DTA Sales by EOU Units: Rules & Permitted Limits under FTP

An Export Oriented Unit (EOU) is primarily established to manufacture goods or provide services for export. Accordingly, the general principle under the Foreign Trade Policy (FTP) is that the entire production of an EOU should be exported.

However, the Foreign Trade Policy recognises that businesses may need to sell a portion of their production in the Indian domestic market. Such sales are permitted under specified conditions and are commonly referred to as Domestic Tariff Area (DTA) sales.

Para 6.07 of the Foreign Trade Policy provides the framework for DTA sales by EOU/EHTP/STP/BTP units. It specifies the categories of goods and services that can be sold domestically, the applicable limits and the conditions relating to payment of duties and taxes.

Let us understand the various provisions governing DTA sales.

1. Sale of Finished Goods in the Domestic Market

Under Para 6.07(a)(i) of FTP, an EOU, other than a gems and jewellery unit, is permitted to sell finished goods manufactured by it in the domestic market, subject to fulfilment of prescribed conditions.

The following conditions must be satisfied:

• The finished goods must be covered under the unit's Letter of Permission (LoP).

• The goods must be freely importable under the Foreign Trade Policy.

• The unit must have achieved positive Net Foreign Exchange (NFE).

• Applicable GST and compensation cess must be paid.

• Customs duty benefits availed on inputs used in manufacturing the goods cleared into DTA must be reversed or paid, as applicable.

How is Customs duty reversal calculated?

An EOU generally imports eligible raw materials and inputs without payment of applicable Customs duties under the EOU exemption.

When the finished goods manufactured using these inputs are sold in the domestic market, the applicable Customs duty exemption availed on the inputs must be reversed.

The duty reversal is calculated based on the applicable Standard Input Output Norms (SION) or the norms fixed by the Norms Committee where SION is not available.

Example:

An EOU imports raw materials without payment of Customs duty and uses them to manufacture electronic components. It subsequently decides to sell a portion of these components in the Indian market.

The EOU will be required to pay applicable GST and reverse the relevant Customs duty benefits availed on the inputs used in manufacturing the goods sold in DTA.

It is important to note that DTA sales are not permitted for certain restricted products, including pepper and pepper products, marble and other items notified by the Government.

2. Activities Not Eligible for DTA Sales under the General Finished Goods Provision

Para 6.07(a)(ii) specifically excludes units engaged in certain activities from the DTA sale facility under Para 6.07(a).

These activities include:

• Packaging and labelling.

• Segregation.

• Refrigeration.

• Compacting.

• Micronisation.

• Pulverisation.

• Granulation.

• Conversion of chemicals from monohydrate to anhydrous form or vice versa.

For example, if a unit merely imports bulk material, repackages it into smaller quantities and intends to sell it in the domestic market, it cannot claim the general DTA sale facility under Para 6.07(a) merely on the basis of such packaging activity.

The restriction is intended to distinguish actual manufacturing activities from the specified processing and handling activities.

3. Supplies by EOU Units to SEZ Units

Para 6.07(a)(iii) provides an important benefit to EOUs supplying goods to Special Economic Zone (SEZ) units.

Sales made by an EOU to an SEZ unit can be considered towards the FOB value of exports of the EOU, provided the payment is received from the foreign currency account of the SEZ unit.

Example:

An EOU makes the following supplies during a financial year:

• Direct exports: ₹5 crore.

• Supplies to an SEZ unit: ₹2 crore.

If the SEZ unit makes payment from its foreign currency account, the EOU can consider the eligible SEZ supplies of ₹2 crore along with its direct exports for calculating the FOB value of exports.

Accordingly, the total FOB value of exports for this purpose would be ₹7 crore.

This provision can be particularly useful for EOUs supplying goods to businesses operating in SEZs.

For pharmaceutical products, including bulk drugs, the applicable mandatory registration requirements must also be fulfilled.

4. Applicability of Anti-Dumping Duty on DTA Sales

In addition to the normal Customs duty reversal requirements, Para 6.07(a)(iv) provides for payment of an amount equal to the Anti-Dumping Duty (ADD) that would have been leviable at the time of import on the goods used for manufacturing or processing products cleared into DTA.

Anti-Dumping Duty is imposed on specified imported goods to protect domestic industries against unfairly priced imports.

Example:

An EOU imports a particular chemical from a country on which Anti-Dumping Duty is applicable.

The imported chemical is used in manufacturing finished goods, which are subsequently sold in the domestic market.

