TIOL-DDT 1326 · the untouched capture
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<p><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong><font color="#663399" size="3">TIOL-DDT 1326</font><br>
26.03.2010 <br>
Friday</strong></font></p>
<p align="center"><strong><font color="#006600" size="2" face="Verdana, Arial, Helvetica, sans-serif">Recovery of Drawback for Export Values not realized by Exporter </font></strong></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>DUTY</strong> drawback payments are governed by provisions of section 75 of the Customs Act, 1962 and the rules made there under. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Second proviso to Section 75 of the Customs Act provides that where any drawback has been allowed on any goods and the sale proceeds in respect of such goods are not realized within the time allowed under the Foreign Exchange Management Act, 1999 such drawback shall be deemed never to have been allowed and the Central Government may, by Rules made under section 75(2), specify the procedure for recovery of the amount of such drawback. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">A procedure has also been laid down under the Customs, Central Excise and Service Tax Drawback Rules, 1995 for recovery of drawback in case of non-realization of export proceeds. Therefore, the amount of drawback paid in all such cases where export proceeds have not been realized has to be recovered. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">However, Board has noticed that some exporters are resisting recovery of drawback in cases where export proceeds have not been realized, citing provisions of Handbook of Procedure (HBP) (Vol.1) of the Foreign Trade Policy (FTP). </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">In terms of Para 2.25.1 of the Handbook of Procedure (HBP) (Vol.1) of the Foreign Trade Policy (FTP) 2009–2014 payments through ECGC cover would count for benefits under FTP. The FTP 2004-09 (Para 2.25.1 of the HBP v.1) and the FTP 2002–2007 ( Para 2.25.3 of the HBP v.1) also had similar provisions. The DGFT vide Policy Circular No.12/2002-2007 dated 1.11.2002 had clarified that this provision would also be applicable to exports made or licenses issued prior to 01.4.2002. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Further, a new provision has been made in the current FTP (Para 2.25.4 of the HBP v.1, 2009-14) which provides that realization of export proceeds shall not be insisted under any of the Export Promotion Schemes under the Foreign Trade Policy, if the Reserve Bank of India (RBI) writes off the requirement of realization of export proceeds on merits and the exporter produces a certificate from the concerned Foreign Mission of India about the fact of non-recovery of export proceeds from the buyer. However, this would not be applicable in self-write off cases. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Since the Drawback scheme is governed by the provisions of the Customs Act, 1962 and the Rules made there under which clearly provide that drawback should be recovered if sale proceeds have not been realized, the Board has now clarified that provisions contained in para 2.25.1 and 2.25.4 of the HBP v.1 (2009-14) would not be applicable to the Drawback scheme. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Hence, ‘Drawback' would not be payable in cases where export proceeds have not been realised in accordance with the provisions of the Foreign Exchange Management Act, 1999 even if the claim has been settled by ECGC or realisation waived by RBI. Action should be taken for recovery of drawback amount in such cases. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">The crux of the matter is that this latest Circular issued by the Board directing field formations to recover drawback on write off of export sale proceeds is inconsistent with the very concept of duty drawback as envisaged by section 75 of the Customs Act read with the Rules. It may be noted that the amount of drawback claimed by an exporter is actually an incidence of duty/tax on inputs or input services consumed by the exporters. It is another matter that this drawback amount is computed and allowed as a percentage of FOB value of exports. </font></p>
