Trading not allowed under export-oriented unit scheme

We have an EOU manufacturing industrial chemicals and we import our raw materials duty-free. We carry out chemical production and export finished goods duty-free. We have another set of chemicals which we do not make in India but would like to import into our same EOU duty-free and re-export them (as it is, or by repacking). This is trading of chemicals. My questions are: (1) Is this allowed by law? (2) If it is not allowed, what is the penalty if we have done this many times in the past? (3) Can I get a trading licence for doing this activity in this EOU?

As per Para 6.00 (a) of the FTP, trading units are not covered under the EOU scheme. The facility for trading units under the EOU scheme was withdrawn in 2002. So, you cannot get a Letter of Permission (LOP) for carrying out trading in an EOU. I believe you have a LOP for manufacturing. If so, carrying out trading activity in the EOU is a violation of the terms and conditions of your LOP. However, as per Para 6.15 (c) of FTP, if an EOU is unable to utilise any material imported or procured from DTA, the same can be exported. This provision would apply to raw materials that you normally need for your production and not for trading on a regular basis.

I believe you have imported the raw materials under the notification no. 52/2003-Cus dated March 31, 2003. That notification allows duty-free import for trading only for trading EOUs in existence before March 31, 2002, and having a valid LOP to continue under the EOU scheme. If you have LOP only for manufacturing, there would be violation under the Customs law also. For violations under the Customs Act, 1962 and Foreign Trade (Development and Regulation) Act, 1992, penalties and prosecution are prescribed for different situations. The penalty can go up to five times the value of goods under both laws. 

What is the “place of removal” under excise law when we export through a merchant exporter?

Para 7 of CBEC Circular 999/6/2015-CX dated February 28, 2015 clarifies this point as follows: In the case of export through merchant exporters, however, two transactions are involved. The first is the transaction between the manufacturer and the merchant exporter. The second transaction is that between the merchant exporter and the foreign buyer. As far as Central Excise provisions are concerned, the place of removal shall be the place where the property in the goods passes from the manufacturer to the merchant exporter.

As explained in paragraph 4 <i>supra<p>, in most cases, this place would be the factory gate, since it is here that the goods are unconditionally appropriated to the contract in cases where the goods are sealed in the factory, either by the Central Excise officer or by way of self-sealing with the manufacturer of export goods taking the responsibility of sealing and certification, in terms of Notification No. 19/2004- Central Excise (N.T.), dated September 6, 2004, etc.