Clandestine clearances by a 100% export oriented unit remain taxable under the domestic duty proviso, with concessional relief denied

A 100% export oriented unit's clandestine and unauthorised domestic clearances were treated as assessable under the proviso to Section 3(1) of the Central Excise Act, 1944, and later permissions did not validate prior removals. The concessional benefit of Notification No. 2/95-C.E. was unavailable where clearances were not made under permission then in force. Duty on inputs was rejected because their value was already included in the finished goods valuation. Confiscation and principal penalties were sustained for deliberate duty evasion, while the vehicle redemption fine was reduced and penalties on certain officials were deleted.

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Issues: (i) whether the quantity and value adopted for clandestine removal of terry towels were sustainable; (ii) whether clearances by a 100% export oriented unit into the domestic tariff area, including clandestine clearances and clearances without prior permission, were assessable under the proviso to Section 3(1) of the Central Excise Act, 1944 and whether the benefit of Notification No. 2/95-C.E. was available; (iii) whether the duty demand on inputs used in the manufacture of the clandestinely cleared goods could be sustained; and (iv) whether the confiscation, redemption fine and penalties were justified.

Issue (i): whether the quantity and value adopted for clandestine removal of terry towels were sustainable.

Analysis: The quantity of clandestine clearances was supported by the security-gate records, the seized documents, the shortage noticed during stock verification, and the admissions of the appellant's officials. The evidence showed two overlapping sets of removals: admitted unaccounted clearances and a stock shortage at the time of search, together supporting the finding of approximately 69 MTs. On value, the statements of the appellant's marketing officer and a regular buyer showed that the prevailing rates ranged from Rs. 180/- to Rs. 350/- per kg., with Rs. 250/- per kg. being the rate in most cases, making the adopted valuation reasonable.

Conclusion: The finding on clandestine removal of 69,267.31 kgs. at Rs. 250/- per kg. was upheld against the assessee.

Issue (ii): whether clearances by a 100% export oriented unit into the domestic tariff area, including clandestine clearances and clearances without prior permission, were assessable under the proviso to Section 3(1) of the Central Excise Act, 1944 and whether the benefit of Notification No. 2/95-C.E. was available.

Analysis: The Tribunal distinguished the decisions relied on for the assessee and applied the Larger Bench view that a 100% export oriented unit remains within the proviso to Section 3(1) while it continues as such, and that clandestine or unauthorized domestic clearances do not take such clearances outside the proviso. The reasoning proceeded on the object of the scheme, the need to prevent an interpretation that would reward law violation, and a purposive construction suppressing the mischief and advancing the remedy. The subsequent permissions obtained from the Development Commissioner were held to operate prospectively and not to validate earlier unauthorised clearances. For the clearances made in 1995-96 without permission, the concessional notification was held inapplicable because the clearances were not made in accordance with any permission then in force.

Conclusion: The duty on clandestine domestic clearances was held leviable under the proviso to Section 3(1), and the claim to the benefit of Notification No. 2/95-C.E. was rejected.

Issue (iii): whether the duty demand on inputs used in the manufacture of the clandestinely cleared goods could be sustained.

Analysis: The Revenue's case for separate duty on inputs was rejected because the value of the raw materials was already embedded in the value of the finished goods on which duty was confirmed. A separate levy on the inputs would amount to double demand without legal basis.

Conclusion: The Revenue's appeal on inputs was rejected.

Issue (iv): whether the confiscation, redemption fine and penalties were justified.

Analysis: Confiscation of the seized goods was sustained as the goods had been removed under bogus documents without payment of duty. The redemption fine on the goods was maintained. The confiscation of the vehicle was also maintained, but the redemption fine was reduced because the vehicle owner could not be treated as equally culpable for the evasion. The major penalty on the appellant was upheld in view of the deliberate fraud and intent to evade duty. The penalty on the principal functionary was sustained, while the penalties on the other officials were set aside as they acted under instructions and the main responsibility was fixed on the principal person. The penalty on the associated company was also sustained because it participated in the fraudulent scheme.

Conclusion: The confiscation and principal penalties were upheld, the vehicle redemption fine was reduced, and the penalties on the other officials were set aside.

Final Conclusion: The appeal succeeded only to a limited extent by reducing the vehicle redemption fine and deleting the penalties on certain officials, while the principal duty demands, confiscation and the main penalties were maintained and the Revenue's appeal on inputs failed.

Ratio Decidendi: A 100% export oriented unit remains subject to the proviso to Section 3(1) of the Central Excise Act, 1944 for domestic clearances made while it continues as an EOU, and unauthorized or clandestine clearances do not escape that regime or create entitlement to concessional treatment intended for permitted clearances.

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