CHAPTER 14

BONDS and LUTs
1. Bonds and Letter of Undertaking

1.1 Bond is an instrument by which the obligation to pay money is createdexpressly. It is also a legal agreement whereby a person undertakes to do or notto do anything subject to conditions stipulated in the agreement. The primarypurpose of the bond is to secure due compliance with the rules and procedureslaid down under the Excise law. A bond is a collateral security , which thedepartment is securing to ensure payment of appropriate duty in addition to thestatutory provisions available .

1.2 As a measure of rationalization and simplification of excise law andprocedures the number of bonds have been further reduced. Several bonds,which were in vogue prior to 1 st July, 2001 have since been dispensed with. Careshould be taken with regard to bonds, which were executed prior to 1 st July, 2001while discharging the same. These bonds should be discharged only after thecompletion/performance of the obligation.

2. Types of bonds

2.1 Bonds are basically two types ,i.e. surety and security. Under a suretybond another person stands as surety to guarantee the performance on the partof obligor. The surety should be for the full value of the bond and the personstanding as surety should be solvent to the extent of the bond amount. Underthe Contract Act the liability of the surety is co-extensive with that of the principaldebtor and hence the department is at liberty to enforce the recovery of thedues either from the obligor or from the surety.

2.2 The following are the types of bonds, which are presently in vogue :

d. B-1 Surety / Security (General Bond) - for export of goods withoutpayment of duty under Rule 19;

e. B-2 Bond Surety / Security(General Bond) for provisionalassessment;

f. B-3 Bond Surety / Security) - to obtain matches Central Excisestamp on credit;

g. B-4 Bond Surety/Security for provisional release of seized goods(provided in this Manual by instruction); and

h. B-17 Bond (General) Surety / Security -composite bond for EPZ/100% EOUs for assessment, export, accounting and disposal ofexcisable goods obtained free of duty [continuation of the Formatas specified under the erstwhile Central Excise Rules, 1944].

3. Guidelines for executing bonds

3.1 The bond should be executed on the non-judicial stamp paper ofappropriate value. The bond amount should be sufficient to cover the dutyliability. The bond should be signed by the obligor or by the authorised agent.The surety should be for the full amount and the person standing as surety shouldbe solvent to extent of the amount covered. The security should normally belimited to the 25% of the bond amount.

3.2 In case of exporters, certain specific categories i.e. Super Star TradingHouse, Star Trading House, Exporters registered with Export Promotion Council &Registered Exporters need not furnish any bank guarantee/cash security whileexecuting export bonds. They may furnish sureties only. This is a modification overthe previous instruction contained in Board’s Circular No.284/118/96-CX, dated31.12.96.

3.3 In the case of 100% E.O.Us obtaining indigenous goods without paymentof duty under a notification issued under section 5A of the Central Excise Act,1944, acceptance of surety bond instead of bank guarantee is permissible. Inrespect of 100% EOUs & EPZ s units may continue to execute bond in the Formatgiven in Form B-17 under the erstwhile Central Excise Rules, 1944. While executingcombined B17 Bond security to the extent of 5% of the value of the bond in theform bank guarantee or cash deposit or any other mode of security may beaccepted in lieu of surety (Board’s letter F.No.305/86/98-FTT dated 19./6/98). Freshbond may not be taken, where the existing units have already furnished bond inB-17 Form prior to 1.7.2001. The existing bond may be simply re-validated underthe new rules.

3.4 The export bonds executed under rule 19 of the said Rules should beaccepted within 24 Hours or the next working day and communicated to theexporter by the Deputy/Assistant Commissioner of Central Excise or MaritimeCommissioner or any other officer authorised by the Board in this behalf.

3.5 Bonds should be executed in favour of and in the name of the Presidentof India. They should be properly stamped. The prescribed wordings of the bondform must be copied out on a non judicial stamp paper of the appropriateamount (to be locally ascertained), except where arrangement can be madefor embossing printed forms or where the State Government rules requireotherwise. The bonds must be executed on stamp paper of the respective StateGovernment in which the registered persons business is situated.

