Strict compliance with EOU exemption conditions, debonding-duty rates and depreciation limits upheld for capital goods and inputs.

EOU exemption notifications were held strictly conditional on fulfilment of export obligation and value addition norms, so non-compliance defeated exemption for imported and indigenous raw materials and consumables used in manufacture for export. On debonding, duty for used capital goods was to be worked on the rate in force on the deemed debonding date, with depreciation capped at 90% under the prescribed circular; the demand on unused raw materials and consumables at the debonding-date rate was sustained. Breach of the notification conditions also rendered the imported and indigenous goods liable to confiscation and penalty. The appeal succeeded only to the limited extent of correcting the rate applied to used capital goods.

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Issues: (i) whether exemption under the customs and central excise notifications remained available in respect of goods actually used in manufacture for export despite failure to fulfil export obligation and value addition norms; (ii) whether duty on used capital goods and unused raw materials and consumables cleared on debonding was chargeable at the rate on the date of payment, the date of debonding, or the date of import, and whether depreciation could exceed 90%; (iii) whether imported and indigenous goods were liable to confiscation and penalty for non-fulfilment of notification conditions.

Issue (i): whether exemption under the customs and central excise notifications remained available in respect of goods actually used in manufacture for export despite failure to fulfil export obligation and value addition norms?

Analysis: The exemption notifications were conditional and were linked to fulfilment of the export obligation and value addition requirements under the EOU scheme. The bond executed by the unit bound it to comply with those conditions. The failure to achieve the required exports and value addition meant that the basic conditions of the exemption were not satisfied. The reasoning proceeded on the principle that exemption notifications must be strictly construed and strictly complied with.

Conclusion: Exemption was not available in respect of the imported and indigenously procured raw materials and consumables actually used in the export manufacturing process; the duty demand on that count was sustained, against the assessee.

Issue (ii): whether duty on used capital goods and unused raw materials and consumables cleared on debonding was chargeable at the rate on the date of payment, the date of debonding, or the date of import, and whether depreciation could exceed 90%?

Analysis: For goods cleared from a bonded EOU on debonding, the applicable date for rate of duty was the date on which the warehousing period expired, which in the facts was the deemed debonding date. For capital goods, duty was payable on depreciated value, but the depreciation was governed by the prescribed board circular and capped at 90%. For unused raw materials and consumables, duty was payable on the value at the time of import, with the rate in force on the debonding date. The plea for 100% depreciation and for applying the rate on the later date of actual payment was rejected.

Conclusion: The assessee succeeded only to the limited extent that the Commissioner had wrongly applied the import-date rate to used capital goods; the correct rate was the rate in force on the debonding date, with depreciation limited to 90%. The duty on unused raw materials and consumables on the debonding-date rate was upheld.

Issue (iii): whether imported and indigenous goods were liable to confiscation and penalty for non-fulfilment of notification conditions?

Analysis: Once the conditions attached to the exemption notifications were not observed, the imported goods became liable to confiscation under the customs provisions and the importer became liable to penalty. For the same reason, the indigenous excisable goods were liable to confiscation and penalty under the excise rules.

Conclusion: Confiscation and penalty were upheld against the assessee.

Final Conclusion: The appeal succeeded only to the limited extent of correcting the rate applied to used capital goods on debonding, while the remaining duty demands, confiscation and penalties were maintained.

Ratio Decidendi: Conditions attached to exemption notifications in an EOU scheme must be strictly fulfilled, and on debonding of warehoused goods the applicable duty rate is the rate in force on the date of expiry of warehousing, with depreciation governed by the prescribed limit.

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