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Standard Input Output Norms for EOU units

[Submitted by Mr. Girish D.,
Consultant in indirect taxes,
Bangalore, Karnataka]

June 3, 2008

In this article an attempt is being made to provide an insight on the law and procedures relating to Standard Input Output Norms (SION) prescribed for the EOU units. The article discusses the aspects such as the meaning, nature and scope of the SION, legal provisions relating to the same under Foreign Trade Policy, central excise and customs law, observance of SION by the job workers/sub-contractors, provisions where inputs are consumed in excess of the SION, documentation and accounting aspects, the methodology adopted for fixing the SION by the Government (Norms Committee/Board of Approvals) etc.

Introduction

Under Export Oriented Undertakings (EOU) Scheme, inputs are allowed to be procured or imported without payment of duty, subject to the condition that such inputs are used predominantly for the production of goods to be exported without payment of duty, with allowed clearance in domestic tariff area by payment of the applicable duties. This has necessitated the Government to closely monitor the consumption of inputs in the production process of the EOU units. With this intention, the Government through the Ministry of Commerce has prescribed a detailed guideline for determining the ratio of inputs to its outputs and also on other side the Ministry of Finance which is taking care of the revenue aspect of the Government, has also insisted for the compliance of said input-output norms.

Standard Input Output Norms (SION) is introduced with a view to facilitate the determination of the quantum of inputs which can be used or are required in the manufacture of different resultant products.

Provisions under Foreign Trade Policy

  1. As per para 6.8 (e) of the Foreign Trade Policy, only in the following cases compliance with the SION provisions is required;
    1. In case of sale of scrap/waste/remnants in DTA; and
    2. Such scrap/waste/remnants shall be those which arises out of the production process or in connection with production process; and
    3. Where the EOU intends to sale such scrap etc., by payment of concessional rate of duties; and
    4. Where such sale of the scrap etc., is within the limits of 50% of FOB value of exports.
     
  2. Such sales of scrap / waste / remnants within the SION norms shall not be subject to achievement of export obligation of the EOU unit (ie., positive NFE).
     
  3. Even though the Foreign Trade Policy prescribes SION only for the aforesaid case, para 6.7 (e) of the Handbook of Procedures to the Foreign Trade Policy, prescribes that the consumption of inputs by the EOU / EHTP / STP / BTP unit shall be based on the Standard Input Output Norms (SION).
     
  4. The following procedure is prescribed under the Handbook of Procedures in this regard,
    1. Where no SION have been notified, generation of waste, scrap and remnants upto 2% of input quantity shall be allowed;
       
    2. Where additional items other than those given in SION are required as inputs or where generation of waste, scrap and remnants is beyond 2% of input quantity, the following procedure shall be followed,
      1. The EOU unit has to give a self-declaration about the actual consumption norms of the inputs.
      2. The EOU shall also provide an undertaking to adjust self-declared / ad-hoc norms in accordance with norms as finally fixed by Norms Committee in DGFT;
      3. Within three months from the date of receipt of the self-declared norms and the undertaking, the consumption of inputs shall be allowed by the jurisdictional Development Commissioner, by prescribing the ad-hoc norms.
      4. The ad-hoc norms fixed shall be finalised by the Norms Committee within six months.
      5. On finalization of the ad-hoc norms by the Norms Committee, the EOU unit shall comply with the same.
      6. In case of utilization of a large number of inputs, wide variation in quantum of consumption of inputs or such other factors which render such fixation of SION difficult in the case of a particular unit, the Norms Committee may refer the case to the Board of Approval for a decision.
      7. Thereafter the Board of Approval, in consultation with Norms Committee in DGFT, will decide on a case to case basis.
         
Provisions under the customs and central excise law

Notification No. 22/2003-C.E and 52/2003-Cus, both dated 31-03-2003 governs the SION provisions for an EOU unit. The following are the law and procedure prescribed thereunder.

  1. The goods other than capital goods shall be used in connection with the production or packaging of goods in accordance with SION for export out of India or cleared for home consumption.
     
  2. Such consumption of inputs shall be within a period of three years from the date of import or procurement thereof or within such extended period as may be allowed by the proper officer.
     
  3. Wherever the SION norms are not fixed or where additional items other than those given in SION are required as inputs or where generation of waste, scrap and remnants is beyond 2% of input quantity, the procedure specified in para 4 above shall be followed.

Having discussed about the legal provisions relating to SION for the EOU units, we shall now examine some of the practical aspects.

Cases where compliance with SION is not required

  1. On a combined reading and interpretation of the provisions of Foreign Trade Policy on the one hand and the central excise/customs on the other hand, it can be stated that, in the following cases compliance with the SION is required,
    1. In case of all capital goods and its spares
    2. In case of all inputs which are procured/imported with payment of duty
    3. In case of all inputs which are procured from the vendors who are not registered under central excise.
    4. In case of all inputs which are procured from the dealers, since inputs cannot be procured from the dealers by issuing them the CT-3 Certificates.
    5. In case of all non-excisable inputs
    6. In case of all consumables which are consumed in negligible minor quantities.