In such cases, the EOU must also consider the applicable Anti-Dumping Duty requirement while undertaking DTA clearance.

Therefore, payment of the normal Customs duty reversal does not automatically take care of the separate ADD requirement.

5. Refund of Benefits Availed under Chapter 7 of FTP

Para 6.07(a)(v) provides that where an EOU or its supplier has availed benefits under Chapter 7 of the Foreign Trade Policy on goods used in manufacturing products subsequently cleared into DTA, the relevant benefits must be refunded in accordance with the FTP.

Chapter 7 deals with the Duty Exemption and Remission Schemes.

Therefore, while evaluating a proposed DTA sale, an EOU must also examine whether any benefits under Chapter 7 have been availed on the inputs used in manufacturing the goods.

6. DTA Sales of Services and Software Units

Para 6.07(b) provides a separate facility for EOUs engaged in providing services, including software services.

Such units are permitted to provide services to customers in the domestic market up to:

• 50% of the FOB value of exports; and/or

• 50% of foreign exchange earned.

The payment for such services must be received in foreign exchange, as specified under the provision.

Example:

An STPI unit provides software development services and earns ₹10 crore through exports.

Based on its export earnings, it may provide eligible services worth up to ₹5 crore in the domestic market, subject to the applicable conditions.

Special treatment for manufacturing-related services

Certain activities classified under GST Service Accounting Code (SAC) 9988 and 9989 are treated as manufacturing of goods under the FTP, where covered under the relevant provisions of the LoP or Para 11.31.

Such activities continue to be governed by Para 6.07(a), rather than the general 50% DTA sale provision for services.

Applicable GST and compensation cess must be paid at the time of DTA clearance according to the relevant GST classification.

This distinction is important for units undertaking manufacturing-related job work or processing activities.

7. Special DTA Sale Entitlement for Gems and Jewellery Units

Gems and jewellery EOUs are governed by a separate provision under Para 6.07(c).

Such units are permitted to sell up to 10% of the FOB value of exports of the preceding year in the domestic market, subject to achievement of positive NFE.

The unit must also pay applicable GST and compensation cess and reverse the Customs duty benefits availed on inputs used in manufacturing the jewellery cleared into DTA.

Example:

If a gems and jewellery EOU has achieved exports of ₹20 crore in the preceding financial year, its DTA sale entitlement would be:

10% of ₹20 crore = ₹2 crore.

Accordingly, the unit can sell jewellery worth up to ₹2 crore in the domestic market, subject to the prescribed conditions.

8. DTA Sale of Rejects

Manufacturing operations may result in certain products failing to meet the required quality standards. Such products are commonly referred to as rejects.

Para 6.07(d) permits the sale of rejects in DTA, provided the sale is not specifically prohibited under the unit's LoP.

The EOU must:

• Give prior intimation to Customs authorities.

• Pay applicable GST and compensation cess.

• Reverse the applicable Customs duty benefits availed on inputs used in manufacturing the rejects.

Special benefit: 5% NFE relaxation

One of the important benefits under this provision is that the sale of rejects up to 5% of the FOB value of exports is not subject to achievement of NFE.

Example:

An EOU has an FOB export value of ₹10 crore.

The value of rejects eligible for the NFE relaxation would be:

5% of ₹10 crore = ₹50 lakh.

Therefore, the unit can sell rejects worth up to ₹50 lakh in DTA without this sale being subject to achievement of NFE.

However, the applicable duties and taxes must still be paid.

9. DTA Sale of Scrap, Waste and Remnants

Scrap, waste and remnants are generated during various stages of manufacturing.

Para 6.07(e) permits EOUs to sell such materials in the domestic market, subject to the applicable SION norms and payment of applicable duties and taxes.

Unlike finished goods and by-products, the sale of scrap, waste and remnants is not subject to achievement of positive NFE.

Example:

An EOU manufacturing solar modules may generate broken glass, metal scraps and other residual materials during its production process.

Instead of exporting these materials, the EOU can sell eligible scrap and waste to domestic buyers, subject to applicable norms and payment of duties and taxes.

What happens if SION norms are not available?

Where the relevant norms have not been notified, the Development Commissioner may fix ad-hoc norms for a period of six months.

During this period, the matter should be referred to the Norms Committee for fixation of final norms.

The ad-hoc norms will continue until the Norms Committee fixes the applicable norms.

EOUs may also export their scrap, waste and remnants.

