Section 65 of Customs Act, 1962 | Bonded Manufacturing

• Is an existing factory which solely manufactured goods to be sold in the domestic market, eligible for application for manufacture and other operations in a bonded warehouse? How will the existing capital goods and inputs be accounted for?

Yeah. Any Domestic Tariff Area (DTA) unit is eligible to apply for manufacturing and other bonded warehouse operations, i.e. an old Domestic Tariff Area (DTA) factory is eligible to apply. Accounting for Domestic Tariff Area (DTA) receipts shall be provided for in the accounting form prescribed for the units conducting manufacturing and other operations in a bonded warehouse. The current capital goods and inputs must thus be accounted for in the prescribed accounting form. The form also allows for a column of comments in the event that such comments are to be entered.

• Who is eligible for applying for manufacture and other operations in a bonded warehouse?

In compliance with the Private Warehouse Licensing Regulations, 2016, the following persons are entitled to apply for manufacturing and other operations in a bonded warehouse-A person who has been issued a warehouse license under Section 58 of the Customs Act. An individual may also make a joint application for a warehouse license pursuant to Section 58, together with a permit pursuant to Section 65 of the Act to conduct manufacturing or other warehouse operations. The individuals mentioned must be Indian citizens or an organization incorporated or registered in India.

• Can a factory which is solely into manufacturing goods, which are to be sold in the domestic market, be eligible for applying for manufacture and other operations in a bonded warehouse?

The eligibility of a production plant and of other activities in a bonded warehouse does not depend on whether the final product will be sold or exported to the domestic market. There is no quantitative constraint on the selling in the domestic market of finished products. Any factory may obtain a license under Section 58 of the Customs Act together with a permit under Section 65 if it intends to import products at the point of importation without payment of customs duty in advance and to store them either as capital goods or as inputs for further processing at the warehouse.

• Is manufacture and other operations in a bonded warehouse allowed in a Public Bonded Warehouse licensed under Section 57 of the Customs Act?

No. At present, manufacture and other operations in a bonded warehouse is allowed only in a Private Bonded Warehouse licensed under Section 58 of the Customs Act.

• Will a unit licensed under Section 65 and Section 58 of the Customs Act, 1962, be under the physical control of Customs?

No. There is no physical control of a unit licensed under Section 65 and Section 58 of the Customs Act, 1962, on a day to day basis. The unit will be subject to risk-based audits.

• Can the license under Section 65 and Section 58 of the Customs Act, 1962, be obtained on bare land with identified boundaries or a built structure is imperative for obtaining the said license?

The regulations do not consider a fully enclosed building to be a requirement for a license to be issued.

What is important is that the site or building is appropriate for the secure storage of goods and compliance discharge, such as adequate boundary walls, access control gate(s) and staff to safeguard the premises. In addition, certain units can operate without completely closed systems, depending on the nature of the materials used, the operations and the industry. The existence of the premises, services, equipment and staff placed in place for the safe storage of goods will be taken into account by the Principal Commissioner / Commissioners of Customs when considering the issuance of a license.

• Do we need to renew the license under Section 58 or permission under Section 65?

The license and permission given shall be valid until the license has been cancelled or surrendered or the license issued in compliance with Section 58 has been cancelled or surrendered. Therefore, no renewal under Section 58 of the license or permission under Section 65 is necessary.

• Can a unit undertaking manufacture and other operations in a bonded warehouse import capital goods without payment of duty? If yes, whether only BCD or both BCD and IGST on imports is covered? For how long is duty deferment available? Is interest payable after some time?

A unit licensed under Sections 58 and 65 can, without payment of duty, import capital goods and store them. A duty deferment scheme is the development and other activities in a bonded warehouse. On imports, both BCD and IGST are also postponed. In the case of capital goods, import duties (both BCD and IGST) are delayed until they are cleared for home use or exported from the warehouse. In accordance with Section 68 read in Section 61 of the Customs Act relating to the payment of the relevant duty without interest, capital goods may be cleared for home consumption. In accordance with Section 69 of the Customs Act, capital products can also be exported after use, without the payment of duty. Without any time constraint, the obligation deferment is.

• Would any customs duty be payable on the goods manufactured in the bonded premises using the imported capital goods (on which duty has been deferred) and sold into the domestic tariff area?

Paras 8 and 9 of Circular No. 34/2019 clarify the payment of customs duties on finished goods. If the capital goods themselves were cleared into the domestic market (home consumption), customs duties on capital goods would be payable. The tax on capital goods is also not integrated into the finished products. Therefore, no additional duty is payable on finished products cleared into the DATA on account of imported capital goods (on which the duty was deferred)

• Can a unit undertaking manufacture and other operations in a bonded warehouse import inputs without payment of duty? If yes, whether only BCD or both BCD and IGST on imports is covered? For how long is duty deferment available? Is interest payable after some time?

