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DISCLAIMER
This presentation provides general information existing as at the time of preparation. The presentation is meant for general Insert picture from stock here guidance and no responsibility for loss arising to any person acting or refraining from acting as a result of any material contained in this publication will be accepted by BMR Advisors. It is recommended that professional advice be taken based on the specific facts and circumstances. This presentation does not substitute the need to refer to the original pronouncements
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A project falls qualifies as substantial expansion if the installed capacity is increased by not less than 25 %
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Hotels; Hospitals; Photographic studios; Photographic film processing laboratories; Photocopying studios; Laundries; and Garages and workshops
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KEY STEPS
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PROJECT IMPORTS
Initial set-up or substantial expansion of following projects eligible for project import and linked concessions:
Industrial plant Power Mining Irrigation Oil and gas exploration Others
Eligible imports
All items of machinery (required for above) including prime movers, instruments, apparatus, appliances, control gear, transmission equipment, auxiliary equipment, equipment required for research and development, equipment for testing and quality control, components, raw materials for the manufacture of above items and spare parts not exceeding 10% of the value of the goods specified above
Excise and Customs key issues
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AUXILIARY EQUIPMENT
No statutory definition/ criterion exists for auxiliary equipment Legal meaning of the term auxiliary
aiding or supporting, subsidiary Blacks law dictionary giving additional help; supplemental or subsidiary; an item not directly a part of a specific component or system but required for its functional operation - Words and Phrases of Excise and Customs by S.B. Sarkar one that aids or helps; an assistant; a confederate Assisting or supporting Advanced Law Lexicon
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Does generic meaning imply that equipment meant for any supporting infrastructure for the plant being set up would qualify? SC in CCE V. Paradeep Phosphates [2006 (200) ELT 515] - Mobile Continuous Ship Unloader required for initial setting up of a fertilizer plant is covered by the expression auxiliary equipment and hence is classifiable under CTH 9801 SC in CIMMCO Ltd V. CCE [2002 (139) ELT A308] - Components and raw material for manufacture of wagons used for transportation of coal from coal mines to thermal plant not auxiliary equipment AAR in AES Chattisgarh Energy Pvt Ltd [2009 (246) ELT 801] goods required for setting up captive coal mine, dedicated coal transportation facility, dedicated water intake and pumping system, all as part of integrated power project, not eligible; dedicated power evacuation system eligible Tribunal in K M Sugar Mills V. CCE [2000 (119) ELT 170] - Empty gas cylinders being auxiliary equipment for manufacture of gas directly connected with initial setting up of plant hence entitled to benefit of project import under heading 9801
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Whether ownership of equipments so imported necessarily needs to be passed on to the Project Authority for falling within realm of auxiliary equipments? Diversion of auxiliary equipment possible, if to be imported under the PI scheme?
SC in CC V. Toyo Engineering India Ltd [2006 (201) ELT 513] concluded in favour of the taxpayer holding that mere possibility of its being used subsequently for other project would not be a bar from availing facility of project import Also held that it is not essential that title in the imported equipment has to transfer to the project owner
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Given varying positions, prior or advance ruling may be sought in complicated cases, for upfront clarity
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Coverage of 9801 machinery, equipment and raw materials and components for their manufacture
Definitions under Blacks Law Dictionary:
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Machinery - A device or apparatus consisting of fixed and moving parts that work together to perform some function Also termed as apparatus; device Equipment - The article or implements used for a specific purpose or activity
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The Supreme Court, in the case of Commissioner of Income Tax v. Mir Mohd. Ali (AIR 1964 SC 1693) relied upon the following definition of machinery:
Civil material like cement and steel may not qualify as machinery or equipments
The phrase - Components or raw material also used in 9801 Components or raw material qualify only when the same is used in the manufacture of machinery and equipments not applicable for Cement and Steel to be used for civil construction Thus, customs duty exemption/concessions may not be available for Cement and Steel to be used for civil construction
Excise and Customs key issues
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Excise exemption for a Mega and Ultra Mega Power Project is subject to customs duty exemption
As discussed, customs duty exemption doubtful for steel and cement for civil works Accordingly, even excise exemption for steel and cement for civil works jeopardized It is pertinent to note that for UMPPs, format of certification from Chief Engineer in the Central Electricity Authority specifically includes Cement and Steel for civil works greater clarity required
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What if sponsoring authority approves essentiality of civil materials for completion of the respective plant?