4. Bonds for provisional assessment

4.1 The amount of the bond in forms B-2 should be fixed on the followingbasis: -

(i) The amount of the specific bond in Form B-2 should be sufficient tocover the difference between the duty payable on provisionalassessment and the probable duty payable if the highest rate /value applicable such goods has to be applied.

(ii) The amount of the general bond in Form B-2(surety)/(Security)should be equal to the difference between the duty payable onprovisional assessment and the probable duty payable applyingthe highest rate / value applicable to such goods for a period of3 months. If the provisional assessment cannot be completedwithin the 3 months and longer time is required, say a period ofone year, in appropriate cases, differential duty likely to ariseduring such period shall be the basis/ determination of the bondamount. When the security bond is executed, the amount ofsecurity will be generally fixed at 25% of the bond amount.However, in appropriate cases, for special reasons to be recorded,the proper officer under rule 7 of the said Rules may order for ahigher security amount. In the event of death or insolvency orinsufficiency of the surety / security, the proper officer maydemand fresh bond. If the security furnished is found to beinadequate, he may demand additional security also. In the caseof provisional assessment, if the assessee fails to make the dueadjustment within the period of 15 days after the final assessmentmade, the proper officer may proceed to enforce the bond orencash the bank guarantee after due notice to the assessee.

5. Stamps on bond

5.1 All bonds must bear stamps on the scale prescribed by article 57 of theschedule I to the Indian Stamp Act 1899, modified as may be, by StateLegislation. Commissionerate should circulate to their staff the rate of stamp dutyrequired in each State within Commissionerate for each type of bond.

5.2 Whoever affixes an adhesive stamp to any instrument chargeable withduty which has been executed by any person shall when affixing such stampcancel the same so that it cannot be used again and whom so ever hasexecuted any instrument on any paper bearing an adhesive stamp shall at thetime of execution unless such stamp has been already been cancelled in themanner aforesaid, cancel the same so that it cannot be used again. Anyinstrument bearing an adhesive stamp, which has not been cancelled so that itcannot be used again, shall so far as such stamp is concerned be deemed to beun-stamped. The person required to cancel an adhesive stamp may cancel it bywriting on or cross the stamp with his name or initials or the name or initial of hisfirm with the true date of his so writing, or in any other effectual manner.

6. Execution of bond by Government Undertaking or AutonomousCorporations

6.1 The Board has decided that every undertaking owned and manageddirectly through any Ministry, Directorate or Directorates by the CentralGovernment is exempt from the execution of any bond; or a State Government ishereby exempt from furnishing any security or surety for bond, where theexecution of such bond, or, as the case may be furnishing of security or surety isrequired by or under any other provision of the rules made under Central ExciseAct, 1944.

6.2 An undertaking owned or controlled by the Central Government or StateGovernment does not include-any undertaking belonging to corporation ownedor controlled by the Central Government or State Government and establishedby or under a Central Provisional or State Act; or any undertaking belonging toGovernment Company within the meaning of Section 617 of the Companies Act,1956 (I of 1956).

7. Security

7.1 The security to be furnished in respect of the bonds will be, as follows:

(i) The security furnished should either be cash, Government promissorynotes, post office savings, bank deposits, national savings Certificates,National Defence Bonds, National Defence Gold Bonds, 1980 or similarrealizable Government papers. Promissory Notes and stock Certificates ofthe Central Government or a State Government shall be acceptedsubject to the conditions laid down in clause (ii) of Rule 274 of GFR.

(ii) Deposit receipt of bank can also be pledged as securities for CentralExcise - Bonds subject to certain specific conditions under Rule 274 (vi) ofG.F.R. The conditions inter alia are:

(a) The deposit receipt shall be made out in the name of the pledgeeor if it is made out in the name of the pledger, the bank shallcertify on it that the deposit can be withdrawn only on demand orwith the sanction of the pledgee.

