Export Promotion Capital Goods Scheme (EPCG) under FTP 2015-2020

Introduction

♠ EPCG Scheme was one of the export-promotion initiatives launched by the government in the early ‘90s. The import duty on capital goods like all other items was high during that period, inflating the cost of capital goods nearly 50%, so the government allowed exporters to import capital goods at only 25% import duty. For waiver of the remaining portion of import duty, exporters were supposed to undertake an ‘export obligation’ (a promise to export) which was worked out on the basis of the duty concession obtained.

♠ The government has been modifying the EPCG scheme over the years in line with the demands of the domestic industry. Since the purpose of the scheme is to allow the exporters compete internationally, it was decided to allow them to buy capital goods at internationally competitive rates.

About the EPCG scheme in FTP 2015-2020

♠ The objective of the EPCG Scheme is to facilitate import of capital goods for producing quality goods and services to enhance India’s export competitiveness.

♠ EPCG scheme allows the import of capital goods for pre-production, production and post -production at Zero custom duty.

♠ Import under EPCG scheme shall be subject to an export obligation (EO) which shall be equivalent to the amount of duty saved and the time reckoned from the date of authorisation.

Who are eligible to claim the benefit under the EPCG SCHEME?

♠ Manufacturer exporter

“Manufacturer Exporter” means a person who manufactures goods and exports or intends to export such goods. The manufacturer exporter procures and process raw materials at his factory and exports finished products. Here, the manufacturer exporter procures the export order and exports in their own name.

♠ Merchant exporters

“Merchant Exporter” means a person engaged in trading activity and exporting or intending to export goods .Merchant exporter procures the material from a manufacturer and exports in his firm’s name. The merchant exporter procures the order from international market. Merchant exporter does not have own manufacturing unit or processing factory. Merchant Exporter can export the excisable goods either directly from the premises of the manufacturer, with or without sealing of the export consignments, or through his premises under claim for rebate or under bond.

♠ Service providers

“Service provider” means a person who is engaged in the provision of export of services. Within its ambit it also includes a service provider who is designated/ certified as a common service provider by the DGFT, Department of commerce or State Industrial Infrastructure Corporation in a town of export excellence.

Capital Goods – Inclusions and Exclusions

There are certain capital goods which are to be included in the calculation of the EO and certain capital which are to be excluded in the calculation of the EO. The list provided herewith is an illustrative list and not an exhaustive one:

Inclusions:

1. Any plant, machinery, equipment or accessories required for manufacture or production, either directly or indirectly, of goods or for rendering services.

2. It includes those required for replacement, modernisation, technological up-gradation or expansion.

3. It includes packaging machinery and equipment, refrigeration equipment, power generating sets, machine tools, equipment and instruments for testing, research and development, quality and pollution control.

4. Computer software systems

5. Spares, moulds, dies, jigs, fixtures, tools & refractories for initial lining and spare refractories; and

6. Catalysts for initial charge plus one subsequent charge.

7. Capital goods for project imports notified by CBEC are also permitted under the EPCG scheme.

Exclusions:

1. Second hand capital goods

2. The capital goods required for production of following goods shall not be covered under EPCG:

i. Electrical energy(power) – Export + Deemed exports + Captive use

ii. Electricity transmission services

3. Capital goods which are restricted for the purpose of imports.

Amount of benefit under EPCG scheme

Import under EPCG scheme shall be subject to an export obligation equivalent to 6 times of duty saved on capital goods. Such equivalent amount is required to be fulfilled within 6 years from the date of issue of authorisation.

Direct imports: Export obligation shall be reckoned with reference to the actual duty saved. Domestic sourcing: Export obligation shall be reckoned with reference to the notional custom duties saved on FOR (Freight on road) value.

E.g. If the duty saved on capital goods through direct imports during the FY 2013-14 was Rs. 1,00,000/- then the authorisation holder needs to fulfil the export obligation for an amount of Rs. 6,00,000/- for importing the capital goods at zero custom duty within 6 years from the date of authorisation.

