MANUFACTURE IN BOND-CONFLICT BETWEEN CUSTOMS & EXCISE

by

 

by

K. VIJAY KUMAR^*

 

As per Section 12 of the Customs Act, 1962, the duty of Customs shall be levied on goods imported into or exported from India. As per Section 57, Assistant Commissioner may appoint Public Warehouses wherein dutiable goods may be deposited. And as per Section 58, at any warehousing station, the Assistant Commissioner of customs may licence a private warehouse. According to Section 65 of the Customs Act, the Assistant Commissioner of Customs can permit manufacturing process or other operations in the warehouse.

 

Section 65. Manufacture and other operations in relation to goods in a warehouse. – (1) with the sanction of the Assistant Commissioner of Customs and subject to such conditions and on payment of such fees as may be prescribed, the owner of any warehoused goods may carry on any manufacturing process or other operations in the warehouse in relation to such goods.

 

1. where in the course of any operations permissible in relation to any warehoused goods under sub-section (1), there is any waste or refuse, the following provisions shall apply –
   

 

1. if the whole or any part of the goods resulting from such operations are export, import duty shall be remitted on the quantity of the warehoused goods contained in so much of the waste or refuse as has arisen from the operations carried on in relation to the goods exported:
   

 

Provided that such waste or refuse is either destroyed or duty is paid on such waste or refuse as if it had been imported into India in that form;

 

1. if the whole or any party of the goods resulting from such operations are cleared from the warehouse for home consumption import duty shall be charged on the quantity of the warehoused goods contained in so much of the waste or refuse as has arisen from the operations carried on in relation to the goods cleared for home consumption.
   

 

The goods manufactured in bond under this section can be either exported without payment of duty or cleared for home consumption on payment of import duty. Regarding any waste arising during such operations:

 

1. import duty is remitted on the quantity of warehoused goods contained in the waste in relation to the goods exported. Provided such waste is either destroyed or duty is paid on such waste as if it had been imported into India in that form,
   
2. when goods are cleared for home consumption import duty shall be charged on that quantity of the warehoused goods contained in the waste in relation to the goods cleared for home consumption.
   

 

In other words according to the provisions of the Customs Act, there can be manufacture in bond from raw materials imported without payment of duty and these manufactured goods can be exported without payment of duty or cleared for home consumption on payment of import duty. And the waste can be either destroyed or duty should be paid on the waste as if such waste has been imported in that form. Deposit and processing of imported goods in warehouse without payment of import duty is allowed under the Customs Act and duty is charged only when the goods are removed from the warehouse that is the warehouse is considered to be the point of import. But this creates a peculiar problem in relation to these warehoused goods according to the Central Excise Act. According to Section 3 of the Central Excise Act, 1944 there shall be levied and collected duties of excise on all excisable goods produced or manufactured in India and this includes goods produced or manufactured in a warehouse under Section 65 of the Customs Act. There are several exemptions in Central Excise to goods produced in 100% Export Oriented Unit. Free Trade Zones, Export Processing Zones etc. But there is no specific exemption for goods manufactured in customs warehouse. This creates some strange situations, --- when goods manufactured in a warehouse are cleared for home consumption (1) import duty has to be paid at the time of removal from the warehouse (2) the warehouse has to be registered under Rule 174 of Central Excise Rules, 1944 (The warehouse is already under the supervision and control of the Customs) (3) excise duty has to be paid on the goods cleared for home consumption from the warehouse (4) there will be no Modvat credit as no duty is paid on the inputs.

 

It may be true that most of the items manufactured in a Customs warehouse are either exported or specifically exempted from Central Excise duty depending on the heading under which they fall and their use. But there is certainly a question of waste. In the case of waste as per proviso to Section 65(2) (A) of the Customs Act, customs duty has to be paid on such waste as if it had been imported into India in that form. This Customs duty also includes Counter availing Duty i.e, Central Excise duty leviable on such goods had they been manufactured in India. But these are goods manufactured in India on which Central Excise duty is leviable but deemed to be imported into India. So when such waste is cleared an import duty, a Counter availing duty and Central Excise duty are leviable. Though this may sound a little illogical, in the absence of any provisions in the Central Excise law for exempting manufacturing activity in a Customs warehouse such activity is liable for Central Excise duty and following of Central Excise procedures in addition to Customs procedures.

EXCISE LAW TIMES –01.01.1997 A 15