Debonding of a 100% EOU: duty limited to stock and depreciated capital goods; penalties not sustainable without breached conditions

On debonding of a 100% EOU that had completed export obligation and achieved positive NFE, duty is confined to unutilised stock on hand and depreciated capital goods; duty cannot be demanded on raw materials and consumables already consumed in manufacture of exported goods. Where the notification conditions were in fact satisfied, the alleged foundational breach does not survive, so confiscation and penalties under the Customs and Central Excise regimes cannot be sustained. The matter is therefore limited to re-quantification of duty on the permissible basis, with no penalty surviving on the facts stated.

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Issues: (i) whether, on debonding of a 100% EOU that had achieved export obligation and positive NFE, duty could be demanded on raw materials, consumables and capital goods used in export production; (ii) whether confiscation and penalties could be sustained in the absence of non-fulfilment of the notification conditions.

Issue (i): whether, on debonding of a 100% EOU that had achieved export obligation and positive NFE, duty could be demanded on raw materials, consumables and capital goods used in export production.

Analysis: The unit had completed the first five-year block with fulfilment of export obligation and value addition, and had also achieved positive NFE in the second block. On debonding, duty could be demanded only on unutilised stock lying in the unit on the relevant date and, in the case of capital goods, only on depreciated value. Duty could not be confirmed on raw materials and consumables already consumed in the manufacture of exported goods. The demand as made in respect of such consumed inputs was unsustainable.

Conclusion: The demand on consumed raw materials and consumables was set aside, and duty on capital goods was directed to be re-quantified after allowing depreciation.

Issue (ii): whether confiscation and penalties could be sustained in the absence of non-fulfilment of the notification conditions.

Analysis: Since the appellant had achieved the export obligation, value addition and positive NFE, the foundational breach alleged in the notice did not survive. In those circumstances, confiscation under the Customs Act and the parallel penal provisions under the Customs and Central Excise regimes could not be upheld. The matter therefore required fresh quantification only for the limited duty liability permissible on stock and depreciated capital goods.

Conclusion: The confiscation and penalties were held not sustainable.

Final Conclusion: The impugned order was set aside and the matter was remanded for re-quantification of duty on the limited basis indicated, with no penalty surviving on the facts found.

Ratio Decidendi: In a debonding case involving a 100% EOU that has satisfied export obligation and achieved positive NFE, duty can be demanded only on unutilised stock and depreciated capital goods, while confiscation and penalty cannot be sustained for alleged non-fulfilment of the notification conditions that are not breached.

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