INTRODUCTION
Duty Credit Scrips (‘DCS’) under the Foreign Trade Policy 2015-2020 (‘FTP 2015-20’) export promotion benefit offered by the Government of India. As with other export incentives, DCS intends to incentivise export of goods manufactured and produced in India. It is issued in accordance with FTP 2015-20 under the Merchandise Exports from India Scheme (MEIS), Service Exports from India Scheme (SEIS), and the Export Promotion Capital Goods Scheme (EPCG). DCS provides tax incentive on export, which can be utilised to pay duties of customs on import. Further, the DCS are freely traded and are transferable. However, they can only be used for the same purpose i.e. for payment of the duties of customs on import of goods to India.
In recent times, several tax payers engaged in selling of DCS are in receipt of show cause notices requiring them to reverse input tax credit (‘ITC’) under Section 42 of Central Goods and Service Tax Act, 2017 (‘CGST Act, 2017’) along with interest. The department has raised these demands on the ground that sale of DCS being an ‘exempt’ supply require reversal of common ITC availed in relation to DCS. In other words, it can be said that the input goods and input services are used for export of goods have been used by the taxpayer for earning DCS.
This article concerns itself to examine the issue of ITC reversal under Section 42 of CGST Act, 2017, upon sale of DCS.
POSITION IN PRE-GST REGIME
Under the erstwhile indirect tax regime, the government had issued series of notifications[1], whereby exempting certain manufactured goods when cleared against the specified DCS issued to an exporter. However, the exporter was entitled to avail Cenvat credit of duties of excise, against the amount debited in the said scrip as per one of the conditions of the notification.
Apropos to above notifications, the Department regarded such clearances as exempted goods and demanded payment of amount under Rule 6(3), as applicable, of the Cenvat Credit Rules, 2004 (‘CCR, 2004’). The relevant extract of Rule 6(3) of CCR, 2004 is as under:
“(3) Notwithstanding anything contained in sub-rules (1) and (2), the manufacturer of goods or the provider of output service, opting not to maintain separate accounts, shall follow [any one] of the following options, as applicable to him, namely:-
(i) pay an amount equal to [six per cent.] of value of the exempted goods and [seven per cent. of value of the] exempted services; or
(ii) ….”
Given the above, the Central Board of Excise and Customs (‘CBEC’) received representations to treat goods cleared against DCS equivalent to that of duty paid goods so that such payment of amount under Rule 6(3) of CCR, 2004 was not required to be made. According, the CBIC vide its Circular number 973/07/2013-CX dated 04 September 2013 clarified as follows:
“3) … In view of these provisions it has been decided that such debit of duty in these scrips shall be treated as payment of duty for the purpose of determining the applicability of rule 6 of the Cenvat Credit Rules, 2004. Therefore, it is clarified that in respect of goods cleared availing the benefit of any of notifications no 29/2012-CE, 30/2012-CE, 31/2012-CE, 32/2012-CE and 33/2012-CE all dated 9th July, 2012, payment of amount under rule 6(3) of the Cenvat Credit Rules, 2004 is not applicable.”
Therefore, the DCS holder was permitted to avail of Cenvat credit of the duties paid through utilization of DCS and the same was treated as payment of duty for the purpose of determining the applicability of Rule 6 of the CCR, 2004.
LAW UNDER GST REGIME
Introduction of Goods and Services Tax (‘GST’) led to subsuming of several central and state levies under the erstwhile indirect tax regime. This resulted in a situation where DCS could only be used for the payment of Basic Customs Duty (‘BCD’) and not towards the payment of GST upon import. This situation inter alia other things has been acknowledged in the 22nd GST council meeting.[2] Accordingly, in order to restore the lost incentive on sale of DCS, the GST on sale or purchase of these scrips was reduced from earlier 5% to exempt vide Entry 122A of Notification number 2/2017-Central Tax (Rate), dated 28 June 2017 as amended by the Notification number 35/2017- Central Tax (Rate) dated 13 October 2017. The relevant extract of the exemption notification is as under:
The above entry vide the exemption notification has resulted in a quandary, whether to reverse ITC under Section 42 of CGST Act, 2017. However, before we examine the requirement of reversal under Section 42 of CGST Act, 2017, it is relevant to first examine Section 17(2) of CGST Act, 2017. The relevant extract of the same is as under:
“17- Apportionment of credit and blocked credits.