Though not in context of civil materials, SC in CCE V. Paradeep Phosphates [2006 (200) ELT 515] approved the principle that once goods approved as essential requirement for completion of the plant by the sponsoring ministry, the PI benefits would be available
Eligibility for importing micro-silica (sand), under the PI Scheme, for construction of spillway structure of the dam prima facie merits seen in the case and matter remanded de novo Tehri Hydo Development Corpn Ltd V. CCE [ 2007 (212) ELT 366]
Test of functionality to be proved - SC in CIT V. Taj Mahal Hotel [1971 (82) ITR 44] reasonable level of complexity
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Difficulty in importing civil materials against advance licence also, as arguably not used in manufacture of goods
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What qualifies as expansion? Essential for the new facility to be dependent on existing capacity or can it be a standalone unit and still qualify as a brown-field expansion? Mere co-location sufficient? Very commonly seen since due to availability of large tracts of land As per MPP, size of expansion units not to be less than the size of existing units. PI Scheme also states that project will qualify as expansion only if capacity enhancement more than 25 percent both conditions to be fulfilled? Treatment of brown-field project of 1000 MW or more ?
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DEEMED EXPORTS
Concept & Benefits
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goods supplied do not leave the country; and goods must be manufactured in India payment received either in INR or in free foreign exchange
Deemed Exports eligible for certain export related facilities and benefits Ten categories of supply of goods by main /sub- contractors which qualify as Deemed Exports
(a) Supply of goods against Advance Authorization (c) Supply of capital goods to holder of EPCG Authorization
Excise and Customs key issues
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(j) Supply of goods to Nuclear Power Projects through competitive bidding as opposed to ICB
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Deemed exports governed by chapters 8 of the Foreign Trade Policy (FTP) and the corresponding Handbook of Procedures (HoP)
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being mentioned specifically as a sub-contractor (either initially or subsequently) in the contract between project owner and the EPC contactor; the sub-contractor ships the goods directly to the project site; and Project authority certificate and payment certificate is issued by project owner to the main contractor and by the main contractor to the sub-contractor
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Thus the deemed export benefits can flow down through the supply chain and proper planning through out the supply chain would significantly reduce the costs of the project
Excise and Customs key issues
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Assessee supplied the goods directly to the project site under excise exemption on grounds that valid certificate in favour of Thermax Babcock & Wilcox Ltd existed at material times, who has placed supply orders on the Assessee
Comments Evidently, the denial of benefits by the court were preceded by lack of planning in the whole arrangement
Excise and Customs key issues
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Claims should be filed within a period of twelve months from date of receipt of supplies by project authority or from date of receipt of the payment as per the option of applicant, either against a particular project or all the projects
Claims may also be filed where part payments have been received. 100 percent TED refund may be allowed after 100 percent supplies have been made physically and payment received at least up to 90 percent
Implication whether refund would not be forthcoming before completion of project and 90 percent payment?
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Notification 6/ 2006 CE, vide entry 91, provides for an exemption from excise duty to goods supplied against International Competitive Bidding (ICB)
The phrase goods supplied under ICB however is not defined ie ICB to be undertaken at what stage IPP or Concession/ EPC/ OEM? reasonable clarity that at IPP\EPC\PPA level should suffice
Goods supplied to mega power projects from which the supply of power has been tied up through tariff based competitive bidding or a mega power project awarded to a developer on the basis of such bidding
Excise and Customs key issues
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Resultant ambiguities best exemplified by power projects till recently issue resolved for Mega Power projects vide introduction of entry 91B in Budget 2010?