<p align="justify"><strong><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Para 2.25.4. of the HBP reads: </font></strong></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Realization of export proceeds shall not be insisted under any of the Export Promotion Schemes under this Foreign Trade Policy, if the Reserve Bank of India (RBI) writes off the requirement of realization of export proceeds on merits and the exporter produces a certificate from the concerned Foreign Mission of India about the fact of non-recovery of export proceeds from the buyer. However, this would not be applicable in self-write off cases. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Now, the Board says no drawback in such cases, which means as per the CBEC drawback is not an Export Promotion Scheme whereas as per Ministry of Commerce it is! </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Compare this with an example under CENVAT Credit scheme. A manufacturer procures duty/tax paid inputs/input services under the cover of an invoice. This input/input service is consumed by the manufacturer for manufacture and export of goods under the claim for rebate of duty paid on inputs. Rule 18 of the Central Excise Rules, 2002 read with Rule 5 of CENVAT Credit Rules, 2004 allows the rebate of duty/tax paid on inputs/input services even if the manufacturer/exporter does not fully realize the sale proceeds for any reason. (Rule 5 is mentioned here because Rule 18 allows only rebate of duty paid on inputs and any excess unutilized credit available in the books on account of input services consumed for export goods will be availed under Rule 5 of CENVAT Credit Rules, 2004). </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Therefore, the proposition to recover duty drawback in this Circular does not make any sense if the concept of duty drawback is properly understood. So any write off of unrealized export sale proceeds or covered by ECGC should not make any difference to the claim of duty drawback by exporters under section 75 of the Customs Act. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Let us hope better sense prevails and the Board withdraws this Circular with immediate effect before any damage is done in the field. </font></p>
<p><a href="http://www.taxindiaonline.com/RC2/subCatDesc.php3?subCatDisp_Id=25&filename=notification/custom/2010/cuscir10_007.htm" target="_blank"><strong><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Circular No. 7/2010-Cus., Dated: March 23, 2010 </font></strong></a></p>
<p align="center"><strong><font color="#006600" size="2" face="Verdana, Arial, Helvetica, sans-serif">Allowing Losses on account of Forex Derivatives - CBDT issues instructions </font></strong></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>EXTREME</strong> volatility in the foreign exchange market in the last financial year is reported to have resulted in substantial losses to an assessee on account of trading in forex-derivatives. A large number of assesses are said to be reporting such losses on ‘marked to market' basis either suo-motu or in compliance of the Accounting Standard or advisory circular issued by the Institute of Chartered Accountants. The issue whether such losses on account of forex-derivatives can be allowed against the taxable income of an assessee has been considered by the Board and the following guidelines have been issued: </font></p>
<p align="justify"><strong><font size="2" face="Verdana, Arial, Helvetica, sans-serif">‘Marked to Market Losses': </font></strong></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">‘Marked to Market' is a concept under which financial instruments are valued at market rate so as to report their actual value on the reporting date. A ‘Marked to Market' loss may be given different accounting treatment by different assesses. Some may reflect such loss as a balance sheet item without making any corresponding adjustment in the Profit and Loss Account. Other may book the loss in the Profit and Loss Account which may result in the reduction of book profit. In cases where no sale or settlement has actually taken place and the loss on Marked to Market basis has resulted in reduction of book profits, such a notional loss would be contingent in nature and cannot be allowed to be set off against the taxable income. The same should therefore be added back for the purpose of computing the taxable income of an assessee. </font></p>
<p align="justify"><strong><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Treatment of loss from actual transactions in forex-derivatives </font></strong></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">In a case where a loss on a forex-derivative transaction arises on actual settlement/conclusion of contract and is not a notional or marked to market book entry, a further question will arise as to whether such a loss is on account of a speculative transaction as contemplated in Section 43(5) of the Income tax Act. For determining whether loss from a transaction in respect of a forex-derivative is a speculation loss or not, the Assessing Officers may refer to Proviso (d) below sub-section (5) of Section 43 inserted by the Finance Act, 2005, with effect from 1.4.2006. It lays down that any ‘eligible transaction' in respect of trading in derivatives referred to in clause (ac) of section 2 of the Securities Contracts (Regulation) Act, 1956, that has been carried out in a recognized stock exchange shall not be treated as a speculative transaction. Further, an ‘eligible transaction' for this purpose would be one that fulfils the conditions laid down in Explanation to Section 43(5)(d). Any loss in a speculative transaction can be set off only against profit from speculative transactions. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">As the revenue implications of such transactions are large, the Assessing Officers are directed to examine the statements of accounts and the notes to accounts with a view to find out any reference to any losses. If necessary an adjustment to the taxable income may be made, keeping in view the provisions of law referred to above. </font></p>
