Duty demand on diverted EOU raw materials upheld, while procedural objections failed and firm-level penalty was set aside.

In a case involving fraudulent diversion of duty-free raw materials by a 100% EOU, the Tribunal upheld the excise duty demand, holding that the liability arose under excise law and that the customs tariff was relevant only for quantification. The challenge on limitation and the complaint that denial of cross-examination vitiated the proceedings were rejected, as the investigation was not confined to a single period and the partner's incriminating statement was not retracted. On penalty, the Tribunal sustained the partner's penalty because he was found instrumental in the diversion, but set aside the firm's penalty to avoid simultaneous punishment on both the firm and the partner.

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Issues: (i) Whether the demand was barred by limitation and the denial of cross-examination vitiated the proceedings; (ii) whether duty was correctly demanded on the diverted duty-free raw materials procured by a 100% EOU; (iii) whether the penalties on the firm and the partner were sustainable.

Issue (i): Whether the demand was barred by limitation and the denial of cross-examination vitiated the proceedings.

Analysis: The material on record showed that the investigation was not confined to August 2001, as a statement was recorded again on 6-6-03. The statement of the partner admitting clandestine removal was not retracted and was later reiterated. In that backdrop, the request for cross-examination of the recipient of the goods was held to be unnecessary and the complaint of lack of effective opportunity did not survive.

Conclusion: The limitation challenge and the challenge based on denial of cross-examination were rejected.

Issue (ii): Whether duty was correctly demanded on the diverted duty-free raw materials procured by a 100% EOU.

Analysis: The diversion of duty-free material received from other 100% EOUs was treated as an admitted fraudulent act. The duty payable by a 100% EOU on goods in such a situation was held to be excise duty, and reference to the customs tariff was only for the purpose of quantification. The demand under the excise provisions was therefore upheld.

Conclusion: The duty demand on the diverted goods was sustained.

Issue (iii): Whether the penalties on the firm and the partner were sustainable.

Analysis: The Tribunal held that the appellant firm had been involved in the diversion of duty-free material, so penalty was justified in principle. However, in the facts of the case, simultaneous penalty on the firm and the partner was considered unnecessary. The partner's penalty was maintained because he was found to be instrumental in the fraudulent activity.

Conclusion: The penalty on the firm was set aside, while the penalty on the partner was sustained.

Final Conclusion: The demand of duty was upheld, the procedural objections failed, and the matter succeeded only to the limited extent of relief from penalty to the appellant firm.

Ratio Decidendi: Where duty-free materials procured by a 100% EOU are fraudulently diverted, the duty demand under the excise law is maintainable, while penalty may be tailored to the role and culpability of the person proceeded against.

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