Show cause notice limits and exemption proviso govern customs and excise liability on prawn seed inputs.

Customs duty demand on imported inputs could not be sustained because the adjudication order travelled beyond the show cause notice, and the connected penalties failed with it. Excise duty on indigenous inputs used to produce prawn seed cleared into the domestic tariff area was upheld because the exemption notification's proviso made input duty payable where the final product was non-excisable and cleared in the contemplated manner. The contention that the proviso applied only to export products was rejected, but the penalties were set aside on the facts. The result was partial relief: customs duty and all penalties were deleted, while the excise duty demand on indigenous inputs was sustained.

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Issues: (i) Whether customs duty and consequential penalties could be sustained when the adjudication order travelled beyond the show cause notice by demanding duty on imported inputs, raw materials and consumables instead of on the prawn seed themselves; (ii) Whether excise duty on indigenous inputs used in the production of prawn seed cleared into the domestic tariff area was payable under the exemption notification when the final product was held to be non-excisable, and whether the penalties imposed could survive.

Issue (i): Whether customs duty and consequential penalties could be sustained when the adjudication order travelled beyond the show cause notice by demanding duty on imported inputs, raw materials and consumables instead of on the prawn seed themselves.

Analysis: The notices demanded customs duty on prawn seed, whereas the adjudication order fastened liability on imported inputs, raw materials and consumables used in relation to the prawn seed cleared to the domestic tariff area. Such a demand was not founded on the allegation or proposal in the show cause notice. An adjudication which introduces a new case and proceeds on a footing not put to notice cannot be sustained.

Conclusion: The customs duty demand on imported inputs was set aside as being beyond the scope of the show cause notice, and the connected penalties founded on that demand could not stand.

Issue (ii): Whether excise duty on indigenous inputs used in the production of prawn seed cleared into the domestic tariff area was payable under the exemption notification when the final product was held to be non-excisable, and whether the penalties imposed could survive.

Analysis: The exemption notification contained a proviso making duty payable on inputs where the resulting products were not excisable and were cleared in the manner contemplated by the notification. On the finding that prawn seed was not excisable, the proviso applied to the inputs used in its production. The contention that the expression 'such products' referred only to export products was rejected. However, the penalties were considered unwarranted in the circumstances and were not justified on the record.

Conclusion: The excise duty demand on indigenous inputs was upheld, but the penalties were set aside.

Final Conclusion: The appeal succeeded in part: customs duty and all penalties were knocked down, while the excise duty demand on indigenous inputs was sustained.

Ratio Decidendi: An adjudication cannot sustain a duty demand on a basis not alleged in the show cause notice, but where an exemption notification expressly makes input duty payable upon clearance of non-excisable products, the input-duty liability can be upheld notwithstanding the product itself not being dutiable.

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