In-house R&D within a 100% EOU did not defeat customs exemption where inputs stayed inside the unit and supported manufacture.

Imported duty-free raw materials received by a 100% EOU were partly used for in-house research and development linked to vaccine manufacture. Because the R&D activity formed an essential part of the manufacturing process, and there was no allegation of diversion outside the unit or use other than within the EOU, the customs exemption benefit was not denied. On that basis, the duty demand and consequential penalties were found unsustainable, and the exemption remained available to the assessee.

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Issues: Whether the benefit of customs exemption notifications was available when imported raw materials, received without payment of duty by a 100% EOU, were partly used for research and development activities within the unit.

Analysis: The imported inputs were used by a 100% EOU engaged in manufacture of vaccines, and the research and development activity was found to be an essential part of the manufacturing process. There was no allegation that the duty-free materials were diverted outside the unit or used otherwise than within the 100% EOU. In these circumstances, the use of inputs for in-house research and development did not justify denial of the exemption benefit.

Conclusion: The demand and consequential penalties were not sustainable, and the exemption benefit was held available to the assessee.

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