Exemption for duty-free EOU inputs fails when diverted after delivery; duty liability follows, while penalties depend on proven involvement.

Duty-free yarn procured for a 100% EOU and diverted before reaching the unit was held outside the exemption under Notification No. 1/95-C.E., because the conditions of receipt, storage, accountal and use in export manufacture were not satisfied. On the evidence, the Tribunal found the re-warehousing certificates and challans to be ly obtained and held that duty liability attached to the consignee once delivery had been taken but the goods were not brought into the EOU, with interest payable. As to penalties, the absence of proved direct involvement justified setting aside the penalties on two directors, while the penalties on the company and the Executive Director were reduced as excessive.

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Issues: (i) whether duty under Notification No. 1/95-C.E. was recoverable where duty-free yarn procured for a 100% EOU was diverted and not used in manufacture of export goods; and (ii) whether penalties on the company and its directors were sustainable.

Issue (i): whether duty under Notification No. 1/95-C.E. was recoverable where duty-free yarn procured for a 100% EOU was diverted and not used in manufacture of export goods

Analysis: The documentary and oral evidence showed that the yarn was delivered only up to Bhiwandi and was diverted elsewhere, that the claimed job workers were non-existent or denied having done the work, and that the raw material shown in the export products did not match the quantity or composition of the yarn procured under CT-3 certificates. The re-warehousing certificates and challans were found to have been incorrectly obtained and the exemption condition requiring receipt, storage, accountal and use of the goods in the 100% EOU was not satisfied. The Tribunal further held that once the consignee had taken delivery and the goods were not brought into the EOU for the intended export use, the liability for accountal and duty arose against the consignee and not the consignor.

Conclusion: Duty under Notification No. 1/95-C.E. was rightly demanded from the assessee, with interest.

Issue (ii): whether penalties on the company and its directors were sustainable

Analysis: The material did not show direct involvement of the Managing Director and one Director in the illegal activity or physical dealing with the goods, so their penalties could not stand. As regards the Executive Director, the record showed his involvement, but the penalty imposed was excessive and warranted reduction. The penalty on the company was also considered excessive and was reduced.

Conclusion: Penalties on the two directors were set aside, the penalty on the company was reduced, and the penalty on the Executive Director was reduced.

Final Conclusion: The demand of duty was upheld, while the penalty reliefs were granted in part by deleting two penalties and reducing the remaining penalties.

Ratio Decidendi: Where duty-free goods are diverted after delivery to the consignee and are not used in the exempted export manufacture, the exemption fails and the consignee bears the duty-accountal consequence; penal liability depends on proved individual involvement.

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