EXPORT PROMOTION COUNCIL FOR EOUs & SEZs

(Ministry of Commerce & Industry, Govt. of India) 705, Bhikaji Cama Bhawan, Bhikaji Cama Place, New Delhi 110066 Tel : 26167042, 26165805 Fax : 26165538, Email : epces@vsnl.net
Dr. L.B. Singhal Director General

EPCES CIRCULAR NO. 73 DATED 4-6-2009

Sub : (1) EPCES met Mr. Pranab Mukherjee, Honble Union Minister for Finance on 2/6/09, Mr. Anand Sharma, Honble Union Minister for Commerce & Industry on 3/6/09 and Mr. S.S.N. Moorthy, Chairman CBDT on 1/6/09 for submitting suggestions for union budget 2009-10 and Foreign Trade Policy 2009-2014. (2) Department of Commerce issues Instruction No. 11 dated 27/5/09 regarding procurement of used capital goods from DTA to SEZ units. (3) Department of Commerce issues Instruction No. 12 dated 1/6/09 regarding applicability of Narcotics Drug and Psychotropic substances Act in SEZs 1.i) EPCES met Mr. Pranab Mukherjee, Honble Union Minister for Finance on 2/6/2009.

Mr. R.K. Sonthalia, Chairman EPCES and myself met Honble Union Minister for Finance Mr. Pranab Mukherjee on 2/6/2009 and submitted various issues relating to EOUs and SEZs for consideration for the union budget 2009-10. This meeting was attended by Mr. G.K. Pillai, Secretary Commerce, Mr. Ashok Chawla, Finance Secretary, Mr. P.V. Bhide, Revenue Secretary, Dr. Rahul Khullar, Secretary (Disinvestment), Ms. Sushma Nath, Secretary (Expenditure), Mr. S.S.N. Moorthy, Chairman CBDT, Mr. P.C. Jha, Chairman CBEC and senior officers of Ministry of Finance. A detailed note on this meeting is enclosed as Annexure I. 1.ii) EPCES met Mr. Anand Sharma, Honble Union Minister of Commerce & Industry on 3/6/2009. Mr. R.K. Sonthalia, Chairman EPCES and myself met Honble Union Minister of Commerce & Industry for submitting our suggestions relating to EOUs and SEZs for the Union Budget 2009-10 and Foreign Trade Policy 20092014 on 3/6/2009. This meeting was attended by Mr. G.K. Pillai, Commerce Secretary, Mr. R.S. Gujral, Director General of Foreign Trade, Mr. R. Gopalan, Additional Secretary (Commerce), Mr. D.K. Mittal, Additional Secretary (Commerce), Mr. P.K. Chaudhary, Additional Secretary (Commerce), Mr. Anil Mukim, Joint Secretary (Commerce), Mr. V.K. Srivastava, Additional DGFT, Mr. Amitabh Jain, Additional DGFT, Mr. Sanjay Rastogi, Export Commissioner, Mr. Tapan Mazumder, Joint DGFT, Mr. A.K. Singh, Joint DGFT and other senior

officers of Ministry of Commerce & Industry. A detailed note on this meeting is enclosed as Annexure II. 1.iii) EPCES met Mr. S.S.N. Moorthy, Chairman, CBDT on 1/6/2009 A EPCES Delegation met Mr. S.S.N. Moorthy, Chairman CBDT on 1/6/2009 for submitting suggestions relating to EOUs and SEZs for consideration for the Union Budet 2009-10. The meeting was chaired by Mr. S.S.N. Moorthy, Chairman CBDT and was attended by Mr. Ashutosh Dikshit, Joint Secretary (TPL) and senior officers of CBEC and CBDT. On behalf of EPCES myself, Mr. R.K. Sonthalia, Chairman EPCES, Mr. T. Vasu, Past Chairman EPCES, Mr. A.K. Jain, Regional Chairman EPCES, NSEZ, Mr. Rajendra J. Hinduja, Gokaldas Exports, Bangalore, Mr. D.P. Nanda, Moserbaer India Ltd, Mr. R. Arumugam, PRP Exports attended this meeting. A detailed note on this subject is enclosed as Annexure III. (2) Department of Commerce issues Instruction No. 11 dated 27/5/09 regarding procurement of used capital goods from DTA to SEZ units.

