POLICY FOR EXPORT ORIENTED UNITS

Units undertaking to export their entire production of goods and services may be set up under the Export Oriented Unit (EOU) Scheme, Export Processing Zone (EPZ) Scheme, Electronic Hardware Technology Park (EHTP) Scheme or Software Technology Park (STP) Scheme. Such units may be engaged in manufacture, production of software, agriculture, aquaculture, animal husbandry, floriculture, horticulture, pisciculture, viticulture, poultry and sericulture. Commensurate with the policy to give a special thrust to export of computer software, such units would be encouraged to be set up under any of the aforementioned export oriented schemes. Software units may undertake exports using data communication links or in the form of physical exports (which may be through courier service also), including export of professional services.

An EOU/EPZ/EHTP/STP unit may import free of duty all types of goods, including capital goods, required by it for manufacture, production , processing, or in connection therewith, provided they are not prohibited items in the Negative List of Imports. However, import of Basmati paddy/brown rice shall be prohibited. The units shall also be permitted to import capital goods on loan from clients for specified periods for executing specified projects. STP/EHTP/EPZ may import free of duty all types of goods for creating a central facility for use by software development units in STP/EHTP/EPZ.

An EOU engaged in agriculture, animal husbandry, floriculture, horticulture, pisciculture, viticulture, poultry or sericulture may import free of duty only such goods as are permitted to be imported duty free under a Customs Notification issued in this behalf.

All second hand goods, other than capital goods, shall be restricted for imports and may be imported only in accordance with a Public Notice or a license issued in this behalf.

An EOU/EPZ/EHTP/STP unit may, on the basis of a firm contract between the parties, source the capital goods from a domestic/foreign leasing company. In such a case, the EOU/EPZ/EHTP/STP unit and the domestic/foreign leasing company shall jointly file the import documents to enable import of the capital goods free of duty.

Net Foreign Exchange Earning as a percentage of exports (NFEP) and minimum export performance

The Unit shall be a net foreign exchange earner. The minimum level of foreign exchange earning as a percentage of exports(NFEP) as defined below and the minimum export performance shall be as specified in Appendix 1 of the Policy. Items of manufacture for export specified in the Letter of Permission/Letter of Intent alone shall be taken into account for calculation of net foreign exchange earning as a percentage of exports and export performance. However, for STP units export obligation norms alone, as notified, would apply. Notwithstanding the above, electronic hardware units shall be allowed to be set up without stipulation of a minimum net foreign exchange earning as a percentage of exports.

The unit shall execute a legal undertaking with the Development Commissioner concerned and in the event of failure to fulfil the obligations, as stipulated in Appendix 1of the Policy, it would be liable to penalty in terms of the legal undertaking and/or under any other law for the time being in force.

Project applications for EOU/EPZ units satisfying the conditions mentioned in the appropriate press note of the Ministry of Industry may be given automatic approval within fifteen days by the concerned Development Commissioner of the EPZ.

In other cases, approval may be granted by the Board(s) of Approval (BOA) set up for this purpose or Secretariat for Industrial Assistance , as the case may be.

The entire production of EOU/EPZ/EHTP/STP Units shall be exported subject to the following:

(a) Rejects upto 5% of the value of production may be sold in the Domestic Tariff Area (DTA). Sale of rejects above 5% may be approved by the Development Commissioner concerned in consultation with the local Customs authority. These sales shall be subject to payment of applicable duties.

(b) 25% of the production in value terms may be sold in the DTA subject to payment of applicable duties. DTA sale shall be subject to fulfillment of minimum net foreign exchange earning as a percentage of exports prescribed in appendix I of the Policy. No DTA sale shall be permissible in respect of motor cars, alcoholic liquors and such other items as may be stipulated by Director General of Foreign Trade by a Public Notice issued in this behalf.

(c) However, an EOU/EPZ unit in agriculture, aquaculture, animal husbandry, floriculture, horticulture, pisciculture, poultry, viticulture and sericulture may, in accordance with the DTA sale guidelines notified in this behalf, sell upto 50% of the production in value terms in the DTA subject to positive net foreign exchange earning.

