Duty Drawback and ITC: Resolving the Double Benefit Conundrum

Duty Drawback

Customs Act, 1962:

Sections 74 and 75 of the Customs Act, 1962 allow duty drawback refunds: Section 74 covers re-exported goods with up to 98% refund of customs duty, while Section 75 applies to materials used in exported products, refunding customs duty on inputs.

However, these provisions only cover basic customs duty. Other taxes on inputs—previously handled under the Central Excise Act, 1944—are now governed by CGST, necessitating an understanding of both old and new refund mechanisms.

Central Excise Act:

The rebate mechanism for the excise duty paid on the excisable goods utilized in the manufacturing of the exported product is governed by Section 11B of the Central Excise Act, 1944 & Rule 18 of the Central Excise Rule, 2002. Section 11B of the Central Excise Act, 1944, lays down the conditions under which the refund claim must be made to the authority mentioned therein. The relevant extract of the provision is hereunder produced:

“Section 11B.   Claim for refund of duty and interest, if any, paid on such duty.

(1) Any person claiming refund of any [duty of excise and interest, if any, paid on such duty] may make an application for refund of such [duty and interest, if any, paid on such duty] to the Assistant [Principal Commissioner of Central Excise or Commissioner of Central Excise] [or Deputy [Principal Commissioner of Central Excise or Commissioner of Central Excise] before the expiry of [two years] [from the relevant date] [in such form [and manner]] as may be prescribed and the application shall be accompanied by such documentary or other evidence (including the documents referred to in Section 12-A) as the applicant may furnish to establish that the amount of [duty of excise and interest, if any, paid on such duty] in relation to which such refund is claimed was collected from, or paid by, him and the incidence of such [duty and interest, if any, paid on such duty had not been passed on by him to any other person….

[(2) If, on receipt of any such application, the Assistant [Principal Commissioner of Central Excise or Commissioner of Central Excise[ [or Deputy [Principal Commissioner of Central Excise or Commissioner of Central Excise]] is satisfied that the whole or any part of the [duty of excise and interest, if any, paid on such duty] paid by the applicant is refundable, he may make an order accordingly and the amount so determined shall be credited to the Fund…

(a) rebate of duty of excise on excisable goods exported out of India or on excisable materials used in the manufacture of goods which are exported out of India;

(b) unspent advance deposits lying in balance in the applicant's account current maintained with the [Principal Commissioner of Central Excise or Commissioner of Central Excise];

(c) refund of credit of duty paid on excisable goods used as inputs in accordance with the rules made, or any notification issued, under this Act;

(d) the [duty of excise and interest, if any paid on such duty paid by the manufacturer, if he had not passed on the incidence of such [duty and interest, if any, paid on such duty] to any other person;

(e) the [duty of excise and interest, if any paid on such duty borne by the buyer, if he had not passed on the incidence of such [duty and interest, if any, paid on such duty to any other person….”

Additionally, the rebate mechanism for the duty paid on the excisable goods used in the manufacturing of the exported goods is also laid down in Rule 18 of the Central Excise Rules, 2002. The relevant extract of the provision is hereunder produced:

“Rebate of duty. — RULE 18. Where any goods are exported, the Central Government may, by notification, grant rebate of duty paid on such excisable goods or duty paid on materials used in the manufacture or processing of such goods and the rebate shall be subject to such conditions or limitations, if any, and fulfilment of such procedure, as may be specified in the notification.”

In addition to this, the Customs, Central Excise Duties and Service Tax Drawback Rules, 1995, also provided the rebate on the input used in manufacturing the export good, and the manner & conditions under which the refund claim can be made to the proper officer.

In this, double benefit only arises, where drawback of duty paid on inputs and rebate of duty paid on inputs under Rule 18 of Central Excise Rules, 2002 are simultaneously availed. For a better understanding, the reliance is placed on M/s Raghav Industries Ltd. Versus Union of India and Others - 2016 (3) TMI 550 - MADRAS HIGH COURT, the relevant extract is hereunder produced:

“12. After clearing the goods on payment of duty under claim for rebate, the petitioners would not have claimed drawback for the central excise and service tax portions, before claiming rebate of duty paid and they should have paid back the drawback amount availed before claiming rebate. When this was not done, availing both the benefits would certainly result in double benefit.