Ministry of Commerce & Industry has issued Instruction No. 11 dated 27/5/2009 laying down the guidelines on procurement of used capital goods from DTA by SEZ units. A copy of the same is enclosed as Annexure IV. This instruction is in supersession of Instruction No. 8, issued by Department of Commerce on 12/10/2007. An important issue clarified by this instruction is the following:It should be ensured by the unit that the sum total of the value of installed used/second-hand capital goods procured from DTA and the value of used/second-hand capital goods proposed to be procured from DTA shall not exceed 20% of the sum total of value of installed capital goods imported (new and used/second-hand) and the value of the installed new capital goods procured from DTA at any point of time. However, a unit can shift used/second-hand capital goods valuing more than 20% in which case they will not be entitled to benefits under the Income Tax Act. (3) Department of Commerce issues Instruction No. 12 dated 1/6/09 regarding applicability of Narcotics Drug and Psychotropic substances Act in SEZs.

Department of Commerce has issued Instruction No. 12 dated 1/6/09, a copy of the same is enclosed, issuing a clarification on the applicability of Narcotics Drug and Psychotropic Substances Act in SEZs. DOC issues the clarification as follows:Under the Narcotics Drug and Psychotropic Substances Act, export from India means to take out to a place outside India and to import to India means to bring into India from a place outside India. The DTA and SEZ both being in India itself, export authorization and import authorization from Central Bureau of Narcotics is required only for movement of Active Pharmaceutical Ingredients (API) goods from SEZ to out of India, from out of India into SEZ and for sale in DTA.

This is for your information please. ____________

PN : All EPCES Circulars, issued during the last 6 years, have been placed on the website www.eouindia.gov.in & www.sezindia.nic.in. Hence for making a reference to any earlier EPCES Circular you can access the above stated website. To access EPCES Circulars, click on to EPCES logo on the homepage and then click on EPCES Circulars.

Annexure I EPCES MEETS MR.PRANAB MUKHERJEE, HONBLE FINANCE MINISTER FOR CARRYING OUT MAJOR CHANGES IN BUDGET FOR EOUs/SEZs. Dr. L.B. Singhal, Director General, Export Promotion Council for EOUs and SEZs (EPCES) has informed that EPCES met with Shri Pranab Mukherjee, Honble Finance Minister on Tuesday, June 2, 2009 at New Delhi and submitted suggestions for incorporation in Union Budget 2009-10. The meeting was attended by Shri G.K. Pillai, Commerce Secretary, Shri Ashok Chawla, Finance Secretary, Shri P.V. Bhide, Revenue Secretary, Dr.Rahul Khullar, Secretary (Disinvestment), Ms.Sushma Nath, Secretary (Expenditure) Shri S.S.N. Moorthy, Chairman, CBDT, Shri P.C. Jha, Chairman, CBEC and senior officers of Ministry of Finance. On behalf of the Council, Shri R.K. Sonthalia, Chairman, EPCES and Dr.L.B. Singhal, Director General, EPCES attended the meeting. Honble Finance Minister assured that the Budget 2009-10 will look into the problems faced by the export sector in the light of the global slowdown. Shri R.K. Sonthalia, Chairman, EPCES requested that the Central Sales Tax should not be imposed and collected on goods sold from SEZs in the domestic tariff area (DTA). Chairman, EPCES mentioned that Sunset Clause under Section 10B was extended for one year i.e. upto 2010 and this benefit should be extended by five more years for survival of EOU Scheme. He further said that Minimum Alternate Tax, made applicable on EOUs in Finance Act 2007, should be withdrawn and Fringe Benefit Tax on EOUs and SEZs should be withdrawn. Dr.L.B. Singhal, Director General, EPCES, while making presentations to Honble Finance Minister on EOU/SEZ issues, suggested that SEZ Units should be allowed to raise external commercial borrowings of upto $ 500 million in a year without maturity restrictions. In 2002, the Reserve Bank of India had allowed ECB facility for SEZ units but this did not find mention in the central banks latest master circular on external commercial borrowings. He requested for grant of infrastructure status for SEZs. The RBI has so far not recognized SEZs as infrastructrure even after Empowered Group of Ministers (EGOM) has recommended to RBI that SEZs should be accorded infrastructure status. He informed that exports from EOUs/SEZs were US $ 56 billion in 2008-09 and this sector was contributing 34% in national exports.

