Bona fide failure in an export-oriented unit: destruction of duty-free goods barred duty demand and consequential penalties.

Duty-free capital goods imported or procured for an export-oriented unit were treated as eligible for destruction under Notification No. 133/94 where there was no diversion, irregular import, or use outside the intended manufacturing activity and the failure was bona fide. Paragraph 7(ii) was read as permitting destruction of goods within the zone and as barring levy of customs duty in such a situation, subject to customs satisfaction. The accompanying Board circular was understood to treat the procedural requirements as non-substantive. On that basis, the demand of duty and consequential penalties under the Customs Act and Central Excise Rules could not be sustained.

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Issues: Whether customs duty and excise duty could be demanded, and penalties sustained, where capital goods were imported and procured duty free for use in an export-oriented unit but the business failed and the assessee sought destruction of the goods under the applicable exemption notification.

Analysis: There was no finding of diversion, irregular import, or use of the goods for any purpose other than the intended manufacturing activity. The case was treated as one of genuine business failure without mala fides. Paragraph 7(ii) of Notification No. 133/94 specifically contemplated destruction of goods within the zone and provided that duty shall not be leviable in such a situation, subject to satisfaction of the customs . The circular issued by the Board also clarified that imported goods covered by the notification could be allowed destruction and that the procedural conditions were non-substantive in nature. In these circumstances, the demand of duty and the penalties imposed under the Customs Act and the Central Excise Rules could not be sustained.

Conclusion: The demand of duty and the penalties were set aside in favour of the assessee.

Ratio Decidendi: Where duty-free goods in an export-oriented unit are not diverted or misused and the case is one of bona fide business failure, paragraph 7(ii) of Notification No. 133/94 permits destruction of the goods within the zone and bars levy of duty and consequential penalties.

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