Rule 18 of Customs and Central Excise Duties Drawback Rules, 2017 (In short Drawback Rules,2017) read with Section 75 of Customs Act, 1962 deals with recovery of amount of drawback where export proceeds have not been realized. The Drawback Rule, 2017 has been notified vide Notification No 88/2017–Cus (N.T.) dated 21,09.2017 and replaced erstwhile Drawback Rules,1995.
It is commonly known fact that export of goods brings remittance or foreign exchange into the country, so it is encouraged and incentive is given to exporter by the Government to neutralize the duty incidence incurred during export of goods. Drawback is one of the way to incentivized the export and based on the principle that home grown taxes will not allowed to be exported, so it is paid to the exporter immediately or within few days after the export is effected and Export General Manifest is filed. However payment of drawback is linked with realization of export/sale proceeds, which is allowed to be received within period of nine months as mandated by provisions of FEMA,1999 and rules made thereunder. This means that between payment of drawback and proof of realization has ample time gap. This gives the chance of undue advantage.
Generally, export proceeds is realized by the exporter but sometimes they failed to realize due to various reasons which led to recovery of drawback thereof. On a few occasions, it is due to unavoidable reasons which is not in the control of exporter. But many a times, non-realization is deliberate and intentional.
Such reasons are loss of goods during shipment due to force majeure. Non-realization of sale/export proceeds also happens on account of war or internal breach of security. These are bonafide reasons which is not in the hands of exporter. For such exigency arrangement has been made in Rule 18(5) of Drawback Rules, 2017 which will be discussed in detail later in this article itself.
Non -Realization of Export Proceeds willfully/deliberately by the Exporter.
This happens in the case of unscrupulous exporter, who designed their entire export in such a manner, wherein realization of export proceeds was never in their scheme of things. It is mostly done by fly by night operators, who obtain their Importer- Exporter Code (IEC) from DGFT by providing fake/bogus IEC address. The bogus IEC address allow them to run away from the clutches of law when, investigation/ enquiry is initiated on commission of offence/export fraud.
Before proceeding further to discuss Rule 18 of the Drawback Rules, 2017, it is expedient to put some light on legislative genesis of drawback under Customs and Central Excise Duties Drawback Rules, 2017. Section 75 is the parent section of drawback and under Central Excise, Section 37 deals with it, which empowers to make rules.
Relevant extracts of the Section 75 of the Customs Act lays down as under;
Provided further that where any drawback has been allowed on any goods under this sub-section and the sale proceeds in respect of such goods are not received by or on behalf of the exporter in India within the time allowed under the [Foreign Exchange Management Act, 1999 (42 of 1999)], such drawback shall [except under such circumstances or such conditions as the Central Government may, by rules, specify,] be deemed never to have been allowed and the Central Government may, by rules made under sub-section (2), specify the procedure for the recovery or adjustment of the amount of such drawback.
Bare reading of the said Section indicates that in case of non-realization of sale/export proceeds within stipulated time period, it is deemed that the drawback has never been paid to the exporter and thus it warrants recovery of the same under the Drawback Rules, 2017. It is safe to aver that Section 75 is the substantive provision, wherefrom drawback has flown.
RULE 18. Recovery of amount of Drawback where export proceeds not realised. –
(1) Where an amount of drawback has been paid to an exporter or a person authorised by him (hereinafter referred to as the claimant) but the sale proceeds in respect of such export goods have not been realised by or on behalf of the exporter in India within the period allowed under the Foreign Exchange Management Act, 1999 (42 of 1999), including any extension of such period, such drawback shall, except under circumstances or conditions specified in sub-rule (5), be recovered in the manner specified below :
Provided that the time-limit referred to in this sub-rule shall not be applicable to the goods exported from the Domestic Tariff Area to a special economic zone.
(2) If the exporter fails to produce evidence in respect of realisation of export proceeds within the period allowed under the Foreign Exchange Management Act, 1999, or any extension of the said period by the Reserve Bank of India, the Assistant Commissioner of Customs or the Deputy Commissioner of Customs, as the case may be, shall cause notice to be issued to the exporter for production of evidence of realisation of export proceeds within a period of thirty days from the date of receipt of such notice and where the exporter does not produce such evidence within the said period of thirty days, the Assistant Commissioner of Customs or Deputy Commissioner of Customs, as the case may be, shall pass an order to recover the amount of drawback paid to the claimant and the exporter shall repay the amount so demanded within thirty days of the receipt of the said order :
Provided that where a part of the sale proceeds has been realised, the amount of drawback to be recovered shall be the amount equal to that portion of the amount of drawback paid which bears the same proportion as the portion of the sale proceeds not realised bears to the total amount of sale proceeds.