For those importers who are not sure of fulfilment of export obligation can opt for post export EPCG scheme, in which the authorisation holder can undertake the following steps:

1. Obtain the EPCG license.

2. Deposit the custom duty on import of capital goods in cash.

3. After fulfilment of export obligation, obtain the freely transferable duty credit scrips. The computation of freely transferable duty credit scrips will be on the basic custom duty amount paid at the time of import of capital goods.

4. Such duty credit scrips can be utilized for payment of applicable custom duties for imports and applicable excise duties for domestic procurement of capital goods.

Conditions required to be fulfilled

The authorisation holder is required to fulfil certain conditions in order to avail the benefits of this scheme. The conditions are as under:

1. The authorisation holder is basically required to fulfil the export obligation.(EO)

2. EO shall be fulfilled by export of goods/services. Export should be physical export of goods.

3. EO shall be over and above the average level of exports achieved by the applicant in the preceding 3 licensing years.

4. In case if the capital goods are sourced locally then the EO shall be 25% less than the EO stipulated i.e. it shall be 4.5 times the duty saved on capital goods.

5. In case where the authorisation holder wants to export through a third party, the export documents shipping bills, bill of lading shall contain the names of the authorisation holder and the supporting manufacturer along with the EPCG number.

6. 50% of the EO must be fulfilled within 4 years from the date of issue of authorisation. 50% of the remaining EO must be fulfilled in the 5th year and 6th

What shall be included in the EO? Export obligation shall include the following:

1. Export of goods

2. Deemed exports in the nature of

a. Supply of goods to EOU/STP/EHTP/BTP/SEZ.

b. Supply of goods against Advance authorisation/Advance authorisation/DFIA.

c. Supply of goods to the projects which are financed by multilateral/bilateral agencies as notified by Department of economic affairs. The list of such agencies is provided in the Appendix 7A of the FTP 2015-2020

d. Supply of goods to any project or for any purpose in respect of which the Ministry of finance has permitted import of such goods at zero custom duty.

e. Supply of goods which are required for set up of mega power project.

f. Supply of goods to nuclear power projects.

3. Supply of ITA-I items to domestic tariff area (DTA) provided the realization is in free foreign exchange.

4. Shipments under Advance authorisation, DFIA, Drawback scheme or reward scheme shall also be counted for fulfilment of EO under EPCG scheme.

5. Royalty payments received in free convertible currency.

6. Foreign exchange received for R&D services.

7.   Payment received in rupee in respect of services which are notified in appendix 3E of the FTP. Such services are yet to be notified.

Process of registration

In order that a person wants to reap the benefits of EPCG scheme, it shall get registered itself under the scheme. The procedural steps are listed down as under:

Pre-registration steps:

1. Obtain a nexus certificate from an independent chartered engineer-  the nexus certificate is required to prove the nexus of the applicant regarding the use of the capital goods imported under EPCG scheme for the pre-production/production/post-production of exported goods or for use of such capital goods for export of services.

2. Obtain a certificate of installation of capital goods- the authorisation holder shall produce within 6 months from the date of completion of import to the regional authority, a certificate of installation of such capital goods. Such certificate shall be obtained from jurisdictional central excise authority or an independent chartered engineer.

3. File a bond with or without bank guarantee with the customs-  The EPCG Authorization holder is required to file a bond with or without bank guarantee with the Customs prior to commencement of import of capital goods. Bank guarantee equal to 100% of the differential duty in case of merchant exporters and 25% in case of manufacturer exporters is required to be submitted except in case of a few exempted categories.

Registration steps:

1. The authorisation holder must compulsorily have an IEC number. So obtain IEC number.

2. Application shall be made by the registered office or the branch office or manufacturing unit of an eligible exporter to the regional authority.

3. Application to be made in Form ANF 5A. Application should contain a list of the plant/machinery installed at the factory premises of the authorisation holder and which should be certified by a Chartered engineer or jurisdictional central excise authorities.

What are the compliance and documentation requirements?

