Valuation of export-oriented unit clearances must follow the customs-based mechanism, not section 4 valuation, with penalty also unsustainable.

Penalty under rule 173Q could not be sustained against a hundred per cent export-oriented undertaking because the unit was excluded from Chapter VIII-A and the record did not show clandestine removal; duty recovery under rule 9(2) was therefore also unsustainable. Clearances by such an undertaking into the domestic tariff area had to be valued under the proviso to section 3 of the Central Excise Act, 1944 read with section 14 of the Customs Act, 1962, on a customs-duty basis as if the goods were imported, and not under section 4 of the Central Excise Act. The demand and penalty were set aside.

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Issues: (i) Whether penalty under rule 173Q could be sustained against a hundred per cent export-oriented undertaking, and whether duty demand could be raised under rule 9(2); (ii) Whether clearances from a hundred per cent export-oriented undertaking to the domestic tariff area were to be valued under section 4 of the Central Excise Act, 1944 or under the valuation scheme mandated by the proviso to section 3 of the Central Excise Act, 1944 read with section 14 of the Customs Act, 1962.

Issue (i): Whether penalty under rule 173Q could be sustained against a hundred per cent export-oriented undertaking, and whether duty demand could be raised under rule 9(2)?

Analysis: The penalty provision invoked was part of Chapter VIII-A of the Central Excise Rules, while units falling under Chapter V-A, including export-oriented undertakings, stood excluded by rule 173A(2). The record also did not disclose clandestine removal so as to justify resort to rule 9(2) for duty recovery. The demand therefore had to proceed under the normal assessment machinery applicable to the clearances in question.

Conclusion: The penalty under rule 173Q and the demand under rule 9(2) were not sustainable.

Issue (ii): Whether clearances from a hundred per cent export-oriented undertaking to the domestic tariff area were to be valued under section 4 of the Central Excise Act, 1944 or under the valuation scheme mandated by the proviso to section 3 of the Central Excise Act, 1944 read with section 14 of the Customs Act, 1962?

Analysis: For clearances by a hundred per cent export-oriented undertaking sold in India, the proviso to section 3 directs levy at an amount equal to the customs duties on like imported goods, and where such duties are chargeable by reference to value, the value is to be determined under the Customs Act, 1962 and the Customs Tariff Act, 1975. Accordingly, valuation had to be made as if the goods were imported into India, and section 4 of the Central Excise Act, 1944 could not govern the computation. The domestic sale price theory was therefore rejected.

Conclusion: Valuation under section 4 was inapplicable and the goods had to be valued under the customs-based mechanism under the proviso to section 3 and section 14 of the Customs Act, 1962.

Final Conclusion: The demand and penalty were set aside and the appeals were allowed.

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