Dr.L.B. Singhal, Director General, EPCES has further informed that with reference to SEZs and EOUs the following suggestions were submitted to Honble Finance Minister:

SEZs Amendment/clarification on Section 10AA of the IT Act, as incorporated in the 2nd Schedule of the SEZ Act, 2005, to substitute the words total turnover of the assessee with the words total turnover of unit Treating SEZs as Infrastructure Projects Restoration of facility of External Commercial Borrowing to SEZ Units Exemption from CST for supply of goods from SEZ to DTA. Levy of either Additional duty of customs (4%) or VAT for removal of all goods from SEZ to DTA to avoid double taxation. EOUs Removal of Sunset Clause under Section 10B for EOUs. Withdrawal of amendment by Finance Bill, 2007, extending the provisions of MAT to Section 10B of the IT Act. Sub-section (3) of Section 10B to permit IT exemption in case of realization of payment within 12 months, in line with RBI provisions & FTP provisions. Amendment/clarification pertaining to Section 10B, Sub-section (3) of IT Act to permit third party exports, in line with FTP provision and DOR guidelines. Rationalization of calculation of education cess on sale of goods from 100% EOUs to DTA i.e. imposition of Education Cess one time instead of 3 times. Change in cenvat formula for cenvat credit so that all duties in nature of excise are cenvatted, as in case of DTA. Definition of Manufacturing to avoid conflict in FTP & Income Tax Act.

EOUs/SEZs: Exemption to EOUs/SEZ units from Fringe Benefit Tax.

Annexure II EPCES meets Shri Anand Sharma, Honble Minister for Commerce & Industry on 3.6.09 at New Delhi and submits its suggestions for Union Budget 2009-10 and Foreign Trade Policy 2009-14. Dr. L.B. Singhal, Director General, Export Promotion Council for EOUs and SEZs (EPCES) has informed that EPCES attended a meeting with Shri Anand Sharma, Honble Minister for Commerce & Industry on Wednesday, June 3, 2009 at Udyog Bhavan, New Delhi to discuss issues related to Union Budget and Foreign Trade Policy. The meeting was attended by Shri G.K. Pillai, Secretary (Commerce), Shri R.S. Gujral, Director General of Foreign Trade, Shri R. Gopalan, Additional Secretary (Commerce), Shri D.K. Mittal, Additional Secretary (Commerce), Shri P.K. Chaudhary, Additional Secretary (Commerce), Shri Anil Mukim, Joint Secretary (Commerce), Shri V.K. Srivastava, Addl.DGFT, Shri Amitabh Jain, Addl.DGFT, Shri Sanjay Rastogi, Export Commissioner, Shri Tapan Mazumder, Jt.DGFT, Shri A.K. Singh, Jt.DGFT and other senior officers of Ministry of Commerce & Industry.