(3) Where the exporter fails to repay the amount under sub-rule (2) within said period of thirty days referred to in sub-rule (2), it shall be recovered in the manner laid down in rule 17.
(4) Where the sale proceeds are realised by the exporter after the amount of drawback has been recovered from him under sub-rule (2) or sub-rule (3) and the exporter produces evidence about such realisation within a period of three months from the date of realisation of sale proceeds, the amount of drawback so recovered shall be repaid by the Assistant Commissioner of Customs or Deputy Commissioner of Customs, as the case may be, to the claimant provided the sale proceeds have been realised within the period permitted by the Reserve Bank of India :
Provided that –
(i) the Principal Commissioner of Customs or Commissioner of Customs, as the case may be, may extend the aforesaid period of three months by a period of nine months provided the sale proceeds have been realised within the period permitted by the Reserve Bank of India;
(ii) an application fee equivalent to 1% of the FOB value of exports or one thousand rupees whichever is less, shall be payable for applying for grant of extension by the Principal Commissioner of Customs or Commissioner of Customs, as the case may be.
(5) Where sale proceeds are not realised by an exporter within the period allowed under the Foreign Exchange Management Act, 1999 (42 of 1999), but such non-realisation of sale proceeds is compensated by the Export Credit Guarantee Corporation of India Ltd. under an insurance cover and the Reserve Bank of India writes off the requirement of realisation of sale proceeds on merits and the exporter produces a certificate from the concerned Foreign Mission of India about the fact of non-recovery of sale proceeds from the buyer, the amount of drawback paid to the exporter or the claimant shall not be recovered.
Rule 18 has replaced the erstwhile Rule 16A. Bare perusal of the Rule 18 pointed out that it is procedural in nature.
Reading of the above provisions revealed that sale proceeds has to be realized in prescribed period allowed by RBI under FEMA, 1999 or under permitted extended period . It implies that receipt of remittance into India is completely controlled by RBI. Similarly going out of proceeds out of India is also controlled by RBI.
Profound reading also gives the notion that it is procedural in nature and it provides mechanism to recover the drawback when not realized. It also says that if drawback is not realized in permitted or extended permitted period Notice has to be issued for production of evidence/proof for realization of sale proceeds and in case of failure to produce such proof within 30 days of receipt of Notice, an order will be passed by Assistant/ Deputy Commissioner of Customs for recovery of such amount and exporter shall pay the amount which is demanded within 30 days of the receipt of the said order. Rule 18(2).
Part Realization of sale proceeds – In such case proportionate drawback will be recovered which is not realized out of total paid drawback. (Proviso to Rule 18(2)
Realization will be on similar line of Section 142(1) of the Customs Act- If exporter fails to pay within stipulated period it will be realized as confirmed demand due to the Government. It means that in case of non-realization copy of Order(OIO) must be marked to Revenue Recovery Cell of Customs House.
Realization of sale proceeds after recovery of drawback amount
There may be the situation, when drawback has been recovered by the Department in prescribed manner and after that exporter receives the sale/export proceeds under the permitted period by RBI, so in case of production of evidence of realization of remittance by the exporter within three months of date of realization of sale proceeds , the recovered amount is required to be paid to exporter.– Rule 18(4).
Prescribed Period of Realization
For the export of goods, period of realization of sale proceeds is nine months in terms of Rule 9 of Foreign Exchange Management (Export of Goods and Services ) Regulation, 2015. Relevant extracts of the said Rule is as under;
REGULATION 9. Period within which export value of goods/software/services to be realized. — (1) The amount representing the full export value of goods/software/services exported shall be realised and repatriated to India within nine months from the date of export, provided
(a) that where the goods are exported to a warehouse established outside India with the permission of the Reserve Bank, the amount representing the full export value of goods exported shall be paid to the authorised dealer as soon as it is realised and in any case within fifteen months from the date of shipment of goods;
(b) further that the Reserve Bank, or subject to the directions issued by that Bank in this behalf, the authorised dealer may, for a sufficient and reasonable cause shown, extend the period of nine months or fifteen months, as the case may be.
It also says that said period of nine months can be extended by RBI on sufficient grounds
Action for recovery to be initiated for non-realization of export proceeds.
