TaxTMI 
TaxTMI 
On 25th September, 2014, Mr. Narendra Modi, our Prime Minister, launched the ‘Make in India’ campaign. The government has identified 25 key sectors in which our country has the potential of becoming a world leader. The PM’s motivated plan is to grow the manufacturing sector’s share in the GDP from the current 15 to 25 per cent. There is no doubt that import and export plays a vital role in economy growth of a country. To achieve the dream seen by our PM; I am highlighting an issue in trading with our neighbour country, Nepal.
In present trade scenario, export to Nepal is increasing day by day. Indian manufacturers require indigenous as well as imported inputs to manufacture the machineries like crane, excavators, car etc. Indian manufacturers are not only selling their final products in domestic market but also in foreign markets.
It is very common that agreement to sell contains warranty clause and also after sale service clause; which requires that the manufacturer will provide the repair and maintenance service to its customer either by itself or through its authorised agent/dealer. To upkeep the machinery, manufacturer/dealer is required to provide the spare parts for repair or maintenance of machinery. The company shall have the responsibility to maintain the Spare Parts availability at accepted industry levels to enable dealer to meet the above responsibilities for customer's support. There is no obstruction to maintain such stock either in India or outside India except Nepal. (In the absence of any clarification from Customs Department).
Import or export of spare parts of machinery is free under ITC (HS) of Import/Export Policy. With effect from 1st March, 2012, CBEC puts export to Nepal at par with exports to other countries (except Bhutan). Export of goods to Nepal is also not restricted by the Customs Act; however it imposes restriction on claiming duty drawback if the exported goods were imported in to India from third country and the value of exported goods received in currency other than freely convertible foreign currency. Foreign Trade Policy 2009-14 nowhere puts any bar/restriction on export of goods to Nepal. As per Para 2.35 of FTP provides the provisions for export of imported goods, which permit such export against payment in freely convertible currency. But treaty between India and Nepal prohibits re-exports of goods imported from third countries without manufacturing activity.
The extract of India and Nepal Treaty is as follow:
Article III to the revised agreement of co-operation between government of India and the government of Nepal to control unauthorised trade states that “subject to such exception as may be mutually agreed upon, each contracting party shall prohibit re-exports to the territory of the other contracting party of goods imported from third countries without manufacturing activity.”
To understand the problem lets take an example, ABC Ltd. is having manufacturing unit in India. ABC Ltd. manufacture the machinery by utilising imported as well as indigenous inputs. ABC Ltd. procured orders from Nepal through its agent and exported the machineries to the customers. Suppose, one machinery breaks down with in warranty period and another breaks down after warranty period. In case of first machinery, the company has to replace the indigenous spare parts only and in case of second machinery, the company has to replace the imported spare parts.
In view of the aforementioned treaty clause, question arises whether company can export the imported inputs to Nepal for maintaining the stock in Nepal and to comply with the maintenance clause as stipulated in agreement to sell; since the imported inputs are manufactured outside India and the same are used to provide after sale services. It is pertinent to note that the imported inputs are to be exported without any manufacturing activity.
Earlier, Customs department has clarified the issue on ‘Goods manufactured in India and parts of such goods whether from of Indian or foreign manufacture and re-imported into India for repairs or for reconditioning’. However, in this case the goods have to be imported back to India and then re-export to Nepal. This process will results in unnecessary cost on the part of customer.
Now these days India’s export business is continuously increasing and manufacturers requires more clarification from customs department to transact effective export business with Nepal customers.
Conclusion:
It is clear that export to Nepal is at par with other countries with effect from 1st March, 2012. Export of Imported goods to other country is permitted by the FTP with a condition that the value of the exported goods must be received in convertible foreign currency. However, the treaty between India and Nepal is accordingly not amended because of which the Indian business entity cannot export imported goods to Nepal. Accordingly, the treaty should be amended to allow export of imported goods to Nepal.