On behalf of the Council, Shri R.K. Sonthalia, Chairman, EPCES and Dr.L.B. Singhal, Director General, EPCES attended the meeting. Shri R.K. Sonthalia, Chairman, EPCES highlighted the following issues of EOUs and SEZs:

EOUs
As regards Extension of sunset clause under Section 10B of the IT Act, Shri Sonthalia said that at present income tax exemption is available to the EOUs upto 313-2010. This may be extended for a further period of 5 years, keeping in mind the contribution made by the EOUs in manufacturing, employment and value addition and present difficult times. He said that EOUs have been subjected to MAT, by an amendment carried out by Finance Bill 2007. This amendment should be repealed. Regarding Extending benefits of Vishesh Krishi & Gram Upaj Yojana Scheme, Focus Market Scheme, Focus Product Scheme and Hi-tech Export Promotion Scheme to all EOUs, Shri Sonthalia said that at present benefits of these schemes are available to the EOUs only in case these EOUs do not avail direct tax exemption under Income Tax Act. It is requested that benefit of these Schemes should, be extended to all EOUs irrespective of whether they are availing exemption from income tax or not. For simplification under EOU Scheme, EPCES has requested that cost recovery charges may be done away with.The requirement of procurement certificate should be abolished. For sale of goods from EOU to DTA, Education Cess should be imposed once instead of 3 times. For sale of goods from EOU to DTA cenvat credit formula should be revised and cenvat credit should be given for all duties including Education Cess, Higher Education Cess, Additional customs duty etc.

SEZs
The benefit of Focus Market Scheme, Focus Product Scheme, VKGUY, Hi-tech Export Promotion Scheme, Served from India Scheme for export from SEZ should be extended to export from SEZ as well subject to the condition that they submit a declaration that for supply of goods from DTA to SEZ these benefits have not been claimed. SEZs should be declared as infrastructure project as has already been recommended by E-GOM to RBI. Guidelines by RBI are yet to be issued. For rationalization of duties on supply of goods from SEZ to DTA following steps may be taken:(i) (ii) for supply of goods from SEZ to DTA, CST should be exempted as in case of imports. From SEZ to DTA for all goods either additional duty of customs (4%) should be made applicable or VAT should be applied. There should not be double taxation. Direct Tax amendment relating to SEZs (i) (ii) Section 10AA should be amended as agreed by E-GOM and should be made applicable w.e.f. 10-2-2006. Mode-II services and inter-unit transfer of goods in the SEZs should be given exemption from Income Tax for encouraging services exports from SEZs. Detailed proposal is already given.

EOU-SEZ Exports from EOUs/SEZs should be exempted from fringe benefit tax.

The Honble Commerce & Industry Minister Shri Anand Sharma stated that todays deliberations are very useful and suggestions submitted will be looked into positively. He

further assured that he will also discuss the major issues with Mr.Pranab Mukherjee, Honble Finance Minister.

Annexure III EPCES Delegation meets Shri S.S.N. Moorthy, Chairman, CBDT and other senior officers of CBEC & CBDT on 1.6.09 at New Delhi. Dr.L.B. Singhal, Director General, Export Promotion Council for EOUs and SEZs (EPCES) informed that on June 1, 2009, EPCES Delegation met Shri S.S.N. Moorthy, Chairman, CBDT. The meeting was attended by Shri Ashutosh Dikshit, Jt.Secretary (TPL) and senior officers of CBEC and CBDT. On behalf of the Council, Shri R.K. Sonthalia, Chairman, EPCES, Dr.L.B. Singhal, Director General, EPCES, Shri T. Vasu, Past Chairman, EPCES, Shri A.K. Jain, Regional Chairman, EPCES, NSEZ, Shri Rajendra Hinduja, Gokaldas Exports, Bangalore, Shri R. Arumugam, PRP Exports, Madurai, Shri D.P. Nanda, Moser Baer India Ltd. attended the meeting. EPCES submitted its suggestions for consideration in the Union Budget 2009-10. With reference to EOUs and SEZs, the following suggestions were made for consideration: EOUs Removal of Sunset Clause under Section 10B for EOUs, Withdrawal of amendment by Finance Bill, 2007, Extending the provisions of MAT to Section 10B of the IT Act, Sub-section (3) of Section 10B to permit IT exemption in case of realization of payment within 12 months, in line with RBI provisions & FTP provisions, Amendment/clarification pertaining to Section 10B, Sub-section (3) of IT Act to permit third party exports, in line with FTP provision and DOR guidelines, Rationalization of calculation of education cess on sale of goods from 100% EOUs to DTA i.e. imposition of Education Cess one time instead of 3 times, Change in cenvat formula for cenvat credit so that all duties in nature of excise are cenvatted, as in case of DTA, Definition of Manufacturing to avoid conflict in FTP & Income Tax Act.

