period; v. Whether any goods are imported in violation of the Foreign Trade Policy; vi. Whether any goods, procured free of duty, are removed unauthorisedly, i.e., they are transferred/ sold/sent for job-work/ supplied to other units without permission of the Assistant Commissioner/Deputy Commissioner or wherever necessary the Development Commissioner. vii. Whether permission for DTA sales has been obtained and if so whether the details of foreign exchange earnings and utilisation, furnished to the Development Commissioner tally with the records of the unit; and whether the conditions of exemption notification are satisfied; viii. Whether, the goods under DTA sales have been valued correctly in terms of the Customs Act read with Customs Valuation Rules and instructions issued by the Board; whether the DTA sale is within the prescribed limit and made on the basis of actual physical exports (and not deemed exports); ix. Whether excess DTA sales are effected at concessional duty by inflating the FOB value of exports. x. Whether duty on DTA sales is short-paid by under-invoicing the value or mis-classification. xi. Whether the facility of partial conversion of DTA unit into EOU is being misused. Such misuse is possible, firstly, when the duty free capital goods or raw materials etc. are used by a non-entitled unit i.e. the DTA unit. Secondly, duty free imported goods may be diverted to the DTA unit and also the production of the DTA is shown as the production of EOU for obtaining concession which can easily be done especially, when two units share common facilities and where they may not be under continuous Customs or Excise supervision. xii. Whether any imported goods/inputs/consumables attracting antidumping duty have been used in the manufacture of goods cleared into DTA.If so, whether proportionate anti-dumping duty leviable thereon has been paid or not. xiii. Whether there is any fudging and concealing of non-fulfilment of conditions by resorting to large scale inter-unit transfer; whether goods are removed against proper advance release orders and the material has reached the actual destination (Sometimes, EOU furnishes copies of only Shipping Bills as filed, as proof of export even though the goods are not exported under such shipping bills. Careful scrutiny of shipping bills will indicate that no goods have been exported and only shipping bill has been filed {and later withdrawn in some cases).It is advised to verify as to whether mate s receipts are available in respect of each of the exports made by the unit; xiv. Whether export obligation as prescribed is shown as fulfilled under both EOU scheme and duty exemption scheme by accounting for the same exports twice. xv. Whether values of exports are being mis-declared for showing the fulfilment of export obligation incorrectly. xvi. Whether re-warehousing certificate has been obtained in case of goods sent for inter-unit transfer or else duty due has been demanded; and whether goods claimed to have been exported have actually been exported. xvii. Whether the CENVAT credit has been availed in accordance with the CENVAT Credit Rules, 2004. 7.6 Tips for conduct of verification: Certain useful tips to conduct audit verification in case of duty free imports, indigenous procurements, sub-contracting etc. are discussed below. These guidelines are only for the general convenience of the officers. For actual application, the relevant notifications and Paras of Foreign Trade policy in vogue should be strictly referred to. 7.6.1 Duty free Imports EOUs can import goods required by them, under Notification No. 52/2003-Customs dated 31.3.2003, as amended. The list of goods permitted for import would depend on the sector (such as aquaculture, agriculture, horticulture, granite production, gems and jewellery or others) in which the unit operates. These goods can also be procured free of duty from a customs bonded warehouse. It is critical for auditors to check that the unit maintains proper account of the receipt, storage and utilisation of these goods and has put adequate internal systems in place, for this purpose. In the event of violation of any of the conditions of exemption, customs duty is recoverable on the goods in question. The value of such goods should be ascertained under Section 14 of the Customs Act, 1962. It is important to note that the exemption would continue to apply to goods imported or procured under this exemption, even when they are used for the manufacture of goods that are cleared into the DTA as per the permission of the Competent Authority (and not exported), as long as the appropriate excise duty is paid on the finished products. i. Examine the Bond register with that of Import documents so as to ensure that the goods obtained duty free are covered in the relevant Annexure of the notification. ii. Check whether the capital goods are installed or otherwise used within one year from the date of importation or procurement or extended period allowed by the Assistant/ Deputy Commissioner, failing which duty together with interest should be demanded. iii.Similarly, in case of other goods check whether they have been used for intended purposes or re-exported within three years or extended period. iv. Check whether the goods produced or packaged have been exported within a period of one year or extended period from the date of import/ procurement. v. Check unused goods (including empty cones, bobbins or containers suitable for repeated use) have been exported or cleared for home consumption within a period of one year or extended period. If not, duty together with the applicable interest at the applicable rate should be demanded. vi. Check whether the unit has achieved positive Net Foreign Exchange Earning. If it has not been achieved, compute the ratio of unachieved portion of NFEE to positive NFEE. Apply this ratio to the differential duty (duty payable on the goods but for the exemption) to arrive at the duty that would have to