It is a known fact that one of the benefits offered under the Special Economic Zone (SEZ) regulations in India, is that the goods manufactured by a SEZ unit can also be cleared to the domestic market, without any restrictions / limit. The only obligation cast on the SEZ unit is fulfillment of positive net foreign exchange earnings, to be achieved cumulatively over a period of five years. Such clearances are treated as imports into the Domestic Tariff Area (DTA) and can be made only on payment of applicable customs duties.

While, the SEZ scheme is still in a nascent stage, with only handful operational manufacturing SEZ units, these units seem to be facing a peculiar challenge on the valuation of goods for payment of customs duties, with respect to DTA clearances.

The key challenge seems to in arriving at the Assessable Value (ie, CIF value + 1% loading charges) for the goods cleared into DTA, especially concerning the point of inclusion of post clearance freight and insurance charges incurred on domestic transportation of goods upto the customer location, to the ex factory price of the goods cleared.

It seems that the office of the Comptroller and Auditor General (CAG) has taken a view that Assessable Value for payment of customs duties on DTA clearance of goods from the SEZ unit should include post clearance domestic freight and insurance charges as well.

Another related issue is the value on which customs duties is payable on goods repaired in the SEZ unit and cleared back to the DTA, especially when the value of goods replaced are negligible and the labour portion is high.

Valuation of DTA clearances

As per SEZ regulations, valuation and assessment of goods cleared into DTA are to be made in accordance with the Customs Act and rules. As per the Customs Valuation Rules, the value of imported goods shall be the value of such goods, for delivery at the time and place of importation and shall include cost of transportation, insurance and handling charges upto the place of importation.

SEZ is deemed to be a port, inland container depot, land station and land customs station and a bill of entry for home consumption is filed by the domestic buyer with the customs officer in the SEZ, who assesses the goods. These goods are assessed and customs duties are paid before they are cleared from the SEZ to DTA.

This being the case, the transaction value of the goods cleared from SEZ unit into DTA can be considered as the value for delivery at the time and place of importation (which is the SEZ).

Further, such clearances from the SEZ to the DTA are similar to clearances of goods imported into India for home consumption. The Assessable value (CIF value + 1% handling charges) in the Bill of Entry for home consumption, even in case of regular imports into India does not include post clearance freight and insurance incurred on domestic transportation of goods. The Assessable value only includes charges incurred upto the place of clearance of goods for home consumption (ie, all charges incurred upto the port of clearance).

There may hence be a merit in the argument that the price at which the goods are sold to the DTA customers by SEZ unit should be considered as the Assessable value (ie, should be considered as CIF + 1% handling charges) and that the post clearance freight and insurance (ie, for domestic transportation of goods to the customer) should not be added to assessable value of the goods.

CAG should evaluate the merits of the above legal position before finalizing its view on this issue.

Valuation of repairs

When a SEZ unit clears goods to DTA, there may be instances where the goods are found to be defective, and are sent back to SEZ unit for repairs. The value of repairs includes cost of parts replaced and labour cost. There may be instances where only labour costs are incurred without any replacement of parts.

SEZ regulations provide that the goods brought to the SEZ unit for the purpose of repair can be cleared back to the DTA on payment of duty on the ?value of repairs?.

It seems that the customs officers at the SEZ insist on payment of customs duties on the entire value of repairs (irrespective of whether such charges pertain to parts replaced or to the labour portion)

SEZ units providing services to the DTA customers are required to pay service tax on the amounts charged for providing such services. As a result, the labour portion of the value of repairs is subject to payment of both customs duties as well as service tax.

In order to avoid this dual tax levy, the term ?value of repairs? should be defined / clarified to mean the value of the part or component replaced including all labour and machining charges incurred on the work done on the replaced part per se. Pure labour charges, without any replacement of parts should not be made liable for payment of customs duties.

Concluding remarks

These emerging operational issues, though presently at an infant stage, have the potential of resulting in high stake litigation battles.

The CBEC/SEZ Authorities should clarify these issues for the benefit of trade, at this stage itself, to achieve certainty / consistency in the method of valuation to be adopted for DTA clearances of manufactured / repaired goods from SEZ units.

Rajeev Dimri is Partner, BMR Advisors. Prashanth Bhat contributed to the article.