13. While sanctioning rebate, the export goods, being one and the same, the benefits availed by the petitioners on the said goods, under different scheme, are required to be taken into account for ensuring that the sanction does not result in undue benefit to the claimant. The 'rebate' of duty paid on excisable goods exported and 'duty drawback' on export goods are governed by Rule 18 of Central Excise Rules, 2002 and Customs, Central Excise Duties and Service Tax Drawback Rules, 1995. Both the rules are intended to give relief to the exporters by offsetting the duty paid. When the petitioners had availed duty drawback of Customs, Central Excise and Service Tax on the exported goods, they are not entitled for the rebate under Rule 18 of Central Excise Rules, 2002 by way of cash payment as it would result in double benefit.

14. As per the proviso to Rule 3 of Customs, Central Excise Duties and Service Tax Drawback Rules, 1995, a drawback may be allowed on the export of goods at such amount, or at such rates, as may be determined by the Central Government provided that where any goods are produced or manufactured from imported materials or excisable materials or by using any taxable services as input services, on some of which only the duty or tax chargeable thereon has been paid and not on the rest, or only a part of the duty or tax chargeable has been paid; or the duty or tax paid has been rebated or refunded in whole or in part or given cis credit, under any of the provisions of the Customs Act, 1962 and the rules made thereunder, or of the Central Excise Act, 1944 and the rules made thereunder or of the Finance Act, 1994 and the rules made thereunder, the drawback admissible on the said goods shall be reduced taking into account the lesser duty or tax paid or the rebate, refund or credit obtained. ”

Duty drawback in its entirety is governed by Section 75 of the Customs Act, 1962; Section 37 of the Central Excise Act, 1944; Rules of the Customs, and Central Excise Duties Drawback Rules, 2017. Under the aforesaid legislations and rules, the Department of Revenue issues notifications to regulate the duty drawback. Notification No. 131/2016 – Customs (N.T.) dated 31st October 2016 prevents the availment of double benefit, which may arise from the rebate of the duty drawback scheme.

The Notification in Note and Condition 7 states Columns (4) & (5), wherein the higher rate of duty drawback includes total drawback for the Customs, Central Excise, and Service Tax components; and Columns (6) & (7) refer to the lower rate of duty drawback available only for the Customs component. The relevant extract of the Notification No. 131/2016- Customs (N.T.) is hereunder produced:

“(7) in the said Schedule, shall be so declared by the exporter and the maximum amount of drawback that can be availed under the said Schedule shall not exceed the amount calculated by applying ad-valorem rate of drawback shown in column (4) or (6) to one and half times the ARE-1 value. (7) The figures shown in the said Schedule in columns (4) and (5) refer to the total drawback (Customs, Central Excise and Service Tax component put together) allowable and those appearing in columns (6) and (7) refer to the drawback allowable under the Customs component. The difference in rates between the columns (4) and (6) refers to the Central Excise and Service Tax component of drawback. If the rate indicated is the same in the columns (4) and (6), it shall mean that the same pertains to only Customs component and is available irrespective of whether the exporter has availed of Cenvat facility or not.”

From the aforementioned, it is clear that an exporter can avail of the higher rate of duty drawback, subject to the condition that no Cenvat credit has been availed. For the availment of the higher rate of duty drawback, the exporter has to make a declaration that no Cenvat credit was availed for the inputs utilized in the manufacturing of the exported product as per 12(a) of the Notification No. 131/2016- Customs (N.T.).

As the exporter under the lower rate of duty drawback is only availing of the customs component, the exporter can avail the Cenvat facility for the inputs used to manufacture the export goods. It is pertinent to note that if the rate is the same under columns 4 & 6, then it pertains to the customs component on which the Cenvat credit can be availed. Therefore, irrespective of choosing the higher or lower rate of duty drawback, if the rate is the same under both columns, then the Cenvat facility for the inputs used in the manufacture of export goods can be availed. Then there is no bar on the availment of the duty drawback, even if the Cenvat credit has been availed.

Transition Credit Mechanism:

During the implementation of the GST, the duty drawback scheme was continued with certain modifications. Post-GST, the scheme was only available for customs duties on imported inputs utilized for the manufacturing of exported goods and items specified in the Fourth Schedule of the Central Excise Act, 1944, used as inputs. However, as an export facilitation measure, a transition period was introduced from July to September 2017, wherein a drawback at a higher rate would be granted, subject to the conditions that the export has not availed the ITC under CGST / IGST, and no refund of IGST paid for the exported goods.

