Customs exemption cannot be denied for deviation in production method where duty-free inputs were used and exports were made.

Exemption under Notification No. 126/94-CE could not be denied merely because an authorised unit did not manufacture export goods in the exact manner described in its project report. The record showed that the finished goods were made from duty-free inputs obtained under CT-3 certificates and exported, with no finding of clandestine removal of those inputs. Any breach of the conditions in the letter of authority or project approval was a matter for the Development Commissioner, not a basis for customs duty demand, confiscation or penalties by customs authorities. On that reasoning, the exemption denial and consequential demands were held unsustainable.

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Issues: Whether the benefit of Notification No. 126/94-CE could be denied and duty, confiscation and penalties sustained merely because the unit did not manufacture export goods in the exact manner stated in the project report submitted to the Development Commissioner.

Analysis: The unit had been authorised by the Development Commissioner, the period for commencement of production had been extended, and the exported finished goods were admittedly manufactured out of duty-free inputs obtained under CT-3 certificates. The deviation alleged by the Department related to the manner of production and the use of manual operations, but there was no finding that the duty-free goods were clandestinely removed from the unit without payment of duty. The proper course, if the unit failed to adhere to the conditions of its letter of authority, was action by the Development Commissioner. Customs authorities could not demand duty or order confiscation merely because the unit had not followed the method of production mentioned in the project report.

Conclusion: The denial of exemption, confiscation of goods, demand of duty and penalties were unsustainable and the issue was decided in favour of the assessee.

Final Conclusion: The order of the Commissioner was set aside and the appeal succeeded.

Ratio Decidendi: Where duty-free goods are procured and the resultant goods are exported, customs authorities cannot deny the exemption or confiscate the goods merely on the ground that the unit deviated from the production method stated in the project report; any non-compliance with the conditions of the letter of authority lies within the competence of the Development Commissioner.

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