Legal Service India - Grab the EOU advantage: Conversion of existing manufacturing units into export oriented units (EOUís)
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Grab the EOU advantage: Conversion of existing manufacturing units into export oriented units (EOUís)

Written by:  Rohan Bagai - final year law student at Amity Law School
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Export Oriented Unit Scheme

The Export Oriented Unit (EOU) scheme was introduced in the year 1980 vide Ministry of Commerce resolution dated 31st December 1980. The purpose of the scheme was basically to boost exports by creating additional production capacity. It was introduced as a complementary scheme to the Free Trade Zones/ Export Processing Zone (EPZ) Scheme introduced in the sixties, which had not attracted many units due to locational restrictions. The exporters showed willingness to set up units with long term commitment to exports under Customs bond operations provided they had the freedom to locate them in places of their choice and given most of the benefits as provided to units set up in the Zones.

Over the years the Scheme has undergone various changes and its scope also expanded substantially as compared to the initial Scheme, which was basically for manufacturing sector with certain minimum value addition in terms of export earnings. The EOU scheme is, at present, governed by the provisions of Chapter 9 of the Export and Import (EXIM) Policy, (1997-2002) and Chapter 9 of the Handbook of Procedures, Volume-I (HOP). Under this scheme, the units undertaking to export their entire production of goods are allowed to be set up. These units may be engaged in the manufacture, services, development of software, trading, repair, remaking, reconditioning, re-engineering including making of gold/silver/platinum jewellery and articles thereof, agriculture including agro-processing, aquaculture, animal husbandry, bio-technology, floriculture, horticulture, pisciculture, viticulture, poultry, sericulture and granites. The EOUís can export all products except prohibited items of exports in ITC (HS).

Under the EOU scheme, the units are allowed to import or procure locally without payment of duty all types of goods including capital goods, raw materials, components, packing materials, consumables, spares and various other specified categories of equipments including material handling equipments, required for export production or in connection therewith. Even the goods appearing in the restricted list of the EXIM Policy (1997-02) are permitted to be imported. However, the goods prohibited for import are not permitted. In the case of EOUís engaged in agriculture, animal husbandry, floriculture, horticulture, pisciculture, viticulture, poultry, sericulture and granite quarrying, only specified categories of goods mentioned in the relevant notification have been permitted to be imported duty-free.

The Customs exemption notifications for import & related Central Excise exemption notification when the goods are procured from local manufacturing units, prescribe several conditions to be fulfilled by the beneficiaries keeping in view the objective of the Scheme and to prevent abuse. Working in Customs Bond is one of the essential prerequisite-there being few exceptions. They also provide various flexibilities in the matter of taking out the materials for jobwork, inter-unit transfer. The EOUís are required to achieve the minimum NFEP (Net Foreign Exchange Earning as a Percentage of Exports) and the minimum EP (Export Performance) as per the provisions of EXIM Policy. The NFEP and EP varies from sector to sector. As for instance, the units with investment in plant and machinery of Rs.5 crore and above are required to achieve positive NFEP and export US$ 3.5 million or 3 times the CIF value of imported capital goods, whichever is higher, for 5 years. For electronics hardware sector, minimum NFEP has to be Ďpositiveí and minimum EP for 5 years is US$ 1 million or 3 times the CIF value of imported capital goods, whichever is higher. NFEP is calculated cumulatively for a period of 5 years from the commencement of commercial production according to a prescribed formula.

The EOUís are licensed to manufacture goods within the bonded premises for the purpose of export. As per the policy, the period of bonding is initially for five years, which is extendable to another five years by the Development Commissioner. On completion of the bonding period, it is for the unit to decide whether to continue under, or to opt out, of the scheme. The imported capital goods are allowed to be warehoused for a period of 5 years. For other goods, the warehousing period is one year, which can be extended further by the Commissioner / Chief Commissioner of Customs. On an application being made by the unit, extension of the time limit is granted in all cases unless there is malafide and diversion of duty free materials. As on 31-3-2001, there are about 1,350 EOUís functioning in the country.

Administrative Machinery

The EOUís basically function under the administrative control of the Development Commissioner of the Export Processing Zones, whose jurisdiction has been notified by the Ministry of Commerce. In all, there are seven Development Commissioners at Mumbai, Gandhidham, Chennai, Cochin, Vizag, Noida and Calcutta, who supervise the functioning of the EOUís and eight Export Processing Zones/Special Economic Zones in the country. The Development Commissioners of the EPZís /SEZís are the Licensing Authorities in respect of units under the EOU Scheme, as per specified territorial jurisdiction as indicated in the Export and Import Policy.

The provisions of the Customs and Central Excise law in respect of the EOUís are administered by the Commissioners of Customs and Central Excise, who work under the control of Central Board of Excise & Customs. The work relating to EOUís is handled by the staff of jurisdictional Commissioner of Central Excise. However, in the case of EOUs located in port cities/towns or within the municipal limits of port cities/towns, the work is handled by jurisdictional Commissioner of Customs, Seaport.

