Indirect Tax Laws and Practice · Manufacture in Bond

Manufacture in Bond under the Customs Act, 1962

Updated 11 October 2026 · Fact-checked

Manufacture in bond lets the owner of warehoused goods carry on a manufacturing process or other operations inside the warehouse itself (Section 65). It needs the permission of the Commissioner of Customs and prescribed conditions. Duty stays deferred until the resulting goods are cleared for home consumption, or is not charged if they are exported.

Understand Manufacture in Bond: Concept and Scope

Ordinary warehousing means you import dutiable goods, do not pay duty at once, and store them in a bonded warehouse under a bond. The goods wait there unchanged until you clear them for home consumption or export them.

Manufacture in bond goes one step further. Under Section 65(1), the owner of warehoused goods may carry on any manufacturing process or other operations in the warehouse in relation to those goods. The goods are worked on while still in bond, so duty is not paid before the work is done.

There are two conditions in the law. First, you need permission of the Principal Commissioner of Customs or Commissioner of Customs. Second, you must follow conditions as may be prescribed. Without permission, you cannot process warehoused goods.

Why does the facility exist? It helps a manufacturer who imports inputs, makes goods and then exports them, or sells them locally. Cash is not locked up in duty on inputs before the output is ready. Section 66 supports domestic industry further: if the duty rate on imported materials is higher than the rate on the goods made, the Central Government may, by notification, exempt the excess, where it is satisfied this is necessary in the interest of establishing or developing a domestic industry.

Processing creates waste or refuse. Section 65(2) deals with it. If the resulting goods are exported, import duty is remitted on the quantity of warehoused goods contained in the waste, provided the waste is destroyed or duty is paid on it as if imported in that form. If the resulting goods are cleared for home consumption, duty is charged on the warehoused goods contained in the waste.

The key difference to remember: plain warehousing is storage only; manufacture in bond is storage plus processing, with permission.

Key rules to remember

Section 65(1): permission rule: Owner of warehoused goods + permission of Principal Commissioner/Commissioner + prescribed conditions = may carry on manufacture or other operations in the warehouse; Permission is from the Commissioner level, not from the proper officer alone. The facility is available to the owner of the goods.
Section 65(2)(a): waste when resulting goods are exported: Duty remitted on warehoused goods contained in waste, if waste is destroyed OR duty is paid on it as if imported in that form; Applies if the whole or any part of the resulting goods is exported, and to waste arising from the goods exported.
Section 65(2)(b): waste when resulting goods are cleared for home consumption: Import duty is charged on the quantity of warehoused goods contained in the waste or refuse; Applies to waste arising from operations on goods cleared for home consumption.
Section 66: excess rate exemption: If duty rate on imported materials > duty rate on goods made, Central Government may exempt the excess (whole or part) by notification; Only if satisfied it is necessary for the establishment or development of a domestic industry.
Section 59(1): bond amount: Bond amount = 3 × duty assessed on the goods; Bond is executed by the importer after the bill of entry for warehousing is assessed.

How to solve Manufacture in Bond: Concept and Scope questions

Use this method for any question on the scope of manufacture in bond or on how it differs from warehousing.

1Identify whether the goods are warehoused goods, that is, imported dutiable goods deposited in a warehouse under bond.
2Check whether the owner has the permission of the Principal Commissioner or Commissioner of Customs under Section 65(1). If not, the operation is not allowed.
3Check that the prescribed conditions are met, and note that the activity can be a manufacturing process or other operations.
4If waste or refuse arises, decide the fate of the resulting goods: exported or cleared for home consumption.
5Apply Section 65(2)(a) for export (remission, subject to destruction or payment of duty on waste) or Section 65(2)(b) for home consumption (duty on the warehoused goods contained in the waste).
6If the question compares duty rates of inputs and output, consider Section 66 exemption by notification.
7Close with a clear conclusion in one line, quoting the section.

Quickest way: Three-question check

When to use it: Use in MCQs and short-answer questions when time is tight.

Who is doing the work? Only the owner of warehoused goods, with Commissioner permission.
Is it only storage, or is there processing? Processing means Section 65; storage only means plain warehousing.
What happened to the waste? Exported goods lead to remission on waste (destroy or pay duty); goods cleared for home use lead to duty on the waste.