1. The authorisation holder needs to submit a report of fulfilment of export obligation to the regional authority.

2. Such report needs to be submitted by the authorisation holder by 30th April of every year.

3. The report must be filled electronically with digital signatures.

4. Basis the report submitted, the regional authority shall issue EO fulfilment certificate.

5. The authorisation holder shall maintain a true and proper account of exports/supplies made and services rendered towards fulfilment of export obligation for a period of 2 years from the date of redemption.

What if the conditions for availment of benefit under EPCG are not fulfilled?

1. The authorisation holder needs to maintain the average export obligation.

2. The authorisation holder needs to achieve the EO over and above the average export obligation.

3. The FTP 2015-2020 has prescribed the block of period within which the EO needs to be fulfilled.

Period from issue of authorisation	Minimum export obligation to be fulfilled
Block of 1st year – 4th year	50%
Block of 5th and 6th year	Balance EO

4. If the minimum EO of the first block is not fulfilled then the authorisation holder needs to do the following:

• Pay the duties of customs within 3 months from the date of expiry of the block. Such duties of customs shall be calculated proportionately by taking the duty saved amount on total unfulfilled EO of the first block.
• Interest as applicable under Customs Law shall be payable by the authorisation holder.

5. In case where the EO fulfilment is extended by the regional authority, the authorisation holder shall be required to pay a composition fee of 2% of duty saved amount proportionate to unfulfilled portion of EO pertaining to the block.

Certain important provisions:

1. The FTP 2015-2020 has permitted the clubbing of two or more EPCG authorisations issued to the authorisation holders. Application to be made in Form ANF 5C.

2. In case of re-export or replacement of capital goods imported under EPCG scheme, such capital goods can be re-exported within 3 years from the date of clearance by customs of such capital goods with permission of RA/customs authority.

3. Authorisation holder shall apply for redemption in Form ANF 5B with documents prescribed therein as a proof of EO fulfilment. On regional authority being satisfied, the regional authority shall issue a certificate of discharge of export obligation to the EPCG authorisation holder and forward a copy of the same to the customs authority with whom such bank guarantee/letter of undertaking has been executed.

4. In respect of export of certain goods, the authorisation holder shall not be required to maintain the average export obligation. The list of such goods is provided in para 5.13 of the handbook of procedures of the FTP 2015-2020. (updated up to 4 August 2015)

5. EPCG authorisation shall be issued with a single port of registration. However, exports can be made from any port.

Custom Duty on Life Saving Drugs

Press Information Bureau
Government of India
Ministry of Finance
26-February-2016 17:13 IST

Custom Duty on Life Saving Drugs

Representations have been received from domestic industry stating, inter alia that the exemption/concessional customs duties on drugs including life saving drugs deters domestic manufacture of these life saving drugs. Accordingly, in consultation with the stakeholders including Ministry of Health and Family Welfare and the Department of Pharmaceuticals, (a) Representations were received from domestic industry stating, inter alia that the exemption/concessional customs duties on drugs including life saving drugs deters domestic manufacture of these life saving drugs. Accordingly, in consultation with the stakeholders including Ministry of Health and Family Welfare and the Department of Pharmaceuticals, exemption/concessional customs duties on 76 specified drugs was withdrawn, vide notification of the Government of India, Ministry of Finance (Department of Revenue) No. 6/2016-Customs, dated the 28th February, 2016 [G.S.R. No. 124 (E) dated 28th January, 2016] so as to eliminate the disadvantage to the domestic manufacturers of such drugs. Following the withdrawal of exemptions/concessions, these 76 imported drugs (including those cleared from SEZ to domestic tariff area) would attract applicable customs duties.

