Strict compliance with customs exemption conditions required; DGFT licence amendment cannot cure breach, though interest and penalty may be mitigated.

Customs exemption notifications must be strictly complied with, and compliance with an import licence or DGFT amendment under the EXIM Policy does not by itself satisfy the independent conditions attached to the exemption. Here, duty-free import was denied because the imported raw materials were used domestically and the resultant goods were not exported by the importer as required; exports through third parties could not cure that breach. On interest and penalty, the Court treated the special facts and DGFT amendment as mitigating circumstances, reduced interest to 9% per annum, and set aside the penalty.

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Issues: (i) whether the assessee satisfied the conditions of Notification No. 30/1997 for duty-free import of raw materials by effecting exports through third parties after the imported material had been used domestically, and whether the DGFT's amendment of the advance licence could cure non-compliance with the customs exemption notification; (ii) whether interest and penalty were leviable in full on the facts of the case.

Issue (i): whether the assessee satisfied the conditions of Notification No. 30/1997 for duty-free import of raw materials by effecting exports through third parties after the imported material had been used domestically, and whether the DGFT's amendment of the advance licence could cure non-compliance with the customs exemption notification.

Analysis: The exemption was granted under Section 25(1) of the Customs Act, 1962 subject to express conditions, including that the exempt materials be used by the importer for manufacture of the specified resultant products and that export obligation be discharged by exporting such resultant products within the prescribed period. The notification required strict observance of the condition that the imported exempt materials not be disposed of except for discharge of the export obligation. The assessee admittedly used the imported material for manufacture but did not export those resultant goods; instead, exports were arranged through third parties. An amendment by the DGFT under the EXIM Policy could not override the customs condition attached to the exemption notification. The customs authorities were entitled to examine breach of the notification notwithstanding the DGFT's view on licence compliance.

Conclusion: The condition of the exemption notification was not fulfilled, and the assessee remained liable to customs duty.

Issue (ii): whether interest and penalty were leviable in full on the facts of the case.

Analysis: The assessee had agreed under the bond to pay interest at 24% per annum on non-compliance, but the Court took into account the amendment granted by the DGFT, the absence of revenue loss in the broader sense, and the peculiar facts showing bona fide conduct. On that basis, the rate of interest was considered excessive for the case. The circumstances did not justify imposition of penalty.

Conclusion: Interest was reduced to 9% per annum and penalty was set aside.

Final Conclusion: The customs exemption was denied for failure to comply with the notification conditions, but the assessee obtained relief on interest and penalty in view of the special facts.

Ratio Decidendi: A customs exemption notification must be strictly complied with, and compliance with an import licence or DGFT amendment under the EXIM Policy does not by itself satisfy the independent conditions attached to the customs exemption.

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