A duty deferment scheme is the development and other activities in a bonded warehouse. On imports, both BCD and IGST are also postponed. In the case of goods other than capital goods, import duties (both BCD and IGST) are postponed until they are cleared for home use from the warehouse and no interest on duty is payable. If the finished goods are exported, the duty would not be payable on the imported inputs (both BCD and IGST). Without any time constraint, the obligation deferment is.

• Is the import of raw material without BCD and IGST allowed? Will there be any interest obligation if IGST is paid when finished goods are sold in domestic markets?

Inputs / raw materials can be manufactured and processed without BCD and IGST payment in the approved warehouse. No liability for interest occurs when the duties are levied at the time the resulting goods are ex-bonded. The duties are to be paid (without any interest) only when the resulting goods are cleared for home use.

• Would it be mandatory to appoint a warehouse keeper in the factory licensed under Section 65 of the Customs Act? Would all goods cleared from the said factory be subject to inspection by the warehouse keeper/ Customs authorities?

In order for the premises to be licensed as a private warehouse under Section 58 of the Customs Act, a warehouse keeper must be named. The warehouse keeper is required, on behalf of the licensee, to discharge duties and obligations, maintain accounts and also sign the documents. It is required that the warehouse keeper will supervise and reassure himself with the veracity of the declarations / accounts he is signing. Only if there is an indication of danger, and not as a matter of normal procedure, will the inspection of products by customs at the ex-bonding stage be carried out. For the clearance of goods from the warehouse, approval by the bond officer is not necessary.

• How frequently is an audit of a unit operating under Section 65 of Customs Act, 1962 expected?

The audit of units operating under Section 65 would also be based on risk criteria. There is no prescribed frequency for such an audit.

• What is the customs document/ form for movement of imported goods on which duty has been deferred to/ from a unit undertaking manufacture and other operations in a bonded warehouse? Are such goods required to be under customs escort during their movement?

The customs document for the movement of manufactured goods for which customs duties have been deferred to / from the manufacturing unit of the undertaking and other operations in the bonded warehouse Customs Station is set out below in Section 65: Bill of entry for warehousing. It is explained that, because the goods are already followed by the Bill of Entry for Warehousing, no separate form is prescribed for movement from the Customs Station to Section 65 Unit. From another warehouse (non-Section 65) to a Section 65 Unit: Form as prescribed under the Warehoused Goods (Removal) Regulations, 2016 for the transfer of goods from a warehouse. This is because the Warehoused Goods (Removal) Legislation, 2016, must be enforced by warehouses that are not a unit of Section 65. From Section 65 Unit to another warehouse (the other warehouse may be a unit of Section 65 or a warehouse of non-Section 65): Type prescribed in the Warehouse Manufacturing and Other Operations (no. 2) Regulations, 2019. During transit, the goods will not be under customs escort.

• If the imported capital goods are cleared for home consumption after use, is depreciation available?

No. Depreciation is not available if imported capital goods (on which duty has been deferred) are cleared for home consumption after use in a Section 65 unit

• If the imported capital goods are cleared for export after use, is depreciation available?

Imported capital goods (on which customs duties have been deferred) can be exported after use in a unit protected by Section 65 without payment of customs duties pursuant to Section 69 of the Customs Act. The Customs Valuation (Determination of Value of Export Goods) Rules 2007 shall be read in accordance with Section 14 of the Customs Act for the purposes of the valuation of export goods.

• Can all export benefits under FTP and Customs (Import of Goods at Concessional Rate of Duty) Rules, 2017 (IGCR) be taken in Bonded warehouse simultaneously?

The eligibility to export benefits under FTP or IGCR would depend upon the respective scheme. If the scheme allows, units operating under Section 65 have no impact on the eligibility. In other words, a unit operating under Section 65 can avail any other benefit, if the benefit scheme allows.

• What will be the method of inventory control in Section 65 units? Whether the First in First Out (FIFO) method can be followed?

The Generally Accepted Accounting Principles will be followed for inventory control in a Section 65 unit. Thus FIFO method can be followed

• What are the procedure and documentation requirements for re-entry of manufactured goods, returned by the customers for repair, in the premises?

They will no longer be treated as warehoused goods until the goods have been removed from the warehouse. Thus, if the customer returns the resulting products cleared from the warehouse for repair, they are entered as DTA receipts (this is provided in the accounting form). The same will be entered in the specified accounting form after repair if the same is cleared from the warehouse. If the goods have been exported and subsequently refused or sent back by the consumer for repair, then the goods must be entered in the accounting form as import receipts upon re-import. When filing the Bill of Entry for the re-import of goods, the relevant customs notice for re-imports must be followed.

• What is the procedure for the surrender of license for a Section 65 unit?

Since the unit operating under Section 65 is also licensed under Section 58 of the Customs Act as a private warehouse, the license surrender procedure will be in compliance with Regulation 8 of the Private Warehouse Licensing Regulations, 2016. Accordingly, by sending a request in writing to the Principal Commissioner of Customs or the Commissioner of Customs, the licensee may, as the case may be, surrender the license given to him. Subject to payment of all dues and clearance of the remaining products in such a warehouse, the license will be revoked upon receipt of such a letter.