(d) The electronics hardware products may be sold in the DTA on the following basis:-

Net foreign exchange earnings as a percentage of exports	Permissible sale in the DTA
(i) Less than 10%	NIL
(ii) 10 - 25%	Up to 30% of the production in value terms of the electronic items, including components manufactured in the unit
(iii) More than 25%	Upto 40% of the production in value terms of electronic items including components manufactured in the units.

(e) EOU/EPZ/EHTP/STP units may be permitted to sell finished products , which are either freely importable under the policy, or against other import licenses, in the DTA , over and above the levels permissible under sub paragraphs (b) and (c) above against payment of full duties, on annual basis, provided they have achieved the stipulated NFEP and export obligation.

(f) Notwithstanding anything stated in above, electronic hardware units in EOU/ EPZ/ EHTP shall have an alternative facility to sell one half of the value of their production on an annual basis, in the domestic market and export the other half of production , in value terms, without any minimum foreign exchange earning stipulation, on payment of applicable duties as specifically notified for this facility. Units desirous of availing this facility shall exercise a one time option in this regard. Such units shall not be eligible for DTA sale facility provided for in paragraph stated above.

(g) For software units, sale in the DTA in any mode, including data communication, shall be permissible upto 25% of their production in value terms

NOTE :- In the case of units manufacturing electronics hardware and software, the net foreign exchange earning as a percentage of exports and DTA sale entitlement shall be reckoned separately for hardware and software.

The following supplies in DTA shall be counted towards fulfilment of export performance/obligation.

(c) Supplies to other EOU/EPZ/EHTP/STP units provided that such goods are permissible for procurement in terms of paragraph 9.2 of the Policy.

Exports through Export House/Trading House/ Star Trading House/ Super Star Trading House

An EOU/EPZ/EHTP/STP unit may export goods manufactured by it through a merchant exporter/Export House/Trading House/Star Trading House/Super Star Trading House recognised under this Policy or any other EOU/EPZ/EHTP/STP unit. This permission extends only to the marketing of the goods by the merchant exporter/Export House/Trading House/Star Trading House/Super Star Trading House or other EOU/EPZ/EHTP/STP unit. The manufacture of the goods shall be done in the EOU/EPZ/EHTP/STP unit concerned. The level of net foreign exchange earning and export performance as well as any other obligation relating to the imports and exports as prescribed shall continue to be discharged by the EOU/EPZ/EHTP/STP unit concerned.

EOU/EPZ/EHTP/STP units may, with the permission of the concerned Customs authorities:

(a) Supply or sell in the DTA, samples of goods produced by EOU/EPZ//EHTP/STP units for display /market promotion, upto 1% of the value of previous year's export or maximum of Rs. 5 lakhs in case of new unit going into production, on payment of applicable duties. Samples may also be allowed to be removed from the unit, without payment of duty, on furnishing a suitable undertaking to the Custom authority for return of such goods. Samples may also be exported including through courier agencies authorised by the Commissioner of Customs.

(c) Transfer goods to DTA for repair/replacement, testing or calibration and return.

(d) Transfer goods for quality testing/R & D purpose to any recognised laboratory/ institution upto a maximum of Rs. 2 lakhs per annum for items appearing in the Negative List of Imports and Rs. 5 lakh per annum for other items, without payment of duty, on giving suitable undertaking to the customs for return of the goods. However, if the goods have been consumed/destroyed in the process of testing etc., a certificate from the laboratory/ institution to this effect shall be furnished to the Customs.

a) Supplies from the DTA to EOU/EPZ/EHTP/STP units will be regarded as "deemed exports" and, besides being eligible for the relevant benefits under paragraph 10.3 of this Policy, will be eligible for the following benefits:

ii) Exemption from payment of Central Excise Duty on capital goods, components and raw materials; and

(b) EOU/EPZ/EHTP/STP units shall, on production of a suitable disclaimer from the DTA suppliers, be eligible for obtaining the benefits of Deemed exports. For this purpose, they shall get Brand Rates fixed by the DGFT. Such supplies would, however, be eligible for benefits specified in paragraph above.

