Subcontract Manufacturing by 100% EOU for a Main contractor (Outside India) who is in contract with an Indian Brand Owner for supply of Ready Made garments

[Sanketh Meri]

Dear All,

An 100% EOU is planning to do Sub Contract Manufacturing for a Main Contractor outside India who has a contract with a Indian Brand Owner for manufacture of Ready Made Garments. The arrangement is such that 100% EOU shall manufacture the goods on sub contract basis for Main Contractor outside India but supply the goods directly to Brand Owner in India (assuming Brand Owner will sell in DTA) and bill in USD to Main Contractor. Main Contractor instead shall bill it to Brand Owner and receive payment.

Note: Subcontractor shall purchase all materials himself and manufacture the Ready Made Garments. It can be DTA or Import Purchase.

Can anyone let us know the implications under the following

1. FTP - Whether it is a deemed export.

2. If it is not a Deemed Export, what shall be the implications under Central excise if billing is done to Main Contractor outside India and goods are cleared in DTA to the Brand Owner.

3. What shall be the implications under Customs for Main Contractor who is billing the Brand Owner in India but not supplying the materials.

4. Whether a 100% EOU shall be allowed to keep duty paid DTA purchases in Warehouse or he has to set up a separate DTA unit.

Looking forward to reply from technical people in this area.

[Rajagopalan Ranganathan]

Sir,

Since the 100% EOU supplies the manufactured ready made garments to the Brand Owner who resides in India such supply will be treated as DTA sales by 100% EOU. A 100% EOU can sell its product in DTA up to the value of 50% of FOB value of exports made during previous financial year. Duty is payable on the products cleared/sold in DTA under section 3A of Central Excise Act, 1944. The prescribed rate is 50% of customs duty payable on such goods as if they were imported into India.

DTA sales will not be treated as deemed export.

Customs will be concerned only when goods are imported or exported. Mere payment of money by Brand owner to the Main Contractor is not a concern of the Customs Department. Only RBI and Income Tax Department are concerned about the payment.

Since 100% EOU can also procure duty paid inputs/capital goods from DTA and can avail credit of duty paid on such inputs/capital goods the same may be kept in the same warehouse provided proper/seperate accounts are maintained. You need not set up a separate DTA unit for this purpose.

Payments made by the Brand owner to Main Contractor will be dealt with under Foreign Exchange Management Act.

[Sanketh Meri]

Dear sir,

Thanks for your inputs. In case EOU is purchasing duty paid goods then on DTA clearance we will have to pay excise duty or under section 3A which requires custom tariff to be levied

[Sanketh Meri]

Further, in case of charging excise duty how will we have to bill them.

Our understanding is that the billing shall be on the Main Contractor in USD and consignee shall be the Brand Owner in India. But the question is how will we charge excise duty and whether to charge in USD or INR. Whether Brand Owner shall be allowed to claim the Cenvat Credit.

Kindly let us know your thoughts on the same.

AI Summary

DTA sales by a 100% EOU trigger domestic excise duty on clearance and are not treated as deemed exports. Supply by a 100% EOU of garments directly to an Indian brand owner is treated as DTA sales, not deemed export. DTA clearances attract excise duty computed with reference to the customs duty applicable on import; customs authority is triggered by physical import/export only. Duty-paid DTA inputs and capital goods may be stored in the same EOU warehouse with separate accounts; a separate DTA unit is not mandatory. Invoicing, currency choice, and entitlement to input credit depend on how excise duty on the DTA clearance is billed and documented.