Proof of customs contravention under exemption schemes is essential; admitted breach of policy conditions sustains duty, with penalty moderated.

Revenue could not sustain the larger customs demand under Notification No. 203/92-Cus because the alleged contraventions were not proved on evidence: the Modvat credit reversal was accepted for the relevant period, the export product remained within the applicable EXIM norm, and diversion, sale of imported inputs, or transfer of licences was not established. The associated duty demand and related penalties on that count were therefore set aside. By contrast, duty on imported Calcium Silicide was sustained because the goods were admittedly used for domestic manufacture and disposed of without the required policy permission; the assessee had also accepted and paid the duty liability. The assessee's penalty was reduced as excessive, while the director's penalty was upheld.

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Issues: (i) Whether the Revenue established contravention of Notification No. 203/92-Cus and the Exim Policy on the grounds of availing Modvat credit, misdeclaration of the exported goods, diversion of imported inputs, and transfer of licences. (ii) Whether the duty demand on 27 metric tonnes of Calcium Silicide and the penalties imposed on the assessee and its director were sustainable.

Issue (i): Whether the Revenue established contravention of Notification No. 203/92-Cus and the Exim Policy on the grounds of availing Modvat credit, misdeclaration of the exported goods, diversion of imported inputs, and transfer of licences.

Analysis: The appeals did not dislodge the finding that the Modvat credit reversal made by the licence holders met the requirement for the relevant period, and there was no established shortfall warranting customs demand. The finding that the export product fell within the relevant serial of the EXIM norms was also left undisturbed. The record did not establish diversion or sale of imported inputs as such, and the allegation of transfer of licences was not proved on evidence.

Conclusion: The Revenue failed to establish the alleged contraventions, and the order dropping the larger duty demand and related penalties was upheld.

Issue (ii): Whether the duty demand on 27 metric tonnes of Calcium Silicide and the penalties imposed on the assessee and its director were sustainable.

Analysis: The imported Calcium Silicide was admittedly sent for use in the manufacture of resultant products sold in the domestic market, and no permission had been obtained for such disposal under the relevant export policy conditions. The assessee had admitted the duty liability and paid duty on the goods. However, the quantum of penalty was considered excessive and was reduced in view of the circumstances.

Conclusion: The duty demand was sustained, the assessee's penalty was reduced, and the director's penalty was upheld.

Final Conclusion: The order substantially favoured the assessee on the major revenue challenges, while sustaining the limited duty demand and modifying only the assessee's penalty.

Ratio Decidendi: A customs demand under an exemption scheme will not survive unless the alleged contravention is proved on evidence, but where the disposal of imported inputs in breach of policy conditions is admitted or established, the corresponding duty liability may be sustained while the penalty can be moderated on the facts.

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