Duty-free EOU clearance requires strict compliance: third-party inputs cannot move as deemed exports without credit reversal or duty payment.

CESTAT Chennai held that inputs procured from third parties and merely cleared onward to a 100% Export-Oriented Unit could not claim the benefit of Notification No. 1/95 unless the notification's direct-procurement conditions were satisfied. The requirement that goods be obtained from the factory of manufacture was treated as a substantive restriction, not a procedural formality, and the EOU certificates were confined to goods manufactured by the supplying unit. Such clearances therefore fell under Rule 57F, requiring export under bond, home-clearance duty payment, or reversal of credit, and not deemed export treatment.

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Issues: Whether inputs procured on which credit had been taken could be cleared as such to a 100% Export-Oriented Unit under Notification No. 1/95 without reversal of credit or payment of duty.

Analysis: The benefit of the notification was held to be available to the manufacturer of the final product and not to inputs purchased from third parties and merely supplied onward. The condition in the notification requiring direct procurement from the factory of manufacture was treated as a substantive restriction, not a procedural formality. The certificates issued for 100% EOUs were held to cover goods manufactured by the supplying unit, not inputs obtained from others. The clearances were therefore governed by Rule 57F, under which inputs could be exported under bond or cleared for home consumption on payment of duty or on reversal of credit, but not cleared to a 100% EOU as such on a deemed-export basis.

Conclusion: The appellants were not entitled to remove the inputs without reversal of credit or payment of equivalent duty, and the reference was answered against them and in favour of the Revenue.

Ratio Decidendi: A notification granting duty-free clearance to 100% EOUs cannot be extended to inputs procured from third parties and cleared as such by the credit-taking manufacturer unless the statutory conditions are satisfied, and such clearances cannot be equated with export under bond for the purpose of credit utilisation.

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