The benefits stated above shall be available provided the goods supplied are manufactured in the country.

a) Rent: The units set up in the EPZs will be charged lease rent on industrial plots/ standard design factory (SDF) buildings/sheds for the first three years, at the following rates

(i) For Plots: The lease rent will be 25% of the applicable rate for the first year, 50% for the second year and 75% for the third year if production had commenced in the first year or the second year. Full rent will be payable in the third year if production had not commenced by the end of the second year;

(ii) For SDF buildings/sheds: The lease rent will be 50% of the applicable rates for the first year and 60% for the second year if production had commenced in the first year. The lease rent will be 75% of the applicable rates for the third year if production had commenced in the first year. Full rent will be payable if production had not commenced by the end of the first year; Units located in Visakhapatnam and Falta EPZs will be eligible for lease rent on industrial plots and SDF buildings/sheds as applicable in the third year , subject to commencement of production as indicated above, during the fourth and fifth years also.

b) Tax Holiday: EOU/ EPZ/ EHTP/ STP Units will be exempted from payment of corporate income tax for a block of five years in the first eight years of operation.

c) FOB value of export of an EOU/EPZ/EHTP/STP unit can be clubbed with FOB value of export of its parent company in the DTA for the purpose of according Export House, Trading House, Star Trading House or Super Star Trading House status for the latter

d) 100% Foreign Equity: Foreign equity upto 100% is permissible in the case of EOU/EPZ/EHTP/STP units.

e) The EOU/EPZ units will be entitled to the benefits including grant of special import licence. In addition, EOU/EPZ units, except telecommunication and electronics units, which achieve more than 25% of the stipulated export performance, would be eligible for additional Special Import Licence of 2% of the f.o.b value of such exports, in accordance with the procedure specified in this behalf.

f) Software units may, in addition, also be allowed to use the computer system for training purpose (including commercial training) subject to the condition that no computer terminal shall be installed outside the bonded premises for the purpose.

a) Transfer of manufactured goods from one EOU/EPZ/ EHTP/STP unit to another EOU/EPZ/EHTP/STP unit will be allowed. However, it would be eligible to be considered as export by the recipient unit only when the transferred goods undergo further processing/ manufacture.

b) Goods imported by an EOU/EPZ/ EHTP/STP unit may be transferred or given on loan to another EOU/EPZ/ EHTP/STP unit which shall be duly accounted for, but not counted towards discharge of export performance/ obligation .

c) Any capital goods transferred or given on loan under para (b) above shall require prior permission of the concerned Development Commissioner.

a) The EOU/EPZ/EHTP/STP Units may be permitted to sub-contract part of their production process, which may also involve change of form or nature of the goods through job work by units in the DTA or other EOU/EPZ/EHTP/STP units. Requests in this regard will be permitted by the Customs Authorities on the basis of factors such as fixation of input/output norms, and on furnishing of undertaking by the concerned unit. EOU/ EPZ/ EHTP/ STP units using predominantly indigenous raw materials (i.e. 90% or more) may be permitted to sub-contract part of their production for job work in DTA or to other EOU/EPZ/ EHTP/STP units.

b) EOU/EPZ/EHTP units may be permitted to remove moulds jigs, tools, fixtures, tackles, instruments, hangers and patterns and drawings to the premises of sub contractors subject to the condition that these shall be brought back to the bonded premises of EOU/EPZ/EHTP unit on completion of the job work, within a stipulated period.

In case an EOU/EPZ/EHTP/STP unit is unable, for valid reasons, to utilise the goods, it may re-export or dispose them in the DTA on payment of applicable duties and submission of import licence, by DTA unit, wherever applicable. Supply from one EOU/EPZ/EHTP/STP unit to another such unit would also be treated as import under this para.

Capital goods that have become obsolete may be disposed of subject to payment of applicable duties on the depreciated value thereof.

ale or disposal in the DTA of scrap/ waste/ remnants arising out of production process may be permitted on payment of duty/taxes applicable on such scrap/waste/ remnants. Percentage of such scrap/waste/ remnants shall be fixed by the respective Board of Approval. However, there shall be no duties/ taxes on such scrap/waste/ remnants in case the same are destroyed with the permission of Customs authority.

Private bonded warehouses may be set up in EPZs for the purposes enumerated hereinafter. Such warehouses need not conform to the requirements of paragraph 9.5 above but shall be subject to such conditions as may be stipulated by the BOA. The provisions of paragraphs above, shall not apply to the private bonded warehouses set up for this purpose.