After 30 September 2017, drawback at a higher rate was discontinued, and only drawback at a lower rate determined on the basis of the customs duties paid on the goods imported for supplying exported goods was admissible.

Since GST subsumes Excise, VAT, Service Tax, etc., the concept of Cenvat credit has been replaced by the “Input Tax Credit” (hereinafter referred to as “ITC”). The amendment to the Notification No. 131/2016- Customs (N.T.) was made videNotification No. 59/2017- Customs (N.T.) dated 29th June 2017, wherein the exporter has to make a declaration that no ITC has been availed. Notification No. 73/2017- Customs (N.T.) dated 26th July 2017 also amends the Notification No. 131/2016 Customs (N.T.) w.r.t introduction of 12A.

Additionally, the CBIC videCircular No. 22/2017 dated 30th June 2017 provided a clarification w.r.t the transition period extending the duty drawback scheme for three months, i.e., from 01.07.2017 to 30.09.2017. In this, it was clarified that during the transition period, the exporter can avail of the higher rate of duty drawback under columns (4) & (5) of the Schedule of AIRs, subject to the condition that ITC has not been availed simultaneously.

It is clear that availing the ITC on the inputs prohibits the availment of a higher rate of duty drawback, to prevent a double benefit that can arise if both are simultaneously availed. However, under the lower rate of duty drawback, the exporter can avail the ITC on the inputs used in the manufacture of export goods, since a refund is only provided on the customs component. Hence, it is not justified to deny the lower rate of duty drawback due to the availment of ITC on inputs.     

For the aforementioned the reliance has been placed on the following judicial precedents:

Awadkrupa Plastomech Pvt. Ltd. Versus Union of India - 2020 (12) TMI 1116 - GUJARAT HIGH COURT:

“9. Even as per the Condition No.7 of the Notification 131/2016- Cus. (N.T.) dated 31/10/2016,if the rate indicated in the columns (4) i.e. higher duty drawback and (6) i.e. lower duty drawback are the same, then it shall necessarily imply that the same pertains only to the Customs component and is available irrespective of whether the exporter has availed of the CENVET facility or not.

10. The petitioner had exported Rope Making Machine HSN Code 84794000 which attracts the same rate under both the columns (4) & (6) respectively i.e. 2 per cent. Thus it is evident that the petitioner has claimed drawback of the customs component only for their exports and there arises no question of denying the refund of IGST. The rationale for not allowing the refund of IGST for those exporters, who claim higher duty drawback is that the higher duty drawback reflects the elements of Customs, Central Excise and Service Tax taken together and since higher duty drawback is already being availed than granting the IGST refund would amount to double benefit as the Central Excise and Service Tax has been subsumed in the GST. In the case of the writ-applicant, the drawback rates being the same, it represents only the Customs elements, which did not get subsumed in the GST and thus, the writ-applicant cannot be said to have availed double benefit i.e. of the IGST refund and higher duty drawback.

11. In the result, this petition succeeds and is hereby allowed. The respondents are directed to immediately sanction the refund towards the IGST paid in respect to the goods exported i.e.’Zero Rated Supplies’ made vide the shipping bills. It appears that the writ-applicant has also prayed to pay interest at the rate of 9% on the amount of refund from the date of shipping bill till the date on which the amount is actually paid.”

The decision of the Gujarat High Court in Awadkrupa Plastomech Pvt. Ltd. has been followed in Gujarat Nippion International Pvt. Ltd. v. UOI, Sunlight Cable Industries Versus The Commissioner of Customs NS II And 2 Ors. - 2023 (7) TMI 160 - BOMBAY HIGH COURT, and Kunal Housewares Private Limited Versus The Union of India, Assistant Commissioner of Customs, Principal Chief Commissioner of Customs. - 2024 (9) TMI 378 - BOMBAY HIGH COURT. It is also necessary to refer to the Madras High Court judgment in Numinous Impex (I) Pvt. Ltd. Versus The Commissioner of Customs, Tuticorin, The Assistant Commissioner of Customs- (Drawback), Tuticorin - 2022 (4) TMI 760 - MADRAS HIGH COURT, the relevant extract is hereunder produced:

“12. Refund of the input tax credit under Section 16(3) of Integrated Goods and Services Tax Act, 2017 r/w Section 54 of the Central Goods and Services Tax Act, 2017 and Rules 89 and 96 of Central Goods and Services Tax Rules, 2017 cannot be denied, merely because the petitioner has claimed duty drawback under the provisions of Customs and Central Excise Duties and Service Tax Drawback Rules, 2017. It does not mean that the petitioner is not entitled to refund under Section 16(3) of the Integrated Goods and Services Tax Act, 2017 r/w Section 54 of the Central Goods and Services Tax Act, 2017 and Rules 89 and 96 of Central Goods and Services Tax Rules, 2017.