Common mistakes in Manufacture in Bond: Concept and Scope

Treating manufacture in bond as automatically available to every warehouse owner.
Students focus on the right and forget the permission condition.
Fix: Always write that permission of the Principal Commissioner or Commissioner of Customs and prescribed conditions are required.
Saying duty is always remitted on waste.
Students remember only the export rule.
Fix: Remission applies when resulting goods are exported, and then the waste must be destroyed or duty paid on it as if imported in that form. For home consumption, duty is charged.
Confusing Section 65 with Section 66.
Both deal with manufacture in a warehouse.
Fix: Section 65 permits the manufacture and handles waste. Section 66 is a power of the Central Government to exempt the excess rate of duty on imported materials.
Limiting Section 65 to 'manufacture' only.
The chapter name says manufacture.
Fix: The section covers any manufacturing process or other operations in relation to the warehoused goods.
Quoting the bond amount as equal to the duty.
Students recall that a bond is needed but not the multiple.
Fix: Under Section 59(1) the bond is for a sum equal to thrice the duty assessed.

Worked examples

Example 1

Sharma Components Ltd imports dutiable raw material and deposits it in a bonded warehouse. It wants to process the material inside the warehouse. State the legal requirements and explain how this differs from simple warehousing.

Show the solution

The goods are warehoused goods and Sharma Components is their owner, so Section 65(1) can apply.
The company must obtain permission of the Principal Commissioner of Customs or Commissioner of Customs and comply with the prescribed conditions.
With permission, it may carry on any manufacturing process or other operations in the warehouse in relation to those goods.
In simple warehousing, goods are only stored unchanged until cleared for home consumption or export. In manufacture in bond, the goods are also processed while in bond.

Answer: Sharma Components may process the goods in the warehouse only with the Commissioner's permission and on prescribed conditions under Section 65(1). Warehousing is storage; manufacture in bond adds processing within the warehouse.

Example 2

In a licensed warehouse, Kaveri Industries processes warehoused goods and generates waste. All the resulting goods are exported. State the duty treatment of the waste.

Show the solution

Resulting goods are exported, so Section 65(2)(a) applies.
Import duty is remitted on the quantity of warehoused goods contained in the waste that arose from operations on the exported goods.
This remission is subject to a proviso: the waste must either be destroyed, or duty must be paid on it as if it had been imported into India in that form.

Answer: Duty on the warehoused goods contained in the waste is remitted under Section 65(2)(a), provided the waste is destroyed or duty is paid on it as if imported in that form. Had the goods been cleared for home consumption, duty would be charged under Section 65(2)(b).

Exam tips

In MCQs, watch for the words 'permission of the Commissioner'; options that omit permission are usually wrong.
Learn the two limbs of Section 65(2) as a pair: export means remission with a proviso; home consumption means duty is charged.
For comparison questions, write a two-column style answer in sentences: purpose, permission, processing, treatment of waste.
Do not quote section numbers you are unsure of; the sections in this topic are 59, 61, 65, 66 and 73.

Practice questions from Manufacture in Bond

Manufacture in Bond: Concept and Scope: frequently asked questions

What is manufacture in bond under the Customs Act?

It is the facility under Section 65 for the owner of warehoused goods to carry on manufacturing or other operations in the warehouse. It needs permission of the Principal Commissioner or Commissioner of Customs and compliance with prescribed conditions.

How is manufacture in bond different from warehousing?

Warehousing only stores imported dutiable goods under bond without paying duty. Manufacture in bond allows the owner to process those goods inside the warehouse as well, with permission.

What happens to waste in manufacture in bond?

If the resulting goods are exported, duty on the warehoused goods contained in the waste is remitted, provided the waste is destroyed or duty is paid on it as if imported in that form. If the resulting goods are cleared for home consumption, duty is charged on the warehoused goods contained in the waste.

What is the role of Section 66?

It lets the Central Government, by notification, exempt imported materials used under Section 65 from the whole or part of the excess where the duty rate on the materials is higher than on the goods made. It must be satisfied that this is necessary for establishing or developing a domestic industry.