Subsequent to the withdrawal of the exemption/concessional customs duties, a Committee comprising of representatives of the Ministry of Health and Family Welfare, Department of Pharmaceuticals, Director General of Health Services, Department of Revenue, National Pharmaceutical Pricing Authority, Central Drugs Standards Control Organization, National AIDS Control Programme and experts from All India Institute of Medical Sciences, Safdarjung Hospital and Ram Manohar Lohia Hospital, was constituted in the Ministry of Health and Family Welfare to assess the impact of withdrawal of customs duties exemption/concession on the 76 drugs. Keeping in view the likely impact on the prices and availability of these drugs, Ministry of Health and Family Welfare recommended to restore exemption/concession of customs duties on three drugs, namely Octreotide; Somatropin; and Anti-Haemophilic factor concentrate VIII & IX. Accordingly, the exemption/concessional customs duties has been restored on these 3 drugs vide notification of the Government of India Ministry of Finance (Department of Revenue)

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Auditors of Banking Companies – time to endure Ind AS

The Ministry of Corporate Affairs (MCA), Government of India has notified the Companies (Indian Accounting Standards) Rules, 2015 on February 16, 2015. A reference is also invited to the Press Release dated January 18, 2016 issued by the MCA outlining the roadmap for implementation of International Financial Reporting Standards (IFRS) converged Indian Accounting Standards for banks, non-banking financial companies, select All India Term Lending and Refinancing Institutions and insurance entities. In this connection, Reserve Bank of India (RBI) mandated videRBI/2015-16/315/DBR.BP.BC.No.76/21.07.001/2015-16, February 11, 2016, that scheduled commercial banks (excluding RRBs) shall follow the Indian Accounting Standards as notified under the Companies (Indian Accounting Standards) Rules, 2015, subject to any guideline or direction issued by the RBI in this regard, in the following manner:

Ind AS applicable from 1st April, 2018 and onwards alongwith comparatives: Banks shall comply with the Indian Accounting Standards (Ind AS) for financial statements for accounting periods beginning from April 1, 2018 onwards, with comparatives for the periods ending March 31, 2018 or thereafter. Ind AS shall be applicable to both standalone financial statements and consolidated financial statements. “Comparatives” shall mean comparative figures for the preceding accounting period. Banks are advised to take note of the Press Release dated January 18, 2016 issued by the MCA which states that notwithstanding the roadmap for companies, the holding, subsidiary, joint venture or associate companies of banks shall be required to prepare Ind AS based financial statements for accounting periods beginning from April 1, 2018 onwards, with comparatives for the periods ending March 31, 2018 and thereafter.

Early adoption not permitted: Banks shall apply Ind AS only as per the above timelines and shall not be permitted to adopt Ind AS earlier.

Directors’ responsibility for “All” applicable laws to Company

Section 134(3)(c) of the Companies Act, 2013 provides that there shall be attached to statements laid before a company in general meeting, a report by its Board of Directors, which shall include “Directors’ Responsibility Statement”.

Section 134(5) of the Companies Act, 2013 further provides that the Directors’ Responsibility Statement referred to in clause (c) of sub-section (3) shall state that the directors had devised proper systems to ensure compliance with the provisions of “all” applicable laws and that such systems were adequate and operating effectively.

The word “all” used in Section 134(5) supra has left the directors of the companies with a question as to whether their responsibility is made open ended under the Companies Act, 2013, since prima facie the word “all” seems to provide an inclusive sense rather than an exhaustive sense. In the present article, an attempt has been made to understand the directors’ responsibility(s) in respect of the requirement under section 134(5) of the Act.

The understanding about the implications of Section 134(5) becomes all the more vital considering the definitions of “officer” and “officer who is in default” contained respectively in Section 2(59) and Section 2(60) of the Companies Act, 2013, as follows:

“officer” includes any director, manager or key managerial personnel or any person in accordance with whose directions or instructions the Board of Directors or any one or more of the directors is or are accustomed to act;

“officer who is in default”, for the purpose of any provision in this Act which enacts that an officer of the company who is in default shall be liable to any penalty or punishment by way of imprisonment, fine or otherwise, means any of the following officers of a company, namely:—

(i) whole-time director;

(ii) key managerial personnel;

(iii) where there is no key managerial personnel, such director or directors as specified by the Board in this behalf and who has or have given his or their consent in writing to the Board to such specification, or all the directors, if no director is so specified;