<p><a href="http://www.taxindiaonline.com/RC2/subCatDesc.php3?subCatDisp_Id=67&filename=notification/cbdt/2010/instruct1003.htm" target="_blank"><strong><font size="2" face="Verdana, Arial, Helvetica, sans-serif">CBDT Instruction No. 3/2010, Dated: March 23, 2010 </font></strong></a></p>
<p align="center"><strong><font color="#006600" size="2" face="Verdana, Arial, Helvetica, sans-serif">DGFT makes exception for export of pulses to Maldives </font></strong></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>DGFT</strong> has amended Notification No. 15 (RE-2006)/2004-09 dated 27.06.2006 read with Notification No. 99 (RE-2008)/2004-09 dated 27.03.2009 to provide for export of 60 metric tonnes of pulses to the Republic of Maldives. A new para 3(iv) is incorporated which reads as follows:</font></p>
<blockquote>
<p align="justify"><em><font size="2" face="Verdana, Arial, Helvetica, sans-serif">“3 (iv) the prohibition on export of pulses shall not be applicable to export of 60 MTs of pulses ( Dal )) to the Republic of Maldives.”</font></em></p>
<p align="justify"> </p>
</blockquote>
<p align="center"><strong><font color="#006600" size="2" face="Verdana, Arial, Helvetica, sans-serif">Mumbai High Court strongly disapproves judicial indiscipline in CESTAT </font></strong></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>IN</strong> a recent case </font><font size="1" face="Verdana, Arial, Helvetica, sans-serif"><strong><a href="http://www.taxindiaonline.com/RC2/subCatDesc.php3?subCatDisp_Id=34&filename=legal/cestat/2010/2010-TIOL-184-CESTAT-MUM.htm" target="_blank"><em>2010-TIOL-184-CESTAT-MUM</em></a></strong>,</font><font size="2" face="Verdana, Arial, Helvetica, sans-serif"> Mumbai
Zonal Bench of CESTAT disagreed with an earlier decision of a Coordinate
Bench rendered in favour of the assessee on a similar issue for an earlier
period. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">While there is no doubt that the Tribunal acted within its powers while disagreeing with an earlier decision of a Coordinate Bench rendered on a similar issue, such disagreement will not attain finality because the relevant provisions of the Law provides that in such cases of disagreement between two Coordinate Benches, the Bench which disagrees with the earlier order has to refer the matter to the President of CESTAT for constituting a Larger Bench to resolve such disagreement. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Unfortunately, in this case the Mumbai Bench chose not to follow this legal path. In fact, the Tribunal justified its action by observing as follows: </font></p>
<blockquote>
<p align="justify"><em><font size="2" face="Verdana, Arial, Helvetica, sans-serif">“We have to admit that when the hearing started, our impression was that the issue has been settled in favour of the appellant by the precedent decision of the Tribunal and only when the learned special counsel vehemently submitted that he would be able to convince us that the decision of the Tribunal would not be applicable, we proceeded to hear both the sides and spent considerable time hearing the arguments. While deciding not to follow the decision of the Tribunal, we would like to record clearly that we are doing so with full awareness of our responsibilities towards observance of judicial discipline. Each transaction is to be assessed and each show cause notice/issue has to be decided treating it as a fresh one unless proved otherwise. When a decision is given by the Tribunal based on representations made by both the sides, it would not be binding eternally, when it can be shown that no ratio was laid down or the conclusion was reached based on arguments advanced.” </font></em></p>
</blockquote>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">But this approach of the CESTAT did not find favour with the Mumbai High Court. Agreeing with the contentions of the petitioner (assessee) that the approach of Mumbai Bench was contrary to established norms of judicial discipline, the High Court strongly disapproved the same with the following observations: </font></p>
<blockquote>
