Circular No. 11 /2009-Cus.

F.NO.605/109/2006-DBK
Government of India
Ministry of Finance
Department of Revenue

New Delhi, the 25th February, 2009.

Subject : Duty Free Import Authorization (DFIA) Scheme - availment of facility under
rule 18 (rebate of duty paid on materials used in the manufacture of resultant
product) or sub-rule (2) of rule 19 of the Central Excise Rules, 2002 or Cenvat credit
under CENVAT Credit Rules, 2004 under Notification number 40/06-Cus dated 1.5.06
- reg.

The undersigned is directed to invite your attention to the above mentioned subject and to
say that doubts have been raised whether an exporter can avail the facility under rule 18
(rebate of duty paid on materials used in the manufacture of resultant product) or sub-rule
(2) of rule 19 of the Central Excise Rules, 2002 or Cenvat credit under CENVAT Credit
Rules, 2004 (here in after referred to as the ‘said facilities’) in respect of raw materials
used in the manufacture of goods exported towards fulfillment of export obligation (EO)
under Duty Free Import Authorization (DFIA) scheme, as well as duty free imports against
the Authorization so obtained in terms of the DFIA scheme, simultaneously.

2. The matter has been examined by the Ministry. The DFIA Scheme was introduced in the
Foreign Trade Policy (FTP) in 2006 and it allowed, inter alia, duty free import of inputs for
manufacture of export goods and transfer of the Authorization or the inputs imported
against it after completion of the EO subject to fulfillment of certain conditions. One of
the conditions stipulated in paragraph 4.4.7 of the FTP (2006) was that no Cenvat credit
facility shall be available for inputs either imported or procured indigenously against the
Authorization. Condition(v) of the corresponding customs notification No.40 / 2006- Cus dt
1.5.2006, issued to implement the DFIA scheme, accordingly provided that the EO would be
discharged by exporting resultant products, manufactured in India which were specified in
the said authorization and in respect of which the said facilities have not been availed of in
respect of materials imported / procured against the said authorization.

3. Several reports were received in the Ministry which indicated that, some exporters
taking advantage of the words “against the Authorization” in the Policy as well as the
customs notification, followed post export route i.e. procured inputs on payment of duty
from indigenous manufacturers, availed cenvat credit of duty paid on such inputs and then
exported the finished products under the DFIA scheme. After completion of exports, the
exporters approached the DGFT authorities for issue of transferable DFIA to enable them
to import duty free materials. The DFIAs were then either sold in the market or used to
import duty free material. Thus the exporters took Cenvat of duty paid on inputs used in
the manufacture of goods exported under the DFIA scheme and also obtained DFIA / duty

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free imports against such DFIAs. It was contended that cenvat of duty paid on inputs was
not being taken in respect of materials imported / procured locally against an authorization.

4. The issue was discussed with Department of Commerce (DOC),Directorate General of

Foreign Trade (DGFT) and Ministry of Law. The DOC/DGFT were of the opinion that the
Policy (para 4.4.7 of the FTP-06), did not prohibit taking Cenvat credit in case of duty paid
inputs procured locally for manufacture of export products. It only prohibited Cenvat
credit if the inputs were procured locally against authorisation. The Department of Revenue
(DOR), on the other hand, was of the view that the Cenvat credit cannot be availed of in
respect of inputs used in the manufacture of goods exported under the DFIA Scheme in
terms of condition (v) of the notification 40/06-Cus. The contention that the Cenvat credit
was restricted only in case of imports against authorization did not appear to be valid as
imports under the DFIA scheme were permitted without payment of customs duties and
therefore there was no possibility of taking credit on such imports. The words “against
authorization” in condition (v) of the notification no 40/06-Cus, therefore, had to be read
constructively keeping in mind the overall objectives of the scheme. Hence the practice
adopted by exporters as elaborated in para 3 above may have resulted in double benefits.
The Law Ministry clarified that from a perusal of the DFIA scheme and the conditions laid
therein it appeared that the authorization holder cannot avail Cenvat credit on the inputs
used in the manufacture of the goods exported under the DFIA scheme as well as duty free
imports under the DFIA simultaneously as it amounts to double benefit and against the
spirit and object of the scheme.

5. Finally, the position that emerged after the discussions between the DOC / DGFT and
the DOR was that unintended benefits may have occured in cases where the duty free
inputs, imported / procured subsequent to completion of EO using indigenously procured
inputs and on which Cenvat credit has been availed of by the exporter, are transferred or
used in the manufacture of non excisable /exempted /nil duty goods. The transferee in
such cases obtains the duty free raw materials and escapes the levy of excise duty on
finished products in domestic market sale. The position holds good even under actual user
imports if the replenished materials are utilized in the manufacture of non-
excisable/exempted/nil-duty products.

