Excess manufacturing wastage cleared on duty payment does not justify customs duty recovery absent diversion or exemption abuse.

Duty-free raw material imported for a 100% EOU did not attract proportionate customs duty merely because excess wastage was generated during manufacture, where the wastage was cleared on payment of Central Excise duty under Notification No. 53/97-Cus. The notification did not impose a wastage-limit condition for denial of benefit; it only required excisable wastage to be cleared on payment of duty. In the absence of any finding of diversion, misuse, or abuse of the exemption, recovery of customs duty on