13. As far as the duty drawback under Notification No.131/2016- Cus (N.T) dated 31.10.2016 is concerned, there are two rates of duty drawback. Column No.4 in Schedule to the said Notification deals with the situation where the CENVAT facility has not been availed. Column No. 5 in Schedule to the said Notification deals with the situation where the CENVAT facility has been availed.

14. There are two rates of All Industry Duty Drawback (AIR) under the Notification No.131/2016-Cus (N.T) dated 31.10.2016 namely:-

i. where input tax credit is availed. ii. where no input tax credit is availed.

15. As far as the goods falling under Customs Heading No. 8483-40-00 of the Customs Tariff Act 1975 are concerned, the rate of duty for goods both covered under these two Columns is only at 2%. Thus, there is no variation as far as the rate of duty is concerned. In this case, admittedly, the petitioner is entitled to duty drawback at 2% irrespective of the fact that whether the petitioner has availed input tax credit under the provisions of the Central Goods and Services Tax Act, 2017 or under the provisions of the State Goods and Services Tax Act, 2017.

16. The expression ‘CENVAT Facility’ in Column Nos. 4 & 5 of the Schedule to the Notification No.131/2016-Cus (N.T) dated 31.10.2016 is to be read as ‘Input Tax Facility’ under the respective enactments. Further, as per notes and conditions in Paragraph No.7 to Notification No.131/2016-Cus (N.T) dated 31.10.2016, if the rate indicated is the same in the Column Nos.(4) and (6), it shall mean that the same pertains to only customs component and is available irrespective of whether the exporter has availed of Cenvat facility or not. The said notes and conditions in Paragraph No.7 to Notification No.131/2016-Cus (N.T) dated 31.10.2016 reads as under:-

(7) The figures shown in the said Schedule in columns (4) and (5) refer to the total drawback (Customs, Central Excise and Service Tax component put together) allowable and those appearing in columns (6) and (7) refer to the drawback allowable under the Customs component. The difference in rates between the columns (4) and (6) refers to the Central Excise and Service Tax component of drawback. If the rate indicated is the same in the columns (4) and (6), it shall mean that the same pertains to only Customs component and is available irrespective of whether the exporter has availed of Cenvat facility or not.”

Therefore, merely because the exporter availed ITC u/s 16(3) of the IGST is not a valid ground to reject the duty drawback, when only the customs component is claimed. Even if the higher rate of duty drawback is claimed, and the rate in columns (4) & (6) of the Schedule of AIRs is similar, still it has to be granted as it only pertains to the customs component.

Refund Under IGST

The refund mechanism for the input utilized in manufacturing the export goods is primarily governed by Section 16(3)(b) of the IGST r/w Section 54 of the CGST, and Rule 96 of the CGST Rules. The proviso of Section 54(3) of the CGST restricts the refund of ITC on one ground that the supplier availed the drawback benefit or claimed the refund on the integrated tax.

The Customs and Central Excise Duties and Service Tax Drawback Rules, 2017videNotification No. 88/2017- Customs (N.T.) dated 21.09.2017 replaced the Customs, Central Excise Duties and Service Tax Drawback Rules, 1995. The definition of ‘drawback’ under the Customs and Central Excise Duties and Service Tax Drawback Rules, 2017 has been amended, wherein the rebate of the integrated tax has been excluded. Therefore, the drawback can be availed only on the Customs component and nothing else. The relevant extract of Rule 2(a) is hereunder produced:

“(a) “drawback” in relation to any goods manufactured in India and exported, means the rebate of duty excluding integrated tax leviable under sub-section (7) and compensation cess leviable under sub-section (9) respectively of section 3 of the Customs Tariff Act, 1975 (51 of 1975) chargeable on any imported materials or excisable materials used in the manufacture of such goods…

Thus, the concept of a higher rate of duty drawback providing the total rebate on the customs, excise, and service components ceased to exist from 30.09.2017. Now, only a lower rate of duty drawback exists, wherein the rebate on the customs component is being provided.

