Duty-free EOU procurement under Chapter X failed against the recipient where Rule 196 contingencies were absent.

Duty-free procurement by a 100% Export-Oriented Undertaking under Notification No. 1/95-C.E. required compliance with the Chapter X procedure, including CT-3 certificates, but liability under Rule 196 of the Central Excise Rules, 1944 remained confined to non-accountal or loss or destruction during transit, handling or storage. Where duty was demanded only because inputs were procured without the approval contemplated by the notification, and none of the Rule 196 contingencies existed, the demand could not be fastened on the recipient undertaking. On the stated reasoning, liability lay against the supplier who cleared goods against an invalid CT-3 certificate, and the demand against the appellants was held unsustainable.

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Issues: Whether duty of excise could be demanded from a 100% Export-Oriented Undertaking for duty-free inputs procured without prior approval of the Commissioner on the recommendation of the Development Commissioner, and whether such demand could instead arise only in the circumstances contemplated by the Chapter X procedure.

Analysis: The exemption under Notification No. 1/95-C.E., as amended, required compliance with the prescribed procedure for procurement by a 100% Export-Oriented Undertaking, including the Chapter X mechanism and use of CT-3 certificates. At the same time, the recipient's liability under Rule 196 of the Central Excise Rules, 1944 was confined to the specified situations of non-accountal, or loss or destruction during transit, handling, or storage. In the present case, the demand was not founded on any of those Rule 196 contingencies. Instead, it was raised merely because the goods had been procured without the approval contemplated by the notification. On that footing, the duty liability was held to lie against the supplier who had cleared the goods against an invalid CT-3 certificate, and not against the recipient appellants.

Conclusion: The demand against the appellants was not sustainable, and the appeals were allowed.

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