Duty-free import diversion triggers confiscation and duty recovery, but composite penalty under separate laws is not sustainable.

Duty-free imports received by a 100% EOU and clandestinely diverted in breach of the exemption conditions were liable to confiscation and recovery of customs duty, because the goods were shown to have been sold for cash and the importer's own material supported the finding of diversion. The challenge that the EOU was not the importer failed on the record. However, a penalty imposed on the Director in a composite form under the Customs Act and Central Excise Rules was held impermissible, so that penalty was set aside.

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Issues: (i) Whether confiscation of the imported polyester filament yarn and confirmation of customs duty on diverted duty-free imports were sustainable; (ii) whether the penalty imposed on the Director under a composite invocation of the Customs Act and Central Excise Rules was legally sustainable.

Issue (i): Whether confiscation of the imported polyester filament yarn and confirmation of customs duty on diverted duty-free imports were sustainable.

Analysis: The imported raw material had been received duty free under the exemption regime applicable to the 100% EOU, and the assessee was required to maintain proper accounts for receipt, issue and consumption of such goods. The record showed that the goods were clandestinely diverted in connivance with brokers and buyers and sold for cash, thereby breaching the conditions of the exemption notification. Once the duty-free goods were diverted and the conditions of the notification were violated, the duty that had not been paid at the time of import became recoverable. The challenge that the EOU was not the importer was not accepted, as the material on record, including the director's admission and the absence of any contrary document, showed that the EOU had imported the goods duty free.

Conclusion: The confiscation and customs duty demands were upheld against the assessee.

Issue (ii): Whether the penalty imposed on the Director under a composite invocation of the Customs Act and Central Excise Rules was legally sustainable.

Analysis: The penalty on the Director was imposed in a combined form under section 112(b) of the Customs Act and rule 209A of the Central Excise Rules. Such a consolidated or composite penalty under two separate provisions was held to be impermissible in law. The penalty could not therefore stand in the form in which it had been imposed.

Conclusion: The penalty on the Director was set aside.

Final Conclusion: The order sustained the confiscation, duty demand, and penalty against the EOU, but deleted the Director's penalty because the composite penalty was not legally permissible.

Ratio Decidendi: Duty-free imports diverted in breach of an exemption notification become liable to duty recovery and confiscation, but a penalty cannot be sustained when imposed as an impermissible composite levy under two distinct provisions.

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