Circular No. 108 dated 13^th October 1995

1.      The question of allowing benefit of exemption under notification No. 204/92-Customs dt. 19.5.92 to Advance Licences issued to a Merchant Exporter has been examined in view of doubts raised by some of the Commissioner of Customs.

2.      The issue is whether goods imported as replenishment by a Merchant Exporter (Advance Licence Holder) for supply to his supporting manufacturer would amount to 'transfer' of goods within the meaning of the words in the prohibition of conditions (vi) of Notification No. 204/92. The Ministry of Law had advised that this may be decided in terms of the intentions of the Administrative Ministry.

3.      Quantity Based Advance Licence (QABAL) envisage that if Modvat has been availed on materials used in the export of goods, the Advance Licence Holder shall not transfer/sell his licence or the material imported thereunder. The spirit of the Scheme and the intention of the wording is that the imported goods should be subject to actual user condition. Where the advance Licence holder is a manufacturer - exporter, there should be no difficulty in fulfilling the condition. However, where the Advance Licence holder is a Merchant Exporter, he has two options, viz.,

(1)     To give the goods to the Supporting Manufacturer as replenishment of the original indigenous (or imported) inputs utilised by him to produce the export product.

(2)     Alternatively, the Advance Licence holder can send the duty-free materials imported for job work for being converted into another product and then sell the converted finished product, thereby fulfilling the condition of the Notification. In other words, the Merchant Exporter, if he sends the imported goods for job working in his own account, and does not lose title over the property in the goods, he can be said to have satisfied the condition of the Notification.

4.      When the Merchant Exporter supplies the goods to the supporting manufacturer as 'replenishment' of the materials originally used by him, there could be two situation, viz.,

(a)     Where the Merchant Exporter makes an outright purchase of the export goods from the Supporting manufacturer for export thereof, which includes the cost of inputs for which he had sought import licence he is neither bound not has any liability to return the imported goods as replenishment to the Supporting manufacturer.

(b)     Where the Merchant Exporter enters into a contract, orally or in writing to obtain from the supporting manufacturer, the export goods by paying him only jobbing charges including the cost of other materials (is other than these inputs sought for import under the Advance Licence) i.e. the cost of inputs specified in the Advance Licence is not included in the contract or the sale price paid to/ agreed to between them then he would be legally bound to deliver the imported goods as replenishment for the inputs used in the manufacture of the export product.

5.      In the circumstances, the scope of the term 'transfer' would cover only cases where the restriction against sale of licence, or the sale of goods imported against the said licence is attempted to be circumvented by the Merchant Exporters by adoption the process of gifting or supplying to the supporting manufacturer in a way which would constitute a sale or a veiled sale. It is only to take care of such transactions, which are of a veiled nature that the term 'transfer' has been used alongwith the term 'sale'. Accordingly, what is to be ensured is that the Merchant Exporter does not get round the condition relating to sale of licence or the imported goods by resorting to such transactions which may be termed as 'transfer'.

6.      In the light of the above, it is clarified that where the type of relationship between a merchant exporter and the supporting manufacturer is as indicated in sub para (a) of para 4 above, it may amount to a veiled sale and therefore the plea of merchant exporters in making over, the importing goods under the pretext of' "replenishment" to the supporting manufacturer would not qualify repeat would not quality for the benefit of duty free concession where the Modvat credit has been availed by the supporting manufacturer in respect of the export goods. In the above type of cases, the merchant exporter would contravene the intention as well as the spirit of the concession granted. Accordingly, in such cases, the duty concession would not be eligible for such imports.

7.      However, where a Merchant Exporter falls under category (b) of para 4 above, he has no vested interest with reference to ownership to that portion of the goods, which entered into export production. Accordingly, when he makes over the imported goods to the supported manufacturer, there is no violation of either the intention of the Government to give relief or in any way offend the spirit of the concession, which was intended for subjecting the goods to actual user condition.

8.      Prior to 1.4.94, the Exim Policy provided for the supporting manufacturer in the Scheme of advance licencing. Licences issued alongwith the DEEC Book should have contained the name of the supporting manufacturer. Hence, there should not be any difficulty in identifying the supporting manufacturer. Be sides, it is left to the Commissioners to satisfy themselves that the goods have already emanated from the supporting manufacturer by counter reference to documents like AR. 4 or other simile documents. However, w.e.f. 1.4.94, the Exim Policy allowed the option to the merchant Exporters not to give the name of the supporting manufacturers. In such cases also, it is quite possible that the merchant exporters would have lifted the exported goods from manufacturers and through similar documents if they were able to establish relationship with the identify of the export goods, notwithstanding the lack of such a provision in the Exim Policy, Commissioners can give the benefit concession in such cases also.

9.      W.e.f. 1.4.95, Exim Policy allows Joint Bond from the Merchant Exporter and supporting manufacturer as co-licences, hence no problem should exist in such cases, since both being joint importers, will be no question of transfer.

10.    Accordingly, imports by Merchant Exporter in terms of notification No. 204/92-Cus. dt. 19.5.92 should be examined in the light of above clarification for grant of exemption for duty. These instructions should be brought to the notice of staff through suitable standing order/ Departmental orders, copies of which should also be forwarded to Commissioner (DBK) and Director General of Inspection and Audit (Customs and Central Excise), New Delhi.