Drawback – value addition in case of free materials
In the business of exports, sometimes the main raw material is supplied ‘free of cost’ by the overseas buyer for maintaining the quality of the final product. In such cases the notional value of the ‘free of cost’ material is declared to Customs only for the purpose of payment of duty and the same is not included in the export value (FOB value) of the product, the reason being that no realization takes place for such notional value of ‘free of cost’ material.
It has been reported that while calculating value addition in such cases, the notional value of ‘free of cost’ material is added to the CIF value of other inputs but not to the FOB value of export goods. This results in the FOB value of export goods becoming less than the CIF value of imported materials. As the value addition works out to be negative the exporters are denied the facility of drawback although duties have been paid on the imported materials. The trade and industry has represented that in such cases the notional customs value of the material supplied ‘free of cost’ should be added both to the export value (FOB value) of goods and the CIF value of inputs for the purpose of calculation of value addition.
Board has observed that:-
++ for the sake of equity the value of the ‘free of cost’ material should be added both to the FOB value of goods and CIF value of materials or this value should not be added to the FOB and CIF values at all.
++ If this is done, the value addition in most of the cases would be positive, entitling the exporters to avail of the facility of duty drawback.
++ However, in terms of paragraph 4.6 of the Handbook of Procedures, Vol-I of the Foreign Trade Policy, under advance licensing scheme, where some materials are supplied free of cost, the value addition is computed by adding the notional value of ‘free of cost’ material to both the CIF value of imports and FOB value of exports.
And so to ensure uniformity in the matter, Board has decided that :-
for the purpose of calculation of value addition under brand rate claims, the notional value of imported materials supplied ‘free of cost’ by the foreign supplier should be added both to the CIF value of inputs and the FOB value of export goods.
CBEC CIRCULAR No.25/2006 –CUSTOMS Dated the 19th September, 2006