Duty-paid capital goods transferred after DTA conversion to EOU do not attract fresh cash duty; credit reversal may suffice.

Capital goods that were duty-paid and received when a unit operated as a DTA unit do not attract fresh cash duty merely because they are later transferred after conversion into a 100% EOU. The scheme distinguishes between duty-free goods received by an EOU under exemption notifications and goods manufactured by an EOU and cleared into the DTA. Where Modvat credit had been taken on the goods in the DTA period, the proper consequence is reversal of that credit, not payment of excise duty in cash on transfer to a sister unit. The demand and penalty were therefore unsustainable.

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Issues: Whether capital goods originally received and duty-paid while the unit operated as a DTA unit, and later transferred after conversion into a 100% EOU, attracted duty in cash on removal to a sister unit, or whether no such duty was payable.

Analysis: The relevant scheme distinguished between a 100% EOU receiving inputs or capital goods free of duty under the EOU exemption notifications and goods manufactured by an EOU and cleared into DTA under the proviso to Section 3(1) of the Central Excise Act, 1944. The capital goods in question were not imported goods or goods received duty-free by the EOU; they had been received and credit had been taken when the unit was still a DTA unit. Even if the Modvat balance stood lapsed upon conversion into an EOU, the goods transferred were not of the kind on which duty was leviable merely because they were removed after conversion. The only appropriate consequence was reversal of the credit taken, not payment of duty in cash.

Conclusion: No duty was payable in cash on transfer of the duty-paid capital goods to the sister unit; the demand and penalty were unsustainable and the decision was in favour of the assessee.

Ratio Decidendi: Capital goods that were duty-paid and brought into the unit while it functioned as a DTA unit do not attract fresh duty merely because they are removed after the unit converts into a 100% EOU; at most, the credit taken on such goods may be reversed.

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