…
(2) Where the goods or services or both are used by the registered person partly for effecting taxable supplies including zero-rated supplies under this Act or under the Integrated Goods and Services Tax Act and partly for effecting exempt supplies under the said Acts, the amount of credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies including zero-rated supplies.”
On perusal of the above, it can be interpreted that that ITC is restricted on inputs, where the outward supply is exempt. Although, one must note that the law does provide for certain exclusions under Explanation 1 to Rule 43 of Central Goods and Services Tax Rules, 2017 (‘CGST Rules, 2017’). It does not cover the case of DCS.
In light of the above, the Department avers that DCS earned by the taxpayer, use the ITC availed on input goods and services at the time of export of goods. According, the common credit attributable to the DCS earned should be reversed under Section 42 of CGST Act, 2017, upon sale or transfer.
WAY FORWARD
There is no dispute that DCS is exempt i.e. no GST is leviable upon sale or transfer of DCS. Further, exports involve several input goods and input services like CHA, raw material etc. against which ITC is available and is primarily in relation to the exports.
Given the backdrop, it is relevant to examine the case of Union Of India v. M/S Hindustan Zinc Ltd,[3] wherein Hon’ble Supreme Court, following its earlier decision, [4] applied literal rule of interpretation to Rule 57CC of Central Excise Rules, 1944 and Rule 6 of CCR, 2004 respectively, held that equating by-product and final product obliterates the plain language, despite the legislation recognising the difference by itself. Further, by-product that emerges as a technical necessity, cannot be said to have used any inputs for the purposes of the by-product.[5]
As discussed earlier, DCS are in the form of incentives given by the government to the tax payers to promote exports. Accordingly, one can argue that the common credit availed is primarily for the purposes of exports and profits therefrom. Moreover, DCS are traded and transferred only when the same is not utilised by the exporter or when it is available in surplus. Thereby, showing its intended purpose.
Therefore, from the above discussion it can be inferred that common credit cannot be attributed for the purposes of earning DCS as the latter is merely incidental i.e. incentive or by-product. Further, the above should also be applicable upon sale of Duty Free Import Authorisations (‘DFIA’) [6] and scrips issued under the new Remission of Duties and Taxes on Export Products (‘RoDTEP’) Scheme.
Notwithstanding above, in a scenario where the registered person is engaged in the business of brokering purchase and sale of DCS or where the registered person is availing such brokering services in relation to DCS, ITC should not be available. As the same will be directly in relation to an exempt supply.
CONCLUSION
From the above discussion, it can be inferred that the exempted supply i.e. Sale of DCS is not effected by registered person intentionally, but is consequent to an underlying principal supply. Therefore, the same cannot be considered as an exempt supply for the purposes of reversal of common credit. Whereas, in a scenario where a registered person engaged in the business of brokering purchase and sale of DCS or where a register person is availing such brokering services, ITC should not be available. As the services are in relation to an underlying exempt supply. Therefore, in order to bring clarity, the government should issue some clarifications in this regard.
[1] Notification number 29 / 2012 - central excise dated 09 July 2012. Notification number 30 / 2012 - central excise dated 09 July 2012. Notification number 31 / 2012 - central excise dated 09 July 2012. Notification number 32 / 2012 - central excise dated 09 July 2012. Notification number 33 / 2012 - central excise dated 09 July 2012. [2] 22nd GST council meeting, minute book, 14 (October, 06 2017), http://gstcouncil.gov.in/sites/default/files/minutes/signed%20minutes%20%2022nd%20gst%20council%20meeting.pdf [3] Union Of India v. M/S Hindustan Zinc Ltd, 2014 (5) TMI 253-SC. [4] Commissioner of Central Excise v. Gas Authority of India Ltd, 2007 (11) TMI 276-SC. [5] JSW Steel Ltd. v. Commissioner of Central Excise, 2015 (10) TMI 1559-CESTAT Mumbai. [6] In re: spaceage syntex pvt. Ltd., 2019 (4) TMI 1542-AAAR.
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