Advance Authorization could be used in interim period to minimize the temporary outflows on customs and excise duty on procurements by the contractor (subject to ICB)
Such benefit available irrespective of project having been accorded MPP status
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Either project should have been awarded on basis of competitive bidding; or supply of power has been tied up through tariff based competitive bidding Hence most times, ICB may not be critical
Typically the IPP or the project award stage does not arise as generation utility of the state responsible to undertake the project As per the Tariff Policy, state utilities need not tie up sale of power on a competitive bidding basis
If ICB followed to award the EPC contract, for corresponding supplies/ works, benefits will still be available
Excise and Customs key issues
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Given the above, a state utility may undertake a project without following both the attendant conditions fate of deemed export benefits (especially excise duty exemption)?
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Ie cenvatability of corresponding input credits (excise duty/ service tax) in such cases?
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Cases in which ICB has not been followed; and / or Cases in which no central excise exemption notification (for eg supply to Advance Authorization or EPCG authorization holder)
Ability to satisfactorily prove that the amounts being claimed as refund have not been passed on to the ultimate consumers
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Further, supply of goods required for the expansion of existing mega power project .. shall also be eligible for deemed export benefits as mentioned in paragraph 8.3 ( a), (b) and (c) of FTP, whichever is applicable.,.
Attempts at refund still made basis paragraph 8.4.4 (i) of FTP read with 8.3.1 (iv) of the HOP interpretative issue
Excise and Customs key issues
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Thus as per the above paragraph, all the deemed export benefits will be available for supplies to mega as well as nonmega power plants contradiction with Para 8.4.4 (iv) Paragraph 8.3.1 (iv) of HOP
In respect of supplies under categories mentioned in paragraphs 8.2(d), (e), (f), (g), (h), (i) and (j) of FTP, claim may be filed either on the basis of proof of supplies effected or payment received100% TED refund may be allowed after 100% supplies have been made physically and payment received at least upto 90%.
However, paragraph 8.4.4 (iv) being more specific to power projects appears to be the more appropriate paragraph in which paragraph excise exemption / refund is not available for non-mega power projects
Excise and Customs key issues
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Viz. advance authorization or deemed export drawback on the input side and excise duty exemption or refund on the output side)
For those ineligible for excise duty exemption or refund on the output side, output excise duty becomes a cost
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Bringing into existence immoveable property through onsite fabrication or assembly = manufacture under FTP? Circular F. No. Misc.8/AM-2001/DBK Cell, dated December 5, 2000 issued by the Directorate General of Foreign Trade (DGFT) pertinent
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Bringing into existence a project (a power project, for example) or part thereof constitutes manufacture under FTP?
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May be explored by those ineligible for excise duty exemption or refund on the output side
Technical issues:
All deemed export categories require supply of goods Such interpretation will equalize indirect tax benefits for mega and nonmega power projects against policy framework
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Minor processing may amount to Manufacture under FTP but not under Central Excise laws
If yes, supply of such polished/ labeled/ repacked equipments to owner = deemed export?
If yes, entitled for deemed export benefits on the input side and no excise duty on the output side? May be explored by those ineligible for excise duty exemption or refund on the output side Technical issues:
Such interpretation will equalize indirect tax benefits for mega and nonmega power projects against policy framework
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Initial Set Up
Expansion
# ICB pre-condition for advancement of benefit ^ Also, refer the earlier discussions in this regard
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Initial Set Up
Expansion
# ICB pre-condition for advancement of benefit or if supply of power, there from, tied or project itself awarded on a tariff based competitive bidding (only in case of initial set up)
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Initial Set Up
Expansion
^ If supply of power tied, there from, through a tariff based competitive bidding # ICB pre-condition for advancement of benefit or supply of power tied, there from, through a tariff based competitive bidding (only in case of initial set up)
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Excise and Customs key issues
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ANNEXURES
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All items of machinery including prime movers, Instruments, Apparatus, Appliances, Control gear, Transmission equipment, Auxiliary equipment, Equipment required for research and development, Equipment for testing and quality control, Components, raw materials for the manufacture of above items and Spare parts not exceeding 10% of the value of the goods specified above Required for initial setting up of a plant or substantial expansion (installed capacity increases by at least 25%) of a unit of an existing unit , of a specified Industrial plant, irrigation project, power project, mining project, project for oil & mineral exploration or such other projects which the Central Government may notify
Machinery :
For industrial plant project For irrigation plant For power project For mining project
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9801 00 30 ---
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Excise and Customs key issues
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