<p align="justify"><em><font size="2" face="Verdana, Arial, Helvetica, sans-serif">“The judicial decorum and legal propriety demand that where a learned single Judge or a Division Bench does not agree with the decision of a Bench of co-ordinate jurisdiction, the matter should be referred to a larger Bench. It is a subversion of judicial process not to follow this procedure. In our system of judicial review which is a part of our Constitutional scheme, we hold it to be the duty of the judges of the courts and members of the tribunals to make the law more predictable. The question of law directly arising in the case should not be dealt with apologetic approaches. The law must be made more effective as a guide to behaviour. It must be determined with reasons which carry convictions within the Courts, profession and public. Otherwise, the lawyers would be in a predicament and would not know how to advise their clients. Subordinate courts would find themselves in an embarrassing position to choose between the conflicting opinions. The general public would be in dilemma to obey or not to obey such law and it, ultimately, falls into disrepute.” </font></em></p>
</blockquote>
<p><strong><font size="2" face="Verdana, Arial, Helvetica, sans-serif">We bring you this latest High Court order on Monday.</font></strong></p>
<p align="center"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong><font color="#006600">Jurispruden</font><font color="#FF6633" size="5">tiol</font><font color="#006600"> – Monday's cases</font></strong></font></strong></font></p>
<p><strong><font color="#663399" size="2" face="Verdana, Arial, Helvetica, sans-serif"><img src="http://www.taxindiaonline.com/RC2/image/stories/ddt_hammer.jpg" alt="Legal Corner Icon" width="100" height="84" hspace="5" border="0" align="left">Central Excise </font></strong></p>
<p align="justify"><strong><font color="#FF6633" size="2" face="Verdana, Arial, Helvetica, sans-serif">Central Excise – Appeals - Judicial propriety requires that Tribunal refer matter to Larger Bench when it has disagreement with view holding field on similar issue - Tribunal order quashed and matter remitted for fresh consideration - Mumbai: High Court </font></strong></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>THE</strong> petitioner, a manufacturer of motor vehicles, arranges for transportation/transit insurance of behalf of the dealers and undertakes to deliver the goods at the doorstep/ premises of the dealer. They recover this as Road Delivery Charges (‘RDC') from the dealers by mentioning it separately in the sales invoices and also pay MVAT (Maharashtra Value Added Tax) as applicable on the RDC for sales within the State of Maharashtra . Not to lag behind, Excise authorities proposed to include this RDC in assessable value and issued show cause notices for different periods demanding excise duty. </font></p>
<p align="justify"><strong><font color="#663399" size="2" face="Verdana, Arial, Helvetica, sans-serif">Income Tax </font></strong></p>
<p align="justify"><strong><font color="#FF6633" size="2" face="Verdana, Arial, Helvetica, sans-serif">Transfer Pricing - Assessee applies cost plus method - Revenue for TNMM - Adjustment can be made only by working out average net profit - matter remanded: Tribunal </font></strong></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>THE</strong> assessee is engaged in the business of sale of finished jewellery to its AEs and non-AEs. It is located in a SEZ and enjoys 100% tax holiday u/s 10A. It applies Cost Plus Method and claims GP margin of 19.37% with AEs. Revenue issues notice u/s 92CA(2). The TPO observes the assessee has not provided adequate data for proper calculation of the margin and applies TNMM method to compute arm's length price. </font></p>
<p align="justify"><strong><font color="#663399" size="2" face="Verdana, Arial, Helvetica, sans-serif">Customs </font></strong></p>
<p align="justify"><strong><font color="#FF6633" size="2" face="Verdana, Arial, Helvetica, sans-serif">Customs - cess under Textile Committees Act payable even if CVD is exempted: High Court </font></strong></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>IS</strong> the Cess levied under section 5 of Textile Committees Act, 1963 is includable as a component of CVD? This was the question of law before the High Court. </font></p>
<p align="justify"><strong><font color="#663399" size="2" face="Verdana, Arial, Helvetica, sans-serif">See our columns Monday for the judgements </font></strong></p>
<p><font color="#FF6666" size="2" face="Verdana, Arial, Helvetica, sans-serif">Until Monday with more <strong>DDT</strong></font></p>
<p><font color="#FF6666" size="2" face="Verdana, Arial, Helvetica, sans-serif">Have a nice weekend. </font></p>
<p><font color="#FF6666" size="2" face="Verdana, Arial, Helvetica, sans-serif">Mail your comments to</font><font size="2" face="Verdana, Arial, Helvetica, sans-serif"> <a href="mailto:vijaywrite@taxindiaonline.com">vijaywrite@taxindiaonline.com </a></font></p>
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