In case of non- realization of the exports proceeds/remittance within the time allowed under the Foreign Exchange Management Act (FEMA),1999 and regulation made thereunder wherein amount of drawback has already been paid to an exporter, action for recovery of drawback amount is initiated in terms of the provisions of Section 75(1) of the Customs Act, 1962 read with Rule 18 ( Earlier Rule 16A) of the Customs, Central Excise Duties and Service Tax Drawback Rules, 1995. Notice for demand of drawback paid is issued by the Assistant/Deputy Commissioner of Customs to the exporter for production of evidence of realization of export proceeds, failing which an order shall be passed to recover the amount of drawback paid to the claimant/exporter, if the exporter fails to produce evidence in respect of realization of export proceeds, within the period allowed under the FEMA, 1999 or as extended by the Reserve Bank of India (RBI).
Evidence of Realization of Export Proceeds Submitted by the Exporter
BRC, e-BRC, Negative statement from AD (Bank)/Statutory Auditor Certificate regarding proof of realization is submitted to the customs authority by the exporter. In terms of Board Circular 05/2009 dated 02.02.2009, six monthly proof of realization is submitted. But this is in vogue in respect of S/Bills having LEO date 31.03.2014.
Implementation of RBI-BRC module vide P.N no 11/2017 dated 30.01.2017 issued by JNCH
In terms of the Instructions contained in JS Drawback’s F. No.609/59/2012-DBK dated 03.06.2015, Instruction dated 27.11.2015 and Instruction vide F.No.609/14/2014-DBK dated 30.06.2016, whereby exporters were advised not to submit 6 monthly Negative Statement from Authorized Dealers/Chartered Accountants showing the proof of realization of export proceeds (BRC) manually to BRC Section, for shipping bills with LEO dates from 0l.04.2014 onwards, a P.N bearing no 11/2017 dated 30.01.2017 was issued by JNCH for the implementation of RBI-BRC module.
When to start recovery of drawback amount
If the BRC /Negative statement or AD (bank)/Statutory Auditor certificate by the exporter is not submitted in period prescribed by FEMA, 1999, drawback recovery proceedings is initiated.
Limitation in issuance
Statutory limitation has not been prescribed for recovery of drawback in case of non-realization of export proceeds, but it should be under reasonable time limit, delay and latches may set aside the proceedings of recovery.
Surinder Singh V/s U.O.I- An Important Judgement
An important judgment of the Hon’ble Supreme Court of India, in the case of Surinder Singh v. Union of India [2016 (340) E.L.T. 97 (S.C.)
The issue was pertaining to non-realization of export proceeds of S/Bills of 1991-93. The contention of the appellant was that Drawback Rule,1995 only came into force in 1995 so no retrospective recovery is permitted under Rule 16A of Drawback Rule, 1995. The SC held that customs portion can be recovered in terms of second proviso to Section 75, as it is substantive law as permit to recover the drawback in spite of absence of Drawback Rule, 1995 as it is only procedural in nature, however no recovery of Central Excise portion, as there was no such inbuilt mechanism in Central Excise Act.
Rule 18(5) of Drawback Rules, 2017
Now the next issue of discussion is recovery of drawback amount, wherein claim have been settled by ECGC (Export Credit Guarantee Corporation) in the case of non- realization of remittance/exports proceeds under Rule 18(5) of Drawback Rules, 2017 subject to compliance of essential ingredients of Rule 18(5) .
Under Drawback Rules 1995, such recovery of drawback amount was dealt by Rule 16A(5) of Drawback Rules 1995. The analysis of relevant provisions regarding ECGC settlement claim under Drawback Rules,2017 and allied acts are as under;
It says that recovery would be subject to not meeting the conditions set out in Rule 18(5).
Reading of said Rule 18(5) says that recovery from exporter/claimant shall not be done if
- the non-realization of sale proceeds is compensated by ECGC,
- write off from RBI and
- productions of a certificate from the concerned Foreign Mission of India about the fact of non-recovery of sale proceeds from the buyer.
It means that if the above three conditions are satisfied there would not be any recovery of drawback which has already been paid to the exporter. These three conditions combined together result into non-recovery, otherwise recovery is envisaged by the lawmakers.
The said sub-rule 16(A)(5), now rule 18(5) came into force by insertion of Notification no 30/2011 –Cus (NT) dated 11.04.2011 and the same reads as under;
Where sale proceeds are not realized by an exporter within the period allowed under the Foreign Exchange Management Act, 1999(42 of 1999) but non-realization of sale proceeds is compensated by the Export Credit Guarantee Corporation of India Ltd under an insurance cover and the Reserve Bank of India writes off the requirement of sale proceeds on merit and the exporter produces a certificate from the concerned Foreign Mission of India about the fact of non-recovery of sale proceeds from the buyer, the amount of drawback paid the exporter or the claimant shall not be recovered.