be recovered. vii. Check the quality of raw materials or components used in the manufacture of the finished (export) product is broadly the same as that imported or procured free of duty. viii. Check whether the goods taken out of the unit for test, repairs, replacement, calibration, job-work etc., as well as the waste, scrap or remnants are either returned or duly accounted for. ix. Check appropriate customs duty has been recovered on such capital goods and other goods (except used packaging materials) that have been allowed to be taken outside the unit, to any other place in India, under paragraph 4 of the notification. In these cases, check the value of and rate of duty applicable on the relevant dates have been correctly applied. In case of capital goods, check the depreciated value has been properly worked out. 7.6.2 Procurement of indigenous goods Exemption from excise duty is also available to goods procured from indigenous sources under Notification No. 22/2003 CE dated 31.03.2003. This exemption is similar to notification no.52/2003-Customs in terms of the conditions prescribed. Thus, the same checks, with suitable changes, should be applied in respect of capital goods, raw materials and other goods on which excise duty exemption is claimed. 7.6.3 Subcontracting, Job-work: There are two situations, i.e. i) Sub contract part of their production process and ii) Sub contract part of the product. In both the cases, check whether the procedure prescribed by Board from time to time is being followed by the unit. 7.6.4 Inter unit transfer (From EOU to EOU): a) Check whether the goods supplied are re-warehoused and the range officer of the receiving unit has issued the re-warehousing certificate. b) Verify whether the receiving unit is an EOU and whether its license/LOP is in force. c) Check whether duty liability in respect of goods short received or not received has been demanded. 7.6.5 Exports: a) Check whether the proof of export has been received within six months of export. In case of non-receipt, check whether show cause notice has been issued demanding duty. b) Check as per Para 6.10 of Foreign Trade Policy read with Para 6.19 of Hand Book of Procedures, Appendix 14I of Handbook of procedures are in order. 7.6.6 DTA sales: Notification No.24/2003-CE exempts all excisable goods manufactured in a 100% EOU from the whole of excise duty [basic, additional (in lieu of sales tax) additional (textiles and textile articles)]. This exemption is applicable so long as the goods are not brought to any other place in India. In other words, DTA clearances of such goods would be liable to excise duty, unless they are exempt under some other notification. The highest rate of duty applicable to such clearances is that specified in section 3 of the Central Excise Act, viz., the aggregate of all customs duties. The effective rate of duty in case of DTA sales, may however, be lower as prescribed in notification No.23/2003-CE. This rate depends on whether the goods under clearance are manufactured out of imported raw materials or exclusively out of indigenous raw materials. Concerned S.No. in the Table annexed to the relevant notification should invariably be referred to while verifying the applicability of these rates. a) Check whether DTA entitlement is in force and is adequate to cover the DTA sales. Also check whether these clearances are in accordance with the provisions of sub-paragraph (a), (b), (d) and (h) of paragraph 6.8 of EXIM Policy. b) Check whether DTA sales of rejects are within the limit of 5% of Free on Board value (FOB value) of the goods actually exported. c) the unit has manufactured/ produced any non-excisable goods that have been cleared into the DTA, check whether the duty foregone on inputs (customs duty if inputs were imported and excise duty if they were procured free of excise duty) that have gone into the production of such goods, has been recovered. 7.6.7 Destruction of rejected goods/scrap/waste/packing material: a) Verify whether all rejected goods/scrap/waste/packing material have been cleared on payment of appropriate duty. b) If the unit declares that these items do not have commercial value and opts for destruction, verify whether the same have been destroyed under the supervision of appropriate Departmental officer. 7.6.8 B-17 bond: a) Check whether the bond is in force and the Bank guarantee given in terms of Board s guidelines. b) Check the balance of bond amount considering 25% of the duty foregone and ensure that the balance is adequate and within limit. 7.6.9 De-bonding of goods procured duty free: a) Check whether depreciation allowed in respect of capital goods is as per the norms stipulated by the Board from time to time. b) Check whether the goods intended to be de-bonded were within the bonding period or within the extended period as permitted by the Chief Commissioner/ Commissioner. c) Check whether the duty at appropriate rates, prevailing on the day of clearance, at the depreciated value in respect of capital goods has been paid and interest at stipulated rates is considered from the date of expiry of the bonding period. d) Check whether the designated officer/Development Commissioner has given approval for the de-bonding of capital goods / raw material etc. e) Check whether the duty is paid within the prescribed time limit after approval of the Green Bill of entry and if not, interest is calculated at the specified rates as required under sub section 2 of section 47. 7.6.10 Payment of cost recovery/supervision charges: a) Check whether the unit has paid the charges for cost recovery/supervision charges. 7.6.11 Others : a) Check whether the unit is operating from a hired premises or has obtained capital goods on lease. If yes, greater alertness will have to be exercised while evaluating internal controls and for recoverability of dues, if any. b) Verify whether the procedure adopted for conversion of a DTA unit to EOU is in accordance with the provisions.