Export-oriented unit exemption does not extend to domestic tariff area clearances; duty applies despite galvanising not being manufacture.

A 100% export oriented unit cannot retain exemption for duty-free inputs when galvanised mild steel pipes are cleared into the domestic tariff area instead of being exported. The exemption under Notification No. 1/95-C.E. operated within the export-oriented scheme and did not permit home-market clearances without duty; duty was therefore payable on such domestic clearances despite the assessee's reliance on the view that galvanising is not manufacture under Section 2(f) of the Central Excise Act. The duty demand was sustained, while the penalty was reduced in light of the facts and circumstances.

---

---

Issues: (i) Whether galvanising of mild steel pipes by a 100% export oriented unit attracted duty on clearance of the goods into the domestic tariff area under Notification No. 1/95-C.E.; (ii) Whether the penalty deserved interference.

Issue (i): Whether galvanising of mild steel pipes by a 100% export oriented unit attracted duty on clearance of the goods into the domestic tariff area under Notification No. 1/95-C.E.

Analysis: The exemption under Notification No. 1/95-C.E. was intended for specified excisable goods brought into a 100% EOU in connection with manufacture, production, processing or packaging of articles for export. The notification and the Exim Policy contemplated duty-free import or procurement of inputs only so long as the resultant goods were exported, while clearances into the domestic market required payment of applicable duties on the value of the goods at the time of such clearance. The Tribunal also relied on the settled position that galvanising does not amount to manufacture under Section 2(f) of the Central Excise Act, but that does not assist the assessee when duty-free inputs are diverted to domestic sale instead of export. The circular issued by the Central Board also indicated a broad construction of the exemption, but only within the export-oriented scheme and not to permit duty-free home-market clearance.

Conclusion: Duty was payable on the galvanised pipes cleared into the domestic tariff area, and the demand was upheld against the assessee.

Issue (ii): Whether the penalty deserved interference.

Analysis: The order sustained the duty demand, but the Tribunal considered the facts and circumstances sufficient to warrant reduction of the penal consequence rather than complete affirmation at the original quantum.

Conclusion: The penalty was reduced to Rs. 10 lakh.

Final Conclusion: The demand of duty on domestic tariff area clearances was sustained, while the penalty was brought down to a lesser amount, leaving the assessee only partial relief.

Ratio Decidendi: An export oriented unit cannot retain the benefit of exemption for duty-free inputs when the resultant goods are cleared into the domestic tariff area instead of being exported, and duty becomes payable on such domestic clearances notwithstanding the assessee's reliance on the process not amounting to manufacture under Section 2(f) of the Central Excise Act.

---