Circular 07/2010 dated 23.03.2010
In this context, related Board Circular 07/2010 dated 23.03.2010, is also required to be examined which says that drawback would not be payable in case of non-realization of exports proceeds in accordance with the provisions of FEMA,1999, even the claim has been settled by ECGC or realization waived by RBI.
But the said Circular would not prevail over Rule 16A(5) made by the Central Government in 2011. Therefore, it is settled law that for the non-recovery along with compensation made by ECGC, write off from RBI and a certificate from the concerned Foreign Mission of India are essential requirements. Not satisfying any of the essential ingredients will set the proceedings in motion for recovery.
In other words, it can be construed that when sale proceeds is compensated by the Export Credit Guarantee Corporation of India Ltd under an insurance cover and RBI has not write off the said non-realization and exporter is not having a certificate from the concerned Foreign Mission of India about the fact of non-recovery of sale proceeds from the buyer, then in such case recovery proceedings will set in motion.
As the matter pertains to realization of exports proceeds into country, similar provisions laid down by RBI Master Circular no RBI/2015-16/83- Master Circular No.14/2015-16 on Export of Goods and Services issued on 01.07.2015 in the matter of ECGC settlement claim which reads as under;
RBI Provisions related to ECGC
Para C.20- Write off in cases of Payment of Claims by ECGC and private insurance companies regulated by Insurance Regulatory and Development Authority (IRDA)
(i) AD Category – I banks shall, on an application received from the exporter supported by documentary evidence from the ECGC and private insurance companies regulated by IRDA confirming that the claim in respect of the outstanding bills has been settled by them, write off the relative export bills and delete them from the XOS statement.
(ii) Such write-off will not be restricted to the limit of 10 per cent indicated above.
(iii) Surrender of incentives, if any, in such cases will be as provided in the Foreign Trade Policy.
(iv) The claims settled in rupees by ECGC and private insurance companies regulated by IRDA should not be construed as export realization in foreign exchange.
Para- C.21- Write-off – Relaxation
As announced in the Foreign Trade Policy (FTP), 2015-20,realization of export proceeds shall not be insisted upon under any of the Export Promotion Schemes under the said FTP, subject to the following conditions:
(a) The write off on the basis of merits is allowed by the Reserve Bank or by AD Category – I bank on behalf of the Reserve Bank, as per extant guidelines;
(b) The exporter produces a certificate from the Foreign Mission of India concerned, about the fact of non-recovery of export proceeds from the buyer; and
(c) This would not be applicable in self write off cases.
Plain reading of the aforesaid provisions revealed that non recovery can only be permitted by RBI and on the production of a certificate from the Foreign Mission of India concerned, about the fact of non-recovery of export proceeds from the buyer. Provisions of Drawback Rules , 2017 and RBI are in agreement.
Para 2.54(c) of FTP
However, provisions of FTP 2015-16 enumerated at Para 2.54(c) of FTP is not in harmony of the provisions of Drawback Rules ,2017 and RBI provisions which reads as under;
“The payment realized through insurance cover, would be eligible for benefits under FTP.
Combined reading of the all the relevant provisions revealed that though the FTP benefit would be available to exporters in case of settlement of claim by ECGC, but drawback benefit which is administered by Finance Ministry will not be available to such exporters in case of ECGC settlement and not meeting other two conditions.
In view of the above, it is cogent that under the provisions of Drawback Rules,2017 in case of settlement of claim by ECGC, exporter has to surrender the duty drawback and applicable interest if any, if other two conditions are not met, set out above in Rule 18(5).
Conclusion– Rule 18 of Drawback Rules read with Section 75 of the Customs Act, 1962 deals with the recovery of drawback amount in case of non-realization of export proceeds. Rule 18 is procedural in nature and it has enumerated mechanism to make recovery. This rule is set in motion when export/sale proceeds or remittance is not received in stipulated period of nine (09) months or under extended period by RBI as mandated under FEMA, 1991 and rules made thereunder. The mechanism involves issuance of notice for drawback recovery and in case of submission of proof, the demand is dropped in OIO otherwise failing to produce evidence in stipulated period , recovery is made as confirmed demand in terms of Section 142 of the Act. Under Rule 18(5) , if the conditions are met , recovery is not initiated in spite of payment of drawback.
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