Drawback entitlement after later duty payment and credit reversal cannot be denied solely for initial duty-free procurement.

Drawback entitlement was examined where an exporter initially procured input materials without payment of duty, but later paid the duty and reversed the credit after notice. The governing drawback rules allow reduction where only part of the input duty has been paid and contemplate adjustment when duty is subsequently paid or credit is reversed. Because the later compliance removed the statutory bar, drawback could not be denied merely on the basis of the initial duty-free procurement. The adverse denial and recovery orders were therefore unsustainable, and the matter required recalculation of admissible drawback under the applicable rules.

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Issues: Whether the exporter remained entitled to drawback after having procured input materials without payment of duty but later paid the duty and reversed the credit, and whether the authorities were justified in denying drawback and ordering recovery.

Analysis: The applicable drawback rules provide that drawback may be reduced where only part of the duty on input materials has been paid, and no drawback is allowable where goods are produced or manufactured from materials on which duty has not been paid. The record showed that the exporter had initially availed the relevant duty-free procurement facility for input materials used in manufacture, but thereafter paid the excise duty and deposited the credit after issuance of notice. The notifications relied upon by the revenue excluded drawback where goods were manufactured or exported under Rule 19(2) of the Central Excise Rules, 2002, but the governing drawback provision itself contemplated adjustment where duty had subsequently been paid or credit reversed. In these circumstances, the later payment of duty and reversal of credit removed the bar to drawback, and the rejection of the claim on the sole ground of subsequent compliance was unsustainable.

Conclusion: The exporter was entitled to drawback to the extent admissible under the proviso to Rule 3(1) of the Drawback Rules, 1995, and the adverse orders were liable to be set aside.

Final Conclusion: The matter was sent back for recalculation of the admissible drawback in accordance with the governing drawback rules after setting aside the orders denying the claim.

Ratio Decidendi: Where duty on inputs is subsequently paid and credit is reversed, drawback cannot be denied merely because the initial procurement was under a duty-free export facility, if the governing drawback provision permits adjustment for lesser duty paid or credit obtained.

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