Sale-Repurchase of Raw Material-Finished Goods under Advance License.

[Pradeep Singhi]

Hello, I'm having a query regarding raw material imported under advance authorization.

Scenario : - Party A has Advance license which has authorized supporting manufacturer as Party B. Party A then enters into agreement with Party B to manufacture finished goods to be transferred exported by Party A only. Party A imports raw material under AA & sells the same to Party B for manufacturing. Party A then re-purchases the Finished goods from Party B. Party A carries out the Export Obligation of Finished goods and closes the advance license.

P.S: GST has been duly paid on raw material sale from Party A to Party B and again when Party B sells finished goods to Party A.

Query: What are the customs law default & exposure in such cases? These advance licenses were for 2018-2022 period and up to what period customs can raise queries?

[YAGAY andSUN]

In the scenario you've described, several customs and GST considerations arise, especially regarding the import of raw materials under Advance Authorization (AA) and the associated export obligations. Let's break down the key concerns and exposures under Customs Law:

Key Points to Address:

1. Advance Authorization (AA) Scheme:
   Under the AA scheme, a company can import raw materials without paying customs duty, provided they meet the export obligation by exporting the finished goods made from these raw materials within a specified period. If the conditions of the license are not met, the duty exemption must be reversed, and penalties may be imposed.
2. Sale of Raw Material to Party B:
   • Party A, who holds the Advance Authorization, imports raw materials duty-free and then sells them to Party B (the supporting manufacturer).
   • The sale from Party A to Party B attracts GST since it's a supply of goods. This GST has been duly paid, which is compliant with the GST law.
   • From a Customs Law perspective, this transaction is likely acceptable as long as the raw materials are ultimately used for manufacturing the finished goods that will be exported, and Party A fulfills the export obligation.
3. Finished Goods Transaction:
   • Party B manufactures the finished goods and sells them back to Party A.
   • This sale is treated as a domestic transaction, so GST is payable on the finished goods.
   • Under the AA scheme, Party A is required to ensure that the finished goods are exported, and the export obligation is fulfilled.
4. Re-Purchase and Export Obligation:
   • Party A re-purchases the finished goods from Party B and fulfills the export obligation. As long as the export is completed, the AA license will be considered closed.
   • Customs will verify that the export obligations are met as per the terms of the Advance Authorization, which may require submission of proof of export.

Customs Law Defaults & Exposures:

1. Failure to Meet Export Obligation:
   If Party A fails to meet the export obligation within the prescribed time frame, Customs can demand the payment of the applicable customs duty on the raw material imported under AA along with interest. In addition, they may impose a penalty.
2. Incorrect Utilization of Raw Material:
   Customs may scrutinize whether the raw materials imported under AA have been utilized correctly for manufacturing the specified finished goods that are eventually exported. If the raw materials were diverted or not used for the intended purpose, Customs may impose penalties and demand the customs duty to be paid with interest.
3. Verification of Export:
   If Customs determines that the finished goods were not exported within the prescribed time period or the export documentation (e.g., shipping bills, export invoices, etc.) is incomplete or incorrect, they may raise demands for duty recovery, along with interest and penalties.
4. GST Issues:
   GST has been duly paid in both transactions (raw material sale and finished goods purchase). However, if there is any discrepancy regarding the GST treatment (for example, wrong classification or improper invoicing), it could trigger scrutiny from the GST department. Although customs is the primary department for Advance Authorization issues, GST-related discrepancies can lead to inquiries or additional assessments.

Time Limits for Customs Queries:

• Time Limit for Raising Queries:
  Under Section 28 of the Customs Act, 1962, the normal period for issuing a show-cause notice for recovery of customs duty is 5 years from the date of importation. However, if the importer has willfully mis-declared or suppressed facts, the period could extend to 5 years from the date of discovery of the misdeclaration or suppression.
  • Since the period of the Advance Authorization you're referring to is from 2018 to 2022, Customs can raise queries until 2027 (5 years from the latest import under that license). However, it depends on the specifics of the case—whether there were any deliberate misrepresentations or other factors that could extend the period of assessment.

5. Import and Export Documentation:
   Customs may audit the documentation relating to the raw material imports, the manufacturing process, the export of finished goods, and the closure of the Advance Authorization. Proper documentation must be maintained to demonstrate compliance with the AA scheme.

Risk Management and Compliance Tips:

• Ensure that the export obligation is met within the stipulated period and that all required export documents are maintained.
• Verify that the correct duties and taxes were paid on both the raw materials and finished goods.
• Maintain proper records of the movement of goods between Party A and Party B to substantiate the use of raw materials in the manufacturing process.
• Review whether the re-purchase and export process is in full compliance with the conditions of the Advance Authorization license.

In summary, while the scenario you described seems generally in compliance with both GST and Customs laws, it's essential to ensure that all export obligations are met, the raw materials are used correctly, and the required documentation is maintained. Customs can raise queries until 2027, but the exposure largely depends on the fulfillment of the export obligations and adherence to the conditions under the Advance Authorization scheme.

[Shilpi Jain]

Logically it may be fine but technically many aspects as mentioned in the FTP have not been fulfilled.

Name of the supporting manufacturer should be endorsed in the AA.

Duty free inputs can be transferred to the supporting manufacturers premises. Need not necessarily be shown as a sale. In case shown as a sale there could be an allegation that duty free inputs are diverted.

The AA holder is required to mention the name of the supporting manufacturer in the shipping bill since AA is provided only to a manufacturer or a merchant exporter tied to a supporting manufacturer.

[Pradeep Singhi]

Thank You, YAGAY &SUN for the detailed and enlightened response on the subject. 

Thank You, Shilpi Jain for your expert view. Just to clarify, supporting manufacturer is endorsed on AA. Also, shipping bill filed for Exports by Party A does mentions supporting manufacturer.