(iv) any person who, under the immediate authority of the Board or any key managerial personnel, is charged with any responsibility including maintenance, filing or distribution of accounts or records, authorises, actively participates in, knowingly permits, or knowingly fails to take active steps to prevent, any default;

(v) any person in accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act, other than a person who gives advice to the Board in a professional capacity;

(vi) every director, in respect of a contravention of any of the provisions of this Act, who is aware of such contravention by virtue of the receipt by him of any proceedings of the Board or participation in such proceedings without objecting to the same, or where such contravention had taken place with his consent or connivance;

(vii) in respect of the issue or transfer of any shares of a company, the share transfer agents, registrars and merchant bankers to the issue or transfer.

Words presumed to be correctly and exactly used and interpreted contextually – The word used in the Act by the Legislature must be considered to have been correctly and exactly used and not loosely or inexactly, in ascertaining the meaning. Mere reference to the ordinary dictionary meaning will be of no use and the construction divorced from the context in which it has been used and the object of the legislation may often lead to injustice, absurdity, contradiction or stultification of the very statutory objective and, consequently, the language must be so modifidely read as to give effect to all provisions of the Act. Further, when the language used is possible of bearing more than one construction, an endeavour to place the correct or true meaning must be made having due regard to the consequences resulting from adopting the alternative constructions and the one which results in hardship, serious inconvenience, injustice or absurdity or anomaly or which leads to inconsistency or uncertainty or friction in the very system, which the State purports to regulate, has to be rejected and the construction, which would avoid such results should always be preferred – H.P. Tourism Development Corpn. v. Union of India [1999] 238 ITR 38 (HP).

To apply words literally may defeat the obvious intention of the Legislature and produce a wholly unreasonable result. To achieve the obvious intention and to produce a reasonable result, some violence to the words has to be done. The proper course is to adopt the sense of the words which harmonises best with the context and promotes in fullest manner, the apparent policy and objects of the Legislature. The ‘Golden rule’ could, thus, be explained as follows:—

1. It is the duty of the Court to give effect to the meaning of an Act when the meaning can be fairly gathered from the words used, that is to say, if one construction would lead to an absurdity while another will give effect to what common sense would show, as obviously intended, the construction which would defeat the ends of the Act must be rejected even if the same words used in the same section, and even the same sentence, have to be construed differently. Indeed, the law goes so far as to require the courts sometimes even to modify the grammatical and ordinary sense of the words, if by doing so absurdity and inconsistency can be avoided.
2. The Court should not be astute to defeat the provision of the Act whose meaning is, on the face of it, reasonably plain. Of course, this does not mean that an Act or any part of it, can be recast. It must be possible to spell the meaning contended for, out of the words actually used.
3. Unless the words are without meaning or absurd, it would be safe to give words their natural meaning because the framer is presumed to use the language which conveys the intention and it would not be in accord with any sound principle of construction to refuse to give effect to the provisions of a statute on the very elusive ground that to give them their ordinary meaning leads to consequences which are not in accord with the notions of propriety or justice entertained by the Court.

The following observations in this regard of Venkatarama Ayyar, J. in Tirath Singh v. Bachittar Singh clearly underscore the desirability of the above indicated course of action in the given situation of textual inadequacy of a given provision:—

“It is argued that if the language of the enactment is interpreted in its literal and grammatical sense, there could be no escape from the conclusion that parties to the petition are also entitled to the notice under the proviso. But it is a rule of interpretation well-established that ‘where the language of a statute’ in its ordinary meaning and grammatical construction leads to a manifest contraction of the apparent purpose of the enactment, or to some inconvenience or absurdity, hardship or injustice, presumably not intended, a construction may be put upon which modifies the meaning of the words, and even the structure of the sentence.”

It is also well-recognised principle of construction that while construing a statute, the courts have to so read the provision of the Act as to steer clear of the vice of unconstitutionality.