Compliance of the SION provisions by the job workers/sub-contractors

  1. Compliance with the SION provisions is basically the obligation of the EOU unit. However if the EOU unit sub-contracts the production, then even the job worker/sub-contractor shall comply with the SION norms. For this purpose EOU unit may specify in the job work/sub-contract agreement about the allowed SION norms for each job worker, depending upon the nature of process undertaken by them.
     
  2. This is because of the concept that, in case the job workers consumes the inputs in excess of the prescribed SION, the EOU unit may find it difficult to consume such inputs within the SION norms, after getting back such inputs from the job workers. 

Consequences if the inputs are consumed in excess of the SION

  1. In cases where the inputs are consumed in excess of the SION norms, then in terms of Notification No. 22/2003-C.E and 52/2003-Cus, both dated 31-03-2003, the duties as applicable at the time of procurement/import of the inputs shall be paid.
     
  2. That means, the applicable duties shall be paid on the procurement or import cost of the inputs which are consumed in excess of the SION.
     
  3. This follows that even if such excess consumed inputs are removed as scrap, then the applicable duties shall be paid on the procurement or import cost of the inputs contained in such scrap and not on the transaction value of the scrap.
     
  4. The applicable duties shall be paid on the procurement or import cost of the inputs which are consumed in excess of the SION, even if such inputs are scrapped during the production and subsequently destroyed with the permission of the proper officer.
     
  5. It may be noted that scrap can be destroyed without payment of duty under the permission of the proper officer, only if such scrap is within the SION. Therefore the applicable duties will have to be paid on the procurement or import cost of the inputs contained in the scrap generated in excess of the SION, in any case.

Notes on procedure for computation of the SION

  1. In many cases, the resultant products and the inputs required have been described in generic terms. The EOU unit shall, therefore, ensure that the goods sought for import and actually imported are those, which are used/required in the export product.
     
  2. The items allowed for import shall be co-related with the description of the export product in the Shipping Bill by the EOU unit to be authenticated by Customs. For example, if the input allowed in the norms is 'relevant fabrics', only the specific types of fabric i.e. polyester or nylon etc. used in the export product shall be allowed. Similarly, if the norms provide for import of BOPP film against export of self adhesive tape, only BOPP film required for manufacture of Self Adhesive Tape will be allowed and not those, which are required as packing material.
     
  3. Wherever a specific norm has been provided, the same will prevail over the generic norm laid down, if any. If the application is based on the generic norm, specific reason for applying under the generic norm should be clearly stated.
     
  4. In some norms, two or more alternative inputs have been permitted for import for the manufacture of a specific resultant product. In such cases, the EOU unit shall be required to opt for only one alternative and the SION norms shall be prescribed accordingly.
     
  5. In case, more than one alternative input is required, the same could be allowed based on the specific declaration from the EOU unit about their requirement in the resultant product, at the time of filing application and the SION will be prescribed indicating the specific quantity of each input.
     
  6. All the inputs allowed for procurement or imports without payment of duty are required to be indicated in terms of quantity. Where an input has been permitted in the norms or specifically allowed for import in terms of value as a limiting factor only, such items shall be indicated in the licence in terms of value only. However, if quantity and value of inputs is a limiting factor, the same shall be applicable.
     
  7. In case of norms wherein the inputs have been allowed based on a percentage content of inputs in the export product with some wastage or on net to net basis or on net plus wastage basis, the EOU unit shall account for the quantity(s) allowed for import minus the wastage permitted, if any, in the product exported. In such cases, the net quantity shall be reflected in the export product description and also in the Shipping Bill by the EOU unit duly endorsed by the Customs Authorities.
     
  8. Unless specified, otherwise, the import of components wherever allowed shall be permitted on net to net basis i.e., without any wastage, with accountability clause and the type, technical specifications (including part No., if any), etc., of the components sought for import should conform to those utilized in the manufacture of the resultant product, which should be reflected in export documents (Shipping Bills) also.
     
  9. An EOU unit need not apply for all the inputs indicated in the norms, provided all other conditions of the Foreign Trade Policy and the Handbook of Procedure are fulfilled.
     
  10. In respect of certain norms, the validity of the same is for a limited period. For regularization/refixation of the same, the EOU unit shall file application in the prescribed format with all the requisite details, including production and consumption data atleast sixty days in advance of expiry of such validity. Unless the validity period is extended, no imports will be allowed based on these norms. However, the EOU unit shall be entitled for imports on self-declaration basis.
     
  11. In case where the input(s) required for the manufacture of the resultant product prescribes alternative items, permission can be given for export of the said input(s) allowing the alternative items as inputs i.e. import items in the same ratio as prescribed in the said input(s).  

Documentation and accounting

  1. No taxation law can be better complied without maintaining the proper documents and accounting records. This statement has to be stressed in case of an EOU unit, especially while dealing with matters relating to SION.
     
  2. Since SION norms envisages the requirement of correlating inputs to outputs, a comprehensive set of inventory records shall be maintained, which can explain with sufficient evidence, that the inputs are consumed within the SION and the resulting products are exported without payment of duty or cleared within India (in DTA) by payment of the applicable duties.

Hope that the article is useful for appreciating the law and procedure relating to SION prescribed for an EOU unit.

  

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