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Issues: (i) whether the value addition norm under the 100% EOU scheme had been satisfied and could be ignored by Customs despite the DGFT's final determination; (ii) whether duty could be demanded on a notional basis for alleged shortfall in export obligation when no such raw materials remained unutilized or diverted; and (iii) whether duty on capital goods, confiscation and penalty were sustainable on the facts.
Issue (i): whether the value addition norm under the 100% EOU scheme had been satisfied and could be ignored by Customs despite the DGFT's final determination.
Analysis: The scheme operated through the EXIM Policy and the corresponding exemption notification, with distinct functions assigned to DGFT and Customs. The value addition dispute had been finally resolved by the DGFT in favour of the assessee after reconsideration. Customs was required to respect that quasi-judicial determination in the absence of any lawful step to have it altered. The earlier adverse view on value addition could not, on these facts, prevail over the final DGFT finding.
Conclusion: The value addition norm was held to have been satisfied, against the Revenue.
Issue (ii): whether duty could be demanded on a notional basis for alleged shortfall in export obligation when no such raw materials remained unutilized or diverted.
Analysis: The record showed that the duty-free inputs had been used in manufacture and the resultant finished goods had been exported. There was no finding of diversion of inputs or finished goods, and no stock of raw materials or finished goods was lying unaccounted at the time of de-bonding. A demand worked out on a notional requirement of inputs for the unfulfilled export obligation would amount to levying duty on goods neither imported nor procured, which was impermissible under the scheme and the notification.
Conclusion: The notional duty demand was unsustainable and was set aside, in favour of the assessee.
Issue (iii): whether duty on capital goods, confiscation and penalty were sustainable on the facts.
Analysis: The capital goods were admittedly imported and used. On de-bonding, duty was payable on the capital goods at their written down value as on the effective de-bonding date, with interest. However, confiscation of the capital goods and the penalty did not survive in the given facts and circumstances. The assessee was not entitled to depreciation beyond the date of effective de-bonding.
Conclusion: Duty on capital goods at written down value with interest was upheld, while confiscation and penalty were set aside.
Final Conclusion: The appeal succeeded substantially: the notional duty demand on inputs was quashed, duty liability on capital goods was confined to written down value with interest, and confiscation and penalty were annulled.
Ratio Decidendi: In a 100% EOU de-bonding dispute, where the duty-free inputs were fully used in manufacture and the DGFT has finally accepted compliance with value addition norms, Customs cannot sustain a notional duty demand for alleged export shortfall on goods not actually imported or procured; duty, if any, is confined to the legally recoverable liability on the capital goods used in the scheme.
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