Power to exempt imported material used in the manufacture of goods in warehouse [Section 66]:
If any imported materials are used in accordance with the provisions of section 65 for the manufacture of any goods and the rate of duty leviable on the imported materials exceeds the rate of duty leviable on such goods, the Central Government, if satisfied that in the interest of establishment or development of any domestic industry, it is necessary so to do, may, by notification in the Official Gazette, exempt the imported material s from the whole or part of the excess rate of duty.
Analysis of Section 65: The substantial ingredients of section 65(1) are
(i) The owner of any warehoused goods may carry on any manufacturing process or other operations in relation to warehoused goods;
(ii) This may be done with the specific sanction of the Assistant or Deputy Commissioner of Customs;
(iii) It will be subject to such conditions and on payment of such fees as may be prescribed.
Rules prescribing the conditions aforesaid: A comprehensive regulations called the Manufacture and Other Operations in Warehouse Regulations, 1966, was promulgated by the Board under its Notification No. 155/66-Cus dated 30-7-1966. These regulations superseded several rules made earlier covering individual situations.
The owner has to make an application giving full details regarding the process to be carried out, imported and other goods used, plan and description of warehouse and volume of manufacture anticipated. On getting permission the necessary bond has to be executed undertaking to observe the regulations and maintain accounts. Manufacture will not be under supervision of the customs officer. However the officers of customs department can visit the warehouse and control and supervise manufacturing process or imported and other goods. Detailed accounts are to be maintained of raw materials, stock, wip and production. Input – output norms maybe prescribed wherever considered necessary.
Subsection (2) of section 65 deals with any waste of refuse arising during the manufacturing operations or other processes done in the warehouse. The question that is considered in this provision is whether any import duty should be levied on the waste or refuse. The answer is dependent upon whether finished product manufactured out of the manufacturing process or other operations is exported out of India or cleared for home consumption.
Let us consider a few examples to understand the above provisions.
Example 1: Let us take the case of cutlery manufactured out of imported high speed cutting steel strips. Locally procured plastic is used for providing handles to the cutlery i.e. knife, fork, etc. In a batch process 200 kg imported steel strips and 100 kg plastic is issued for the manufacture of the cutlery items. 400 gross knives are manufactured and they are cleared for home consumption. The steel strip content in the above knives is 178 kg. The weight of the plastic handles is 85 kg. The waste is in the form of shaving etc. The total weight of the waste is [(200+100)-(178+85)=37kg]. The steel content of the waste is 22 kg. So import duty of customs at the rate applicable to steel strips should be collected on the waste.
The other alternative is where the finished goods are exported out of the country. Take the same example. In this case the manufacturer has two options. He can destroy the waste. Then he will not be required to pay duty on the steel strip content in the waste. If he does not choose to destroy the waste, then he has to pay duty on the steel strip content in the waste. Remission of duty on the imported material content in the waste or refuse is allowed only when the final product concerned is exported out of India and the waste is destroyed.
Example 2: Let us now take an example where the final products are both exported and cleared for home consumption. The question of appropriating the waste will have to be decided first. The imported raw material is rubber. The end product is motor vehicle tyre. The additional materials used are (1) beading wire, (2) tyre cord warp sheet (3) chemicals and (4) mineral oil.
| Total quantity of rubber issued | 1500kg |
| Weight of beadwire used | 10kg |
| Weight of tyre chord warp sheet used | 180kg |
| Weight of chemical used | 4kg |
| Weight of mineral oil used | 16kg |
| Total weight of raw materials issued | 1710kg |
| Total no. of tyres manufactured | 100pcs |
| Weight per tyre | 16.5kg |
| Thus total weight 100 tyres | 1650kg |
| Wastage | 60kg |
| Total no. of tyres cleared for home consumption | 25pcs |
| Total no. of tyres exported | 75pcs |
Wastage relatable to tyres exported 60kg * 75/100 = 45
Imported rubber content in the waste relatable to the exported tyres = 45 * 1500/ 1710 = 39.5 kg(appx)
Import duty leviable on the import rubber content in the waste can be remitted if 45 kgs of the waste are destroyed.
| Weight of waste relatable to tyres cleared for home consumption | = 15 kg |
| Imported rubber content in the waste | = 13.2 kg |
Import duty is compulsorily leviable on this quantity of import rubber. The value would be the original import value; but the rate of duty would be that prevailing on the date of payment of duty.
Relevant date for determination of rate of duty leviable on import material content in the waste: The next question is the relevant date for valuation and tariff valuation of the import material content in the waste/refuse. Attention is invited to the provisions of section 15(1). In this case the goods are not
(i) cleared for home consumption on a bill of entry filed under section 46; or
(ii) cleared from the warehouse, where the date of presentation of bill of entry for home consumption is relevant. Hence in this case the third alternative, namely “the date of duty” under section 15(1)(c) applies. Hence in collecting the import duty on the imported material content in the waste or refuse, the rate of duty and tariff valuation prevalent on the date of payment of duty will apply.
Rate of duty leviable on the finished product: In the case of warehoused goods, the identity of the imported goods is retained at the time of clearance of the goods from the warehouse. When they are bonded in a warehouse and cleared as such the classification would not change. The rate of duty prevailing on the date of presentation of bill of entry for home consumption will apply. Normally it would not be less than the rate prevalent at the time of importation. Hence, there would normally be no loss of revenue on account of warehousing. With regard to the position in respect of manufacture in bonded warehouse, if the material undergoes change they have to be classified with regard to their finished condition.
Analysis of Section 66: The policy of the Government in permitting manufacture in bond had been to encourage growth of Indian industry. Thus instead of attaching the difference in duty, that is lost in the process of manufacture in bond, the Government is prepared to forego it totally or partially. Section 66 of the Customs Act deals with this power.
Ingredients of section 66: The main conditions of section 66 are:
(i) imported materials are used in the manufacture of any goods in accordance with the provisions of section 65
(ii) the import duty leviable on the imported materials exceeds the rate of duty leviable on the finished products
(iii) the Central Government is satisfied that in the interest of establishment or development of a domestic industry, it is necessary to give protection to the finished products. Then, the Central Government may by an official notification in the Gazette, exempt the imported material, from the whole or part of excess duty.
The use of manufacture-in-bond facility is now being resorted to less and less. The reasons are very simple. They are:
(i) there is step-by-step control and interference by Customs Authorities
(ii) the double duty bond under section 59 and the bond under section 65 cause undue financial burden on the manufacturers
(iii) the maintenance of detailed accounts and the control of Customs Officers over them is cumbersome
(iv) the looking of the imported material storage room by customs and issue of such material for manufacture at the discretion and control of the customs causes undue operational bottlenecks
(v) finally, the duty liability of imported material in the waste is another source of irritation.