Application Procedure
Paragraph 6.7 of the Exim Policy, (2002-2007), deals with the application for the approval of units under the EOU Scheme. It is provided that the project applications for EOU units except for service sector units satisfying the conditions mentioned in the Handbook of Procedures may be given approval within 15 days by the Unit Approval Committee. In all other cases, the approvals may be granted by the Board of Approvals (BOA) set up for that purpose.

Further, the Trade Policy announced on 13-8-1991 included a new package for 100% EOU units. As a result, along with the removal of the industrial licensing requirement for larger segment of industry, a route of automatic approval was introduced for the EOUís falling within a defined parameter. Such proposals were to be cleared within 2 weeks.

As per the present policy and procedure, in case the unit is proposed as an EOU, 3 copies of the application in the prescribed proforma are to be submitted to the Development Commissioner concerned.

Completed application entitled ĎApplication form for EOUísí must be accompanied by a crossed bank draft for Rs.5000/-. The receipt of the application will be acknowledged by the Development Commissioner and a reference number will be given.

If the application satisfies the specific conditions, the Letter of Approval (LOA)/ Letters of Permission (LOP) shall be issued within 15 days by the Development Commissioner. This shall specify the conditions/parameters and also obligations and conditions under which he unit shall work.

The LOP shall specify the items of manufacture/service activity; annual capacity; projected annual export performance for five years in dollar terms; Net Foreign Exchange earnings (NFE); limitation and such other matter as necessary.

The LOP shall be construed as a license for all purposes under the scheme, including for the procurement of raw materials and consumables either directly or through designated canalizing agency.

The LOP shall be valid for 3 years from the date of commencement of production. This period is extendable for a period of further 3 years at a time by the Development Commissioner.

Benefits for the unit once registered as an EOU

The eligible EOU unit may import without payment of duty all types of goods required by it (other than prohibited goods in the ITC (HS)) for manufacture, production, processing etc. (Customs Duty Exemption)

In a parallel to the customs duty exemption notifications enabling the EOUís to import goods for their use without payment of customs duty, there are central excise duty exemptions which exempt the goods procured by the EOUís from domestic manufacturers.

Income Tax concessions

EOU units can avail the exemption from payment of corporate income tax in terms of Section 10 B of the Income Tax Act, 1961. Under the provisions of the said section, the entire profits of the EOU would be eligible for a deduction for a 10-year period from the date of start of commercial production. The deduction is subject to an overall expiry date of March 31, 2009.

The CBDT in its Circular no.1 dated January 6, 2005 has clarified that in the case of a unit (engaged in domestic sales), which converts into an EOU, the unit can avail the deduction under section 10B of the Act from the year from which it receives the EOU approval. Given the fact that the CBDT circular recognizes a conversion, it should be possible to claim an income tax exemption post conversion. However, given the provisions of the Act and the circular, any unit which has been set up before April 1, 1999 would not be eligible for the same tax deduction, irrespective of when the conversion happens.

The concessions are subject to the fulfillment of the following conditions:
# The unit should be engaged in manufacturing.
# The unit is not formed by splitting up or reconstruction of an existing business.
# The unit should not be formed by the transfer to a new business of machinery or plant previously used for any purpose.
# The sale proceeds in foreign exchange must be received within the period of 6 months or such extended period as may be allowed at the end of the previous period.
# With a few exceptions there should be no reorganization of the business and ownership or beneficial interest in the unit must not be transferred.
# The profits from exports shall be the amount, which bears the same proportion to the profits of the unit as the export turnover bears to the total turnover of the unit.
# A report of the Chartered Accountant in the prescribed form 56 F or 56 G must be submitted along with the return of the income.

Conversion of DTA unit into EOU

Domestic Tariff Area (DTA) signifies an area within India, which is beyond the Special Economic Zones (SEZís).
An existing DTA (Domestic Tariff Area) unit may apply for conversion into an EOU unit but no concession in duties and taxes would be applicable under the scheme for the plant, machinery and equipment already installed.

Guidelines for conversion:
There would be no concessions in or refund of duty (customs, excise etc.) and taxes on machinery, plant and equipment already installed in the DTA at the time of its conversion into an EOU.

On conversion into an EOU the export obligation under the EPCG scheme, if any, will be met concurrently from the exports by the unit as an EOU. In this case there shall be no refund of duty paid by the unit under EPCG scheme. If the unit is having outstanding export commitment in proportion to the quantum of duty free material actually utilized for production and be permitted to carry forward the unutilized material, if nay under the EOU scheme.

If the industrial unit is both operating as a domestic unit as well as an EOU unit, it shall have two distinct entities with separate accounts. It is however, not necessary for it to be a separate legal entity, but it should be possible to distinguish the imports and the exports or supplies effected by the EOU unit from those made by the other units of the enterprise.

In event of partial conversion of a DTA unit into an EOU unit and vica versa after necessary approval of the competent authority, the EOU as well as the DTA unit continue to operate from the same or adjacent premises.

The author can be reached at: rohanbagai@legalserviceindia.com / Print This Article

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