Special additional duty refund for ‘deemed sales’

Importation of goods into India attracts customs duties including special additional duty (SAD). This is in lieu of central sales tax/value-added tax (VAT) levied on the sale of goods in India. Notification 102/2007-Customs, dated 14 September 2007, provides for refund of SAD if the subject goods are subsequently sold in India.

To obtain the refund, the importer must: (i) pay all customs duties, including SAD, at the time of importation; (ii) specify in the invoice for Indian sale that no SAD credit will be admissible; (iii) file a claim for refund of SAD with the jurisdictional customs officer; and (iv) pay appropriate VAT/central sales tax on the sale of the goods.

One of the key issues in respect of SAD refund is whether only sales merit the recouping of SAD, or whether even deemed sales (such as transfer of right to use any goods, works contract, etc.) are eligible for refund. Questions also arise in the case of processing not amounting to manufacture of the goods. Tribunals and courts have expressed divergent views on this issue.

[ihc-hide-content ihc_mb_type=”show” ihc_mb_who=”3″ ihc_mb_template=”2″ ]

Cases in favour of importers

In Commissioner of Customs, Kandla v Posco India Delhi Steel Processing Limited (2014), the respondent paid customs duties on imported steel coils. The coils were subjected to cutting and slitting before being sold in India on payment of VAT. Gujarat High Court noted that the cutting and slitting process did not amount to manufacture and that the goods retained their distinct and original character as well as identity.

The court emphasized that the SAD levy’s objective was to create a level playing field for domestic manufacturers and the importer who subsequently sold the goods. The court added that domestic manufacturers were not affected by the levy of SAD since they could take credit, whereas the importer that sold the goods did not get the benefit of credit and therefore exemption/refund had to be extended. The court observed that if the importer in the case was denied a refund, domestic manufacturers would get undue advantage to the extent of SAD credit, which was not the intention of the legislature. Refund of SAD was thus granted.

In Commissioner of Customs (ICD), New Delhi v Reliance Communications Infrastructure Limited (2012), the respondent imported set-top boxes. The goods were supplied to consumers on a “right to use” basis and applicable VAT was discharged. The Delhi bench of the tribunal held that the word “sale” must be understood in the same sense in which it is defined in the VAT/sales tax acts, i.e. including “deemed sale” – and accordingly, the subject supply was treated as “sale” for the purpose of SAD refund as the definition of “sale” as contained in VAT/sales tax acts explicitly includes transfer of right to use any goods. In this case, the form of the goods was evidently unchanged.

Case against the importer

The recent decision of the Ahmedabad tribunal in Proflex Systems v Commissioner of Customs, Ahmedabad (2014) involved a purchase order of the appellant that read: “Execution under works contract for laying Proflex Roof material on your building”. Based on analysis of the relevant documents, the tribunal noted that the quantity of the imported goods used/sold was not known until the completion of the contracted work. The final invoices also did not separately show the quantity of imported goods that had been sold to the clients.

The rate for laying of “Proflex Roof” was charged on a per square metre basis, including the value of the materials (i.e. service plus sale). A final retail invoice was issued after the work was completed, when the imported goods did not at all exist in the form in which they were originally imported. The tribunal held that when the “deemed sale” occurred, the imported goods did not exist as such, but what existed was the “Proflex Roof”. The tribunal distinguished the facts from those in the Posco case discussed above and denied the refund.

Significantly, the 2007 notification contains no stipulation that the imported goods “as such” be sold in India. Therefore, the view adopted by the Ahmedabad tribunal appears to be unduly harsh and unwarranted, especially since SAD was levied to compensate and equalize for state VAT. The intent was to make it VAT-able/refundable, as was explained by Gujarat High Court and the circular issued at the time of introducing the levy.

Conclusion

The various circumstances where refund has been sought to be denied on some pretext raise concerns about doing business in India. One hopes that the imminent goods and services tax (GST) will address these concerns. However until GST is in place, importers will have to live with the burden of litigation.

[/ihc-hide-content]

Ranjeet Mahtani is an associate partner and Rajat Chhabra is a senior associate at Economic Laws Practice. This article is intended for informational purposes and does not constitute a legal opinion or advice.