SEZs -

Amendment/clarification on Section 10AA of the IT Act, as incorporated in the 2nd Schedule of the SEZ Act, 2005, Exemption from CST for supply of goods from SEZ to DTA, Levy of either Additional Duty of Customs (4%) or VAT for removal of all goods from SEZ to DTA to avoid double taxation.

EOUs/SEZs: Exemption to EOUs/SEZ units from Fringe Benefit Tax. Chairman, CBDT assured EPCES delegation that their suggestions will be considered positively.

ANNEXURE IV Instruction No.11 No.B-11/3/2008-SEZ Government of India Ministry of Commerce and Industry (Department of Commerce) ... Uydog Bhawan, New Delhi Dated the 27th May 2009

OFFICE MEMORANDUM ... To The Development Commissioner SEZ & Chairperson, Approval Committee (All Special Economic Zones) Sub: Procurement of used capital goods from DTA by SEZ Units. Sir/Madam, As you are aware the Department of Revenue, in order to regulate shifting of existing businesses from DTA to SEZs to avail of the direct tax exemption on the export income, substituted subsection (4) of Section 10AA of Income Tax Act as below: (4) This section applies to any undertaking, being the Unit, which fulfils all the following conditions, namely: (i) it has begun or begins to manufacture or produce articles or things or provide services during the previous year relevant to the assessment year commencing on or after the 1st day of April, 2006 in any Special Economic Zone; it is not formed by the splitting up, or the reconstruction, of a business already in existence: Provided that this condition shall not apply in respect of any undertaking, being the Unit, which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such undertaking as is referred to in section 33B, in the circumstances and within the period specified in that section; (iii) it is not formed by the transfer to a new business, of machinery or plant previously used for any purpose.

(ii)

Explanation: The provisions of Explanations 1 and 2 to sub-section (3) of section 80IA shall apply for the purposes of clause (iii) of this sub-section as they apply for the purposes of clause (ii) of that sub-section. Relevant extract from Section 80IA referred to in the new subsection are as below: Explanations to sub-section (3) of Section 80 IA :