10. Destruction of Scrap, Waste and Remnants

In certain cases, the scrap or waste generated during manufacturing may not be suitable for sale or export.

Para 6.07(f) permits destruction of scrap, waste and remnants with the permission of Customs authorities.

Where such destruction is undertaken with the required permission, there shall be no duties or taxes under this provision.

However, this exemption does not cover applicable taxes and cess under GST laws.

For example, an EOU manufacturing chemicals may generate unusable waste during production. If the unit intends to destroy such waste through an authorised disposal process, it must follow the prescribed Customs procedure and obtain the necessary permission.

11. DTA Sale of By-products

A by-product is an additional product generated during the manufacturing of the main product.

For example, molasses generated during sugar manufacturing is a commonly understood example of a by-product.

Para 6.07(g) permits the sale of by-products in DTA, subject to the following conditions:

• The by-product must be included in the LoP.

• The unit must achieve positive NFE.

• Applicable GST and compensation cess must be paid.

• Applicable Customs duty benefits availed on inputs must be reversed or paid.

Example:

An EOU manufacturing sugar also generates molasses as a by-product. If molasses is included in its LoP, the EOU can sell it in the domestic market after fulfilling the prescribed NFE, duty and tax requirements.

It is important to distinguish between by-products and scrap. By-products are saleable products generated during manufacturing, whereas scrap and waste are residual materials arising from the production process. Different provisions apply to these categories.

12. Separate NFE Calculation for Electronics Hardware and Software

Para 6.07(h) provides that where an EOU manufactures both electronics hardware and software, NFE and DTA sale entitlement must be calculated separately for each activity.

For example, an electronics EOU may export hardware worth ₹10 crore and software worth ₹5 crore.

The unit cannot simply combine the two activities and calculate a common NFE and DTA entitlement. Separate calculations must be maintained for hardware and software.

This ensures that the applicable DTA sale conditions are independently assessed for each activity.

13. Advance DTA Sales for New EOUs

A newly established EOU may not have completed its first year of operations or generated sufficient export earnings to establish its NFE position.

To address this, Para 6.07(i) permits advance DTA sales for new EOUs.

The permitted advance DTA sale is up to 50% of the estimated exports for the first year.

For pharmaceutical EOUs, the calculation is based on estimated exports for the first two years.

Example – General EOU:

A newly established EOU estimates exports of ₹10 crore during its first year.

Its permissible advance DTA sale entitlement would be:

50% of ₹10 crore = ₹5 crore.

Example – Pharmaceutical EOU:

A new pharmaceutical EOU estimates exports of ₹40 crore during its first two years.

Its permissible advance DTA sale entitlement would be:

50% of ₹40 crore = ₹20 crore.

This provision provides newly established EOUs with flexibility to undertake domestic sales while developing their export operations, subject to applicable requirements.

14. Procurement of Spares and Components for After-Sales Service

Para 6.07(j) provides a special facility for procurement of spares and components required for after-sales service.

An EOU may procure spares and components up to 2% of the value of manufactured articles cleared into DTA during the preceding year.

These spares must be supplied to the same consignee or buyer for after-sales service.

Example:

An EOU manufacturing industrial machinery cleared manufactured goods worth ₹10 crore into DTA during the preceding financial year.

The permissible value of spares and components under this provision would be:

2% of ₹10 crore = ₹20 lakh.

Accordingly, the unit may procure eligible spares and components worth up to ₹20 lakh for supply to the same buyers for after-sales service.

Applicable GST and compensation cess must be paid, along with reversal of applicable Customs duty benefits availed on inputs.

This provision is particularly useful for engineering, machinery and equipment manufacturers who are required to provide after-sales support to their domestic customers.

How Can Commercial Consultancy Counsel (CCC) Assist EOU Units?

Understanding the DTA sale provisions is important for EOUs looking to optimise their domestic sales while remaining compliant with the Foreign Trade Policy and Customs regulations.

Commercial Consultancy Counsel (CCC) assists businesses in understanding and implementing EOU-related regulatory requirements, including:

• Application of EOU

• Examination of DTA sale eligibility under Para 6.07 of FTP.

• Calculation and verification of DTA sale entitlement.

• NFE calculation and compliance.

• Assessment of Customs duty reversal on inputs used in DTA-cleared goods.

• Examination of applicable SION and Norms Committee requirements.

• Assistance with Customs permissions and procedural compliances.

• Advisory on the treatment of finished goods, rejects, scrap, waste and by-products.

• Ongoing EOU compliance and regulatory support.