(i) Import, stock and sale of goods Imports may be permitted to meet requirements of EOU/EPZ units. Items importable in accordance with this Policy may also be imported and sold in the DTA subject to compliance with the Policy for such clearance in the DTA and on payment of applicable duties at the time of effecting such sales.

(ii) Trading, including re-export after re-packing/labelling Imports may be permitted for re-export in freely convertible foreign currency for activities such as re-packing and labelling.

EOU/EPZ/EHTP/STP units may be permitted to import goods of any origin to carry out reconditioning, repair, testing, calibration, quality improvement, upgradation of technology and re-engineering activities for export in freely convertible foreign currency. The provisions of stated above of this Chapter shall not, however, apply to such activities.

If an exporter fails to realise the export proceeds within the time specified by the Reserve Bank of India, he shall, without prejudice to any liability or penalty under any law for the time being in force, be liable to action in accordance with the provisions of the Act, the Rules and Orders made thereunder and the provisions of this Policy.

Goods or parts thereof on being imported and found defective or otherwise unfit for use or which have been damaged after import may be returned, and goods in replacement thereof may be imported from the foreign suppliers.

The bonding period for units under the EOU/EHTP/STP Schemes shall be 5 years. This period may be extended to 10 years in case of products requiring significant capital investment and infrastructural support. On completion of the bonding period, it shall be open to the unit to continue under the scheme or opt out of the scheme. If no intimation in this regard is received from the unit within a period of six months of expiry of the bonding period, the Development Commissioner will take action, suo moto, to debond the unit. Where the unit opts to continue, the Development Commissioner concerned will extend the bonding period and determine the net foreign exchange earning as a percentage of exports and the export performance to be achieved during the extended period

Subject to the approval of the Development Commissioner, EOU/EPZ/EHTP/STP Units may be debonded. Such debonding shall be subject to penalty, if any, that may be imposed and payment of duties of Customs and Excise applicable at the time of debonding. Debonding shall be subject to the industrial policy in force at the time of debonding.

An EOU/EPZ/EHTP/STP unit may also be permitted, as a one time option, to debond on payment of duty on capital goods under the prevailing EPCG Schemes, subject to the unit satisfying the eligibility criteria and such conditions as may be specified by the BOA. Request for debonding under the zero duty EPCG Scheme may be considered on merits. Debonding shall be subject to payment of duties of Customs and Excise on other goods applicable at the time of debonding.

(a) Existing DTA units may also apply for conversion into an EOU/EHTP/STP but no concession in duties and taxes would be available under the scheme for plant, machinery and equipment already installed. Existing DTA units having an export obligation under the EPCG scheme may also apply for conversion into an EOU/EHTP/STP unit. On such a conversion, the export obligation under the EPCG scheme will be met concurrently from the exports by the unit as an EOU/EHTP/STP unit.

(b) The existing EHTP/STP units may also apply for conversion/merger to EOU unit and vice-versa. In such cases the units will continue to remain in bond and avail the permissible concession in duties and taxes as applicable under the relevant scheme.

Net foreign exchange earning as a percentage of exports (NFEP) shall be calculated annually and cumulatively for a period of five years from the commencement of commercial production according to the following formula:

 A - B 
NFEP = ---------x 100,
  A

B is the sum total of the CIF value of all imported inputs, the CIF value of all imported capital goods, and the value of all payments made in foreign exchange by way of commission, royalty, fees, dividends, interest on external borrowings during the first five years period or any other charges. "Inputs" mean raw materials, intermediates, components, consumables, parts and packing materials.

1. If any input is obtained from another EOU/EPZ/EHTP/STP unit, the value of such input shall be included under B.

2. If any capital goods imported duty free is leased from a leasing company, the CIF value of the capital goods shall be included under B.

3. For annual calculation of net foreign exchange as a percentage of exports ,1/5th value of imported capital goods shall be included under B.

4. In the case of projects where the investment in land, building, plant and machinery exceeds Rs.200 crores, the value of the capital goods shall be amortised over a period of seven years; i.e. in such cases, only 5/7th of the CIF value of the imported capital goods shall be included under B.

In the case of units under EHTP/STP Schemes, necessary approval/ permission under relevant paragraphs of this Chapter shall be granted by the officer designated by the Department of Electronics for the purpose instead of the Development Commissioner of EPZ and by the Inter-Ministerial Standing Committee (IMSC) instead of BOA.