Additionally, the Circular No. 37/2018- Customs dated 09.10.2018, restricting the availment of ITC on the ground that the benefit under drawback has been availed, is not valid. As the IGST, i.e., statute itself, provides for a refund on export, and in the light of this, the circular cannot override the statute. For this the reliance is placed on M/s. Precot Meridian Limited Versus The Commissioner of Customs, The Assistant Commissioner of Customs - 2020 (1) TMI 90 - MADRAS HIGH COURT, the relevant extract is hereunder produced:

“10. The Hon'ble Supreme Court, in a similar circumstance, in the case of COMMISSIONER OF CENTRAL EXCISE, BOLPUR Versus M/s RATAN MELTING & WIRE INDUSTRIES - 2008 (10) TMI 5 - Supreme Court, has held as follows:

'6. Circulars and instructions issued by the Board are no doubt binding in law on the authorities under the respective statutes, but when the Supreme Court or the High Court declares the law on the question arising for consideration, it would not be appropriate for the Court to direct that the circular should be given effect to and not the view expressed in a decision of this Court or the High Court. So far as the clarifications/circulars issued by the Central Government and of the State Government are concerned they represent merely their understanding of the statutory provisions. They are not binding upon the court. It is for the Court to declare what the particular provision of statute says and it is not for the Executive. Looked at from another angle, a circular which is contrary to the statutory provisions has really no existence in law.'

11. It is held that circulars cannot prevail over the statute. Circulars are issued only to clarify the statutory provision and it cannot alter or prevail over the statutory provision. In that circumstance, it is clear that the explanation of provisions of drawback has nothing to do with the IGST refund. In view of that matter, Circular No.37/18-Customs, dated 09.10.2018 cannot have an application in the present case. Paragraph 2.5 reads as under:

'By declaring drawback serial number suffixed with A or C and by making above stated declarations, the exporters consciously relinquished their IGST/ITC claims.'

12. When the above circular was dealt with by the Hon'ble Division Bench of Gujarat High Court at Ahmedabad in M/s AMIT COTTON INDUSTRIES THROUGH PARTNER, VELJIBHAI VIRJIBHAI RANIPA Versus PRINCIPAL COMMISSIONER OF CUSTOMS - 2019 (7) TMI 472 - GUJARAT HIGH COURT, the Division Bench has held that it has nothing to do with the IGST refund and it is incumbent on the respondents to refund the IGST as claimed by the petitioner therein. The respondents have already passed a circular when they were facing lot of problems because of the fact that the refunds are completely system- managed and they have taken a conscious decision to refund the amount vide Circular No.40/2018-Customs, dated 24.10.2018.”

It is also relevant to refer to Circular No. 37/11/2018-GST dated the 15th March, 2018, which clarifies that availing the drawback on the basic customs duty does not restrict the ITC refund. The relevant extract of the circular is hereunder produced: 

“2.1 This has been clarified in paragraph 8.0 of Circular No. 24/24/2017 – GST, dated 21st December 2017. In the said paragraph, reference to “section 54(3)(ii) of the CGST Act” is a typographical error and it should read as “section 54(3)(i) of the CGST Act”. It may be noted that in the said circular reference has been made only to central tax, integrated tax, State / Union territory tax and not to customs duty leviable under the Customs Act, 1962. Therefore, a supplier availing of drawback only with respect to basic customs duty shall be eligible for refund of unutilized input tax credit of central tax / State tax / Union territory tax / integrated tax / compensation cess under the said provision. It is further clarified that refund of eligible credit on account of State tax shall be available even if the supplier of goods or services or both has availed of drawback in respect of central tax.”

The lower rate of duty drawback cannot be denied solely on the ground that the exporter has availed Input Tax Credit (ITC) on inputs. Following the cessation of the higher rate of drawback with effect from 30.10.2017—wherein the principle against double benefit was embedded—the rationale for denying the lower rate on account of ITC availment no longer holds. The higher rate encompassed rebates on the customs duty, central excise duty, and service tax components, thereby covering the input tax burden comprehensively. Consequently, availing ITC in such cases would have resulted in a double benefit.

However, the lower rate of drawback pertains exclusively to the rebate of basic customs duty. Since this component is not covered under ITC, the availment of ITC on inputs does not lead to a double benefit scenario. Therefore, in light of the prevailing legal position and judicial precedents, exporters remain entitled to claim the lower rate of duty drawback even when ITC on inputs has been availed.