6. The DOC/ DGFT therefore modified the provisions of the DFIA Scheme in FTP 2007 and
2008. Para 4.4.2 of the FTP-2008 now states that where Cenvat credit facility on inputs
used in the manufacture of goods exported under the DFIA scheme has been availed, even
after completion of EO, the imported goods shall be utilized in the manufacture of dutiable
goods whether within the same factory or outside (by a supporting manufacturer). Further,
Para 4.4.6 of the FTP and 4.72 of the Hand Book of Procedures (HBP) Vol I also state that,
in case where EO has been fulfilled after availment of cenvat credit facility on the inputs,
transferability of DFIA or transfer of imported /domestically procured inputs against the
Authorization shall be subject to payment of applicable additional duty of customs (in case
of imports) / excise duty (in case of domestically procured goods). However, in cases where
the Cenvat facility has not been availed, exemption from additional duty of customs / excise
duty would be available even after endorsement of transferability on DFIA.

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7. To put the matter beyond doubt, it has been decided to amend notification No. 40/06-
Cus dated 1.5.06 vide notification No.17/09-Cus dated 19.2.09 to incorporate the features
of FTP 2007 and 2008. The salient features of the amending notification are as under:-

(a) The restriction imposed vide condition No. (v) of the notification No. 40/06-Cus has
been deleted; thus the ‘said facilities’ can now be availed by the exporter. However, in
respect of imports made after the discharge of export obligation in full, if the ‘said
facilities’ have been availed, then,-

(i) the importer at the time of clearance of the imported materials shall execute a bond
that he shall use the imported materials in his factory or in the factory of his supporting
manufacturer for the manufacture of dutiable goods. Further, he shall submit a certificate
from the jurisdictional Central Excise officer within 6 months from the date of clearance
of the said materials, that the imported materials have been so used. It may be noted that
in case this condition is violated, then the importer would be required to pay all duties of
customs which have been exempted under notification No. 40/06-Cus dated 1.5.06. These
duties are duties of Customs leviable as specified in the First Schedule to the Customs
Tariff Act, 1975, the additional duty, safeguard duty and anti-dumping duty specified under
sections 3,8 and 9A of the said Customs Tariff Act respectively and cess as applicable. The
term ‘dutiable goods’ has been defined in the explanation to the notification and would mean
all excisable goods which are not exempt from Central Excise duty and which are not
chargeable to ‘nil’ rate of central excise duty;

(ii) if the materials are imported against an authorisation transferred by the Regional
Authority, or the imported materials are transferred with the permission of Regional
Authority, then the importer has to pay an amount equal to the additional duty of customs.
In case, the duty is not paid then interest @ 15% from the date of clearance of the said
materials till the date of payment has to be paid;

(iii) the importer also has an option to pay additional duty of customs on the imported
materials and clear his goods without furnishing any bond as specified in condition No. (iiia)
of the notification number 17/09-Cus dated 19.2.09. This additional duty of customs so paid
shall be eligible for availing CENVAT Credit under CENVAT Credit Rules, 2004.

(b) In respect of imports made after the discharge of export obligation in full, and if ‘said
facilities’ have not been availed, then the imported materials can be cleared without
furnishing a bond specified in condition (iiia) ibid. However, the importer will have to furnish
a proof to the assessing officer to the effect that the ‘said facilities’ have not been availed.

(c) In case of imports made before the discharge of export obligation in full, the importer
has to execute a bond, at the time of clearance, binding himself to the conditions specified
in the notification No. 40/06-Cus dated 1.5.06 and to pay the leviable customs duties
alongwith interest @15% in case the conditions of the notification are not complied with.
This condition was also present earlier before the amendment of the notification No.
40/06-Cus.

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8. As regards the period prior to the issue of the notification No.17 dated 19.2.09, double
benefits may have taken place in case the exporters have availed the ‘said facilities’ and also
duty free replenishments in view of the Law Ministry’s advice mentioned in Para 4 above.
Further, the discussions with the DOC / DGFT have revealed that unintended benefits may
have occurred in cases where the duty free inputs, imported / procured subsequent to
completion of EO using indigenously procured inputs and on which Cenvat credit has been
availed of by the exporter, are transferred or used in the manufacture of non excisable
/exempted /nil-duty goods. The action to recover revenue shall, therefore, be limited only
to such cases. This would ensure uniformity for all the three years. This would mean that in
case an exporter has availed the ‘said facilities’ during the period 1.4.05 to 18.2.09, the
action to recover revenue shall be taken in case the duty free replenishments (imported /
procured locally) have been used in the manufacture of non-dutiable goods. Further, the
importer will have to pay an amount equal to the additional duty of customs if the materials
are imported against an Authorisation transferred by the Regional Authority, or the
imported materials are transferred with the permission of Regional Authority.

