Permitted duty-free disposal by EOU trading unit defeats customs duty liability and director penalties.

Duty-free imports by a 100% EOU trading unit, when disposed of through a route expressly permitted by the governing bond and clarificatory circular, do not give rise to customs duty liability. Where the goods were supplied against valid advance licences or other specific duty-free entitlements in accordance with that permitted framework, the legal basis for personal penalties on directors under Sections 112 and 117 of the Customs Act also fails. The directors' penalties were therefore held unsustainable and set aside.

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Issues: Whether personal penalties under Sections 112 and 117 of the Customs Act, 1962 were sustainable against the directors of a 100% EOU trading unit that had imported goods duty free under Notification No. 53/1997-Cus and supplied them against advance licence or specific duty-free entitlements.

Analysis: The goods were imported after execution of a bond that permitted disposal to another EOU/SEZ unit or against advance licence or specific duty-free entitlements, subject to fulfilment of the stipulated conditions. The circular issued by the Board clarified that trading units covered by Para 9.21 could supply goods to other EOU/EPZ/EHTP/STP units or to DTA against valid advance licences or specific duty-free import entitlements. As the factual position showed supply in accordance with that permitted route, no duty liability arose against the main company. In the absence of any duty liability, the foundation for penal action against the directors under Sections 112 and 117 also failed.

Conclusion: The penalties on the directors were not sustainable and were set aside in their favour.

Ratio Decidendi: Where duty-free imports by a trading EOU are disposed of in a manner expressly permitted by the governing bond and clarificatory circular, no customs duty liability arises and personal penalties on directors under Sections 112 and 117 cannot be imposed.

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