Contextual interpretation of words – Words are meant to serve and not to govern – Plain words are delusion. Since the words must have spoken as clearly to legislators as to judges, it may be safely presumed that the Legislature intended what the words plainly say. This is the real basis of the so-called literal rule of construction that where the words of statutes are plain and unambiguous, effect must be given to them. Where words used are unambiguous, interpretative aids such as objects of statute would not be relevant [Kailash Nath Agarwal v. Pradeshiya Indl. & Invt. Corpn. of U.P. Ltd. [2003] 114 Comp. Cas. 4 (SC)]. While it is permissible to refer to dictionaries to find out the meaning in which a word is capable of being used or understood in common parlance, the well-known canon of construction should not even for a minute be overlooked that the meanings of the words and expressions used in a statute ordinarily take their colour from the context in which they appear. Words take colour from the context in which they are used (Jasbir Singh v. Vipin Kumar Jaggi [2001] 8 SCC 289).

Interpretation of word “all”: The word(s) “all” or “every” as well as “some” or “one” and its meaning in a given statute depends upon the context and subject of the statute (Lucknow Development Authority v. M. K. Gupta AIR 1994 SC 787)

Context under the Companies Act, 2013: The context of “all” the applicable laws should be understood with the harmonious assessment of the following twin factors:

(a) Industry or sector in which the company is operating;

(b) Object clause of the Memorandum of Association;

Further, there are many laws and regulations, relating principally to the operating aspects of an entity that typically do not affect the financial statements and are not captured by the entity’s information systems relevant to financial reporting. Non-compliance may even involve any conduct designed to conceal it, such as collusion, forgery, deliberate failure to record transactions, management override of controls or intentional misrepresentations being made to the entity. Whether an act constitutes non-compliance is ultimately a matter for legal determination by a court of law.

Indicators of non-compliance of the applicable laws: The following can be the indicators of non compliance of the applicable laws:

(a) Investigations by regulatory organisations and government departments or payment of fines or penalties.

(b) Payments for unspecified services or loans to consultants, related parties, employees or government employees.

(c) Sales commissions or agent’s fees that appear excessive in relation to those ordinarily paid by the entity or in its industry or to the services actually received. Purchasing at prices significantly above or below market price.

(d) Unusual payments in cash, purchases in the form of cashiers’ cheques payable to bearer or transfers to numbered bank accounts.

(e) Unusual payments towards legal and retainership fees.

(f) Unusual transactions with companies registered in tax havens.

(g) Payments for goods or services made other than to the country from which the goods or services originated.

(h) Payments without proper exchange control documentation.

(i) Existence of an information system which fails, whether by design or by accident, to provide an adequate audit trail or sufficient evidence.

(j) Unauthorised transactions or improperly recorded transactions.

(k) Adverse media comment.

Devising proper systems to ensure compliance with the provisions of “all” applicable laws: The system as aforesaid or the control environment in a more technical sense, can be designed:

• either as an in house function; or
• may even be outsourced as a separate independent function.

Some elements of an entity’s control environment have a pervasive effect on assessing the risks of non-compliance. The effectiveness of the design of the control environment in relation to participation by those charged with governance is therefore influenced by such matters as:

1. Their independence from management and their ability to evaluate the actions of management.
2. Whether they understand the entity’s business transactions.
3. The extent to which they evaluate whether the financial statements are prepared and entity is operating in accordance with the applicable financial reporting framework.
4. Control activities to ensure that management directives are carried out

An active and independent board of directors may influence the philosophy and operating style of senior management. However, other elements may be more limited in their effect. For example, although human resource policies and practices directed toward hiring competent financial, accounting, and IT personnel may reduce the risk of errors in processing financial information, they may not mitigate a strong bias by top management to overstate earnings.

Control activities are the policies and procedures that help ensure that management directives are carried out. Control activities, whether within IT or manual systems, have various objectives and are applied at various organisational and functional levels. Examples of specific control activities include those relating to the following:

(a) Authorization.

(b) Performance reviews.

(c) Information processing.

(d) Physical controls.

(e) Segregation of duties

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