9. It is therefore clarified that for the past cases, i.e duty free imports for the period
1.5.06 to 18.2.09,-

(a) appropriate action to safeguard revenue may be taken against the actual users, if they
have availed the ‘said facilities’ on the inputs used in the manufacture of the goods
exported under the DFIA scheme, and thereafter used the imported/ locally procured duty
free replenishments in the manufacture of non dutiable goods. This would mean collection
of all duties of customs which were exempted in the notification no. 40/06-Cus while
permitting duty free imports. Further, this action shall be taken in respect of all duty free
imports affected during the years 2006-07, 2007-08 and 2008-09;

(b) appropriate action to safeguard revenue may be taken in case imports /domestic
procurement against Authorizations have been transferred. As per para 4.4.6 of the FTP
(2007), this transfer should have taken place after payment of additional duty of customs /
excise duty, as the case may be. It needs to be verified whether the practice as specified
in the FTP was actually followed for the years 2007-08 and 08-09. If not, action to recover
revenue needs to be taken accordingly;

(c) appropriate action to safeguard revenue may be taken in case the Authorization itself
has been transferred. As per para 4.4.6 of the FTP(2007) and para 4.72 of the HBP, this
transfer should have taken place after payment of additional duty of customs / excise duty,
as the case may be. It needs to be verified whether the practice as enjoined in the FTP has
actually been followed for the years 2007-08 and 08-09. If not, action to recover revenue
needs to be taken;

(d) as regards the authorizations issued prior to 1.4.2007, the DOC in para 4.4.6 of the
FTP(2008) has provided that, exemption from payment of additional duty of customs
/excise duty shall continue to be available, even after endorsement of transferability. In
view of this, no action need be taken to recover revenue in such cases.

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This has the approval of the Competent Authority.

10. In this background the Commissioners of Customs/Customs & Central Excise, through
whose jurisdiction exports under DFIA scheme have taken place, shall review all cases of
such exports and take appropriate measures to recover duties wherever required in terms
of these instructions. The Commissioners will accordingly device suitable procedures in this
regard. A suggested questionnaire has been appended to this circular which may be used to
get requisite information from the exporters. The recovery action may thereafter be
initiated after following the due procedure of law.

11. The jurisdictional Chief Commissioner of Customs/Customs & Central Excise as the case
may be, may supervise the above process and send a factual report to the Board on or
before 31st May, 2009. The report may inter-alia contain the duties, which need to be
recovered and the status of such recoveries, year wise.

12. As regards, future cases, the Commissioners may kindly go through the provisions of the
notification No.17 dated 19.2.09 and take action accordingly.

13. These instructions may be brought to the notice of the trade / exporters by issuing
suitable Trade / Public Notices. Suitable Standing orders/instructions may be issued for
the guidance of the assessing officers. Difficulties faced, if any in implementation of the
Circular may please be brought to the notice of the Board at an early date.

14. These instructions are being issued in terms of section 151A of the Customs Act, 1962.

15. Receipt of this Circular may kindly be acknowledged.

Yours faithfully,
Sd/-
(P.V.K. Rajasekhar)
OSD(DBK)
Questionnaire

1. Whether the inputs used in the manufacture of the goods exported under the DFIA
scheme were imported or procured indigenously?

2. If the goods were procured indigenously, whether the facility under rule 18 (rebate of
duty paid on materials used in the manufacture of resultant product) or sub-rule (2) of rule
19 of the Central Excise Rules, 2002 or Cenvat credit under CENVAT Credit Rules, 2004
was availed in respect of such inputs?

3. The details of the shipping bills under which the above exports took place and the details
of the authorizations issued against the said exports and the port of registration.

4. Whether the DFIAs so obtained have been used to import / procure duty free
replenishments?

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5. If so, whether the said replenishments have been used in the manufacture of dutiable
goods. If yes, a certificate from the jurisdictional Central Excise Superintendent to this
effect may be furnished. If not, then the proof of payment of all duties of customs on
replenishments used in the manufacture of non dutiable goods may be furnished.

6. If the replenishments have been transferred, whether applicable additional customs

duty/ excise duty has been paid in terms of Para 4.72 of the Hand Book of Procedures. The
proof of payment i.e the copy of TR-6 Challan may be furnished.

7. Whether the DFIA so obtained has been transferred? If yes, the details i.e. the name,
address and IEC number of the transferee may be furnished.

8. Any other information as deemed fit.

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