Explanation 1.For the purposes of clause (ii), any machinery or plant which was used outside India by any person other than the assessee shall not be regarded as machinery or lant previously used for any purpose, if the following conditions are fulfilled, namely : (a) such machinery or plant was not, at any time previous to the date of the installation by the assessee, used in India; (b) such machinery or plant is imported into India from any country outside India; and (c) no deduction on account of depreciation in respect of such machinery or plant has been allowed or is allowable under the provisions of this Act in computing the total income of any person for any period prior to the date of the installation of machinery or plant by the assessee. Explanation 2.Where in the case of an undertaking, any machinery or plant or any part thereof previously used for any purpose is transferred to a new business and the total value of the machinery or plant or part so transferred does not exceed twenty per cent of the total value of the machinery or plant used in the business, then, for the purposes of clause (ii) of this sub-section, the condition specified therein shall be deemed to have been complied with. 3. Keeping in view the provisions that exist in Section 10AA of the Income Tax Act, 1961 to deal with tax related issues in case of previously used Capital Goods, in terms of the provisions of sub-section (8) of Section 15 of the Special Economic Zones Act, 2005 , it is hereby prescribed that while granting any approval for setting up new units in any SEZ, the Approval Committee or the Development Commissioner, as the case may be, shall ensure that procurement of second hand capital goods shall be allowed only in terms of the provisions of sub-section (4) of Section 10AA read with Explanation 1 & 2 to sub-section (3) of Section 80 IA of the Income Tax Act ,1961. For this purpose, it has been decided to prescribe the following procedure for the guidance of the units in the SEZs:(i) The units intending to move second hand capital goods in DTA should furnish details as prescribed in the enclosed annexure and must obtain prior approval of the Development Commissioner before such movement. No second hand capital goods will be allowed to be moved into the Zone without prior approval from the Development Commissioner. While computing the value of the used/second hand capital goods sought to be transferred into the Zone from DTA, including from an EOU, EHTP/STP/BTP unit, within the Zone or from any other Zone, the depreciation rates stipulated as per the provisions of Income Tax Act and Rules made thereunder will be adopted for arriving at the depreciated value of such second hand capital goods intended to be moved into the Zone. It should be ensured by the Unit that the sum total of S. No. 5 & 6 of the enclosed annexure shall not exceed 20% of the sum total of S. Nos 3 & 4 of the annexure at any given point of time. However, the units can shift used/second hand capital goods valuing more than 20% in which case they will not be entitled to benefits under the Income Tax Act. For each transfer of used/second hand capital goods from the DTA into the zone the unit has to compute the values as mentioned above and indicate at the relevant S. Nos of the enclosed annexure. The details of such procurement of used/second hand Capital goods from DTA (including from an EOU, EHTP/STP/BTP unit) should be clearly mentioned in the Annual Performance Report submitted by the unit.

(ii)

(iii)

(iv)

(v)

(vi)

The limitation of 20% of the value of used/capital goods Capital goods that can move into the zone would not be applicable in respect of capital goods moved to DTA under Rule 50 of the SEZ Rules, 2006. These instructions are issued in supersession of Instruction No. 8 issued vide this Departments O.M. No. F1/6/2006-SEZ dated 12th October 2007. Please acknowledge the receipt of this communication the contents of which may please be brought to the notice of all concerned including Zones, Units and Members of Approval Committee.

4.

5.

(T. Srinidhi) Director Telefax: 23063265

ANNEXURE Application for procurement of used capital goods from DTA (including from an EOU/EHTP/STP/BTP unit) (1) Name of the unit : (2) Date of Commencement of : Commercial production (3) Value of the installed Capital goods : (Imported) (New & used/second hand) (4) Value of the installed Capital goods : (Procured from DTA) (New) (5) Value of the installed Capital goods : (Procured from DTA) (used/second hand) (6) Value of the Capital Goods : proposed to be procured from DTA - (used/second hand) We hereby declare that this procurement of the above mentioned second hand capital goods is strictly in terms of the provisions of sub-section (4) of Section 10AA read with explanation 1 & 2 to sub-section (4) of section 10AA read with explanation 1 & 2 to subsection (3) of section 80 IA of the Income Tax Act 1981. SIGNATURE OF THE UNIT

AUTHORISED SIGNATORY

ANNEXURE V

Instruction No.12
F.No.C.3/10/2009-SEZ Government of India Ministry of Commerce and Industry Department of Commerce Udyog Bhawan, New Delhi Dated the 1st June , 2009 To All Development Commissioners. Subject: Clarification on applicability of Narcotics Drug and Psychotropic Substances Act reg.. Sir, I am directed to say that Clarifications have been sought from this Department on the applicability of Narcotics Drug and Psychotropic Substances Act in SEZs. 2. The matter was considered in this Department and it is clarified as follows: Under the Narcotics Drug and Psychotropic Substances Act, export from India means to take out to a place outside India and to import to India means to bring into India from a place outside India. The DTA and SEZ both being in India itself, export authorization and import authorization from Central Bureau of Narcotics is required only for movement of Active Pharmaceutical Ingredients (API) goods from SEZ to out of India, from out of India into SEZ and for sale in DTA.

Yours faithfully

(R K Pandey) Under Secretary to the Government of India

Copy to : DG, EPCES