Dutiability of scrap from duty-free inputs and limits on extended limitation turn on proof of nexus and wilful suppression.

Waste and scrap were held dutiable under Notification No. 22/2003-CE only when they arose from duty-free goods or their processing; scrap from packing material used to hold duty-free inputs, and from electrical, pipe, tube light and mechanical parts, was not shown to have arisen from such duty-free material, so the duty demand failed. On limitation, mere non-payment of duty was insufficient to prove wilful suppression, and the Revenue did not establish deliberate intent to evade duty; accordingly, the extended period and equal penalty were held not invocable. The demand, interest and penalties were treated as unsustainable.

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Issues: (i) whether waste and scrap of packing material and certain plant/machinery parts was chargeable to duty under Notification No. 22/2003-CE as having arisen in the course of production, manufacture, processing or packaging of goods received duty free; (ii) whether the extended period of limitation and equal penalty were invocable on the basis of alleged wilful misstatement or suppression of facts.

Issue (i): Whether waste and scrap of packing material and certain plant/machinery parts was chargeable to duty under Notification No. 22/2003-CE as having arisen in the course of production, manufacture, processing or packaging of goods received duty free.

Analysis: The notification fastens duty only on waste and scrap arising from the relevant production or processing of goods received duty free. The packing material out of which the scrap arose was not itself received duty free, but merely held the duty free inputs. Such scrap could not, therefore, be treated as arising from the processing of the duty free inputs. The same reasoning applied to scrap of electrical fittings, pipe fittings, tube light chokes, comber spares and mechanical parts, since it was not shown that these arose from duty free raw material. The ratio of the decision relied upon on containers and barrels was treated as applicable.

Conclusion: The duty demand on the impugned waste and scrap was not sustainable and is held against the Revenue.

Issue (ii): Whether the extended period of limitation and equal penalty were invocable on the basis of alleged wilful misstatement or suppression of facts.

Analysis: Mere non-payment of duty was held insufficient to establish wilful suppression. The notice itself showed that separate records were not maintained and that the department was uncertain whether the scrap arose from indigenous or imported material. That uncertainty did not discharge the Revenue's burden to prove facts necessary for invoking the proviso. In the absence of material showing a deliberate intent to evade duty, the extended period could not be sustained.

Conclusion: The extended period of limitation and mandatory equal penalty were not invocable.

Final Conclusion: The demand, interest and penalties were unsustainable and the impugned order was set aside in full.

Ratio Decidendi: Waste and scrap are dutiable under the relevant exemption notification only when they arise from the duty-free goods or their processing, and the extended limitation period cannot be invoked without positive evidence of wilful suppression or deliberate evasion.

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