Inter unit transfer

[Dashrath Walkoli]

Sir, An EOU unit has supplied goods to another EOU (inter unit transfer) for last 3 year has has not taken prior approval from Development Commissioner as well as from customs authorities. The recipient unit has not issued form-A also in this regard. Since the recipient unit is paying IGST to supplier and availing ITC. Now the Development Commissioner and customs authorities are of the opinion that such transactions cannot be treated as deemed export as per FTP and therefore the supply will not be calculated for the purpose of NFE.

Now if the transaction is not calculated for NFE, my NFE will not be positive. Can the authorities disqualify this transaction as not treating as deemed export under FTP, just due to procedural lapse.

[YAGAY andSUN]

This situation involves the interpretation of export benefits under the Foreign Trade Policy (FTP) and the eligibility for Duty Drawback/Exemption for an Export Oriented Unit (EOU). It seems the issue revolves around whether the transaction between two EOUs can be treated as a deemed export, and whether the procedural lapse (not obtaining prior approval and not issuing the necessary Form A) should disqualify the transaction from being counted towards the Net Foreign Exchange (NFE) obligation.

Let’s break this down:

1. Export Oriented Units (EOUs) and Deemed Exports:

• An EOU is a unit set up under the Foreign Trade Policy (FTP) with the aim of exporting goods and earning foreign exchange.
• Deemed Export refers to supplies of goods that are treated as exports for the purposes of fulfilling the NFE (Net Foreign Exchange) obligation, but without the physical movement of goods out of the country. These supplies are typically for EOUs, SEZ units, or other specified entities.

2. Procedural Compliance under FTP:

• Under the Foreign Trade Policy (FTP), certain procedural requirements must be adhered to in order for a transaction between EOUs to be considered a deemed export.
  • Form A is required for inter-unit transfers between EOUs.
  • The transaction must also typically get prior approval from the Development Commissioner and/or customs authorities.

In your case, the recipient EOU has not issued Form A, and neither the prior approval nor the approval of customs authorities has been obtained for the transfer. These are procedural lapses that may be in violation of the regulations, leading to concerns over the validity of the transaction as a deemed export.

3. NFE (Net Foreign Exchange) Calculation:

• An EOU is required to fulfill the NFE requirement, i.e., the value of exports must exceed the value of imports. If inter-unit transfers between EOUs are not treated as deemed exports, these transactions would not be counted towards the NFE, which could result in a negative NFE for the EOU in question.
• Customs authorities and the Development Commissioner are concerned because the transaction may not meet the FTP criteria for deemed export due to procedural lapses, meaning it will not count toward the NFE calculation.

4. Can Authorities Disqualify the Transaction Due to Procedural Lapses?

• Yes, the authorities can disqualify the transaction from being considered a deemed export if there is a procedural lapse. The Foreign Trade Policy and Customs Procedures often require specific documentation (like Form A) and approvals from relevant authorities (Development Commissioner, Customs), and failure to comply with these procedural requirements may result in the disqualification of the transaction as a deemed export.

While procedural non-compliance (such as the lack of Form A or prior approvals) does not necessarily change the nature of the transaction (i.e., it is still an inter-unit transfer), compliance with procedural requirements is mandatory for the transaction to be recognized as a deemed export. As such, the authorities are within their rights to not count this transaction for NFE purposes.

5. Impact of Disqualification:

• If the transaction is not treated as a deemed export, it could affect your NFE calculation negatively, especially if your other exports are not sufficient to meet the NFE obligation. The authorities may also impose penalties or demand revised compliance for future transactions.
• Disqualification of this transaction for NFE purposes might result in a compliance issue for your EOU, as it could affect your eligibility for the export incentives and tax benefits available to EOUs.

6. Possible Remedies and Course of Action:

• Seek Rectification or Regularization: You can approach the Development Commissioner and Customs Authorities to regularize the transaction, explaining the situation and seeking their approval, as well as requesting that the transaction be counted towards NFE.
• Issue Form A and Obtain Approvals Retroactively: If possible, issue Form A for the inter-unit transfer and seek retroactive approval or clarification from the Development Commissioner and Customs. This may help mitigate the consequences of the procedural lapse.
• Appeal Process: If the authorities do not accept the regularization, you can explore an appeal to higher authorities or seek judicial review of the decision if you feel the action is unduly harsh.

Conclusion:

In this case, the authorities can disqualify the transaction from being treated as a deemed export due to procedural lapses (lack of prior approval and failure to issue Form A). This would indeed affect the NFE calculation and potentially your compliance with the FTP and export obligations. However, you may still be able to rectify the situation by seeking approvals retroactively or filing for regularization, depending on the discretion of the authorities involved.

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[Shilpi Jain]

As per para 6.10 of HBP read with para 6.04 and 6.08 of FTP supplies to other EOU would be counted for NFE calculation.

I do not see any condition regarding requirement of filing of Form A. This requirement of Form A applies under GST law where in the case of treating the said transaction as a deemed export, Form A is required to be submitted.

I don't see Form A as a requirement for FTP or HBP. Am I missing something?

Also, notification 52/2003 Cus requires prior intimation to be given to the officer and proper maintenance of records of removal and receipt of goods. Not making this prior intimation could be regarded as a procedural lapse as it is only intimation and not permission.

[Dashrath Walkoli]

Is there any case law law is support of the deparment, wherein the Development Commissiner or Custom authorities have issue Notice (SCN) or OIO for disqualifying the transaction as deemed export.

[KASTURI SETHI]

Form-A is required in terms of CBIC Circular No.14/14/17-GST dated 6.11.17 as amended vide Circular Nos.24/24/2017-GST dated 21.12.17 and 125/44/2019-GST dated 18.11.19 read with Notification No. 48/2017-Central Tax, dated 18-10-2017.

Either the transactions should be regularized retrospectively or else  the same may not be treated as deemed export.  

There is hope for retrospective   regularization, if no revenue loss has been caused.

You are asking for case law in favour of the Department, rather, you should trace out case law in your favour on the ground of procedural lapse.  Procedural lapse stands for no revenue loss.

AI Summary

Deemed export recognition: procedural non compliance can lead to disqualification, affecting NFE calculation and remedial regularisation. Inter unit EOU supplies may be disqualified from recognition as a deemed export for NFE purposes where prescribed procedural formalities - prior intimation/approval to Development Commissioner or customs and issuance of Form A - were not complied with; applicable FTP/HBP provisions contemplate counting EOU to EOU supplies for NFE but customs and GST circulars and notifications impose documentary/record requirements, and remedies include retrospective regularisation if no revenue loss and administrative or judicial challenge if regularisation is denied.