(b) The depositors shall agree in writing to undertake any risk involvedin the investment and make good the depreciation, if any.

(c) The depositors shall receive the interest when due, direct from thebank on a letter from the pledgee authorising the bank to pay it tohim.

(d) The responsibility of the pledgee in connection with the depositand the interest on it will cease when he issues a final withdrawalorder to the depositor and sends an intimation to the Bank that hehas done so.

(e) Only the larger Scheduled banks are to be considered asrecognized banks approved by Government for the purpose ofitem of Rule 274 of G.F.R.

(f) Interest on the securities will, however, continue to accrue and willbe realised by the holders on discharge of the bond and return ofthe securities.

(g) Where the same bond and security continue for over one year,arrangements must be made for credit or payment of the intereston such securities to the bonders.

(h) On cash securities no interest is payable. In the case of SavingsBank Account, the interst may be paid to the parties on claimpreferred by them periodically or can be collected after theamount is returned to them. In respect of other securities,arrangements are to be made for the payment of interest atregular intervals of 6 months.

8. Surety

8.1 Whenever surety bond is executed it is to be ensured that both the obligor andsurety sign the bond. Field officers will ensure that surety is financially sound and havebeen verified from time to time. Whenever bank guarantee is accepted for security,care should be taken to get the guarantee renewed before expiry from time to time, soas to enable the enforcement of liability as and when such need arises. Execution of B17Bonds is optional and if the assessee does not wish to avail of this facility, he may executeindividual bonds prescribed for different purposes.

8.2 A partner or a director of a limited company can also stand as surety in hisindividual capacity to guarantee the performances of the firm or a company as thecase may be. Since, in law, a limited company is a distinct legal entity and the memberof the company including directors are distinct from the company, there should be noobjection to allow the directors of the limited company to stand as surety for thecompanies provided they fulfil all the other conditions applicable to sureties. (F. No.8/10/16/CX II dt 5/8/1960)

9. Guarantee bond executed by bank

9.1 The provisions governing the execution of bonds by banks are, as follows:

(i) When the State Bank of India or a scheduled bank gives a guarantee fora registered person with or without deposit of security, the guaranteebond should provide a period of validity and an extra period during whichobligations arising during the period of validity to be enforced. The timelimit for enforcement of obligation should be at least two years.

(ii) Where there is a need for extension of the period of validity of bankguarantee furnished by the bank on behalf of a party in pursuant to anorder of an original or appellate authority or any other reasons, it shouldbe done by means of supplementary deed of bank guarantee on astamp paper.

10. Preservation of bond and retention of securities

10.1 Proper preservation of bonds is to be ensured in the interest of the revenue.

(i) Bonds must be preserved as long as they are valid and should bereturned only after all the obligations under the bond had beendischarged.

(ii) All officers who filled Central Excise bonds must be careful not to enforcethe words “ cancelled” on the bonds even after the apparent fulfilment ofobligation ; otherwise it is likely to be argues that persons liable under thebond have been their by discharge from the liabilities imposed by thebond. The obligations under the bond are not legally extinguished solong as the bond is not returned to the obligor or is not cancelled onexecution of a deed of cancellation.

11. Verification of sureties

11.1 In respect of surety bonds, periodical verification, preferably on an annual basiswill be made by the jurisdictional Central Excise Officers so as to ensure the sureties arefinancially sound, solvent and alive. The enquiry to verify the financial stability of thesureties will be made by any of the following methods:

(i) By reference to the surety’s bankers.

(ii) By making personal enquiries and ascertaining whether the suretypossesses a house or other immovable property, industrial equipment,shop etc. which would cover the bond amount. Alternatively, the suretiesmay themselves be asked to furnish a list of their property, which may beverified by the Officer.

(iii) By reference to Revenue Officer not below the rank of Tahsildar or aMamalakdar.

(iv) The result of enquiry as well as the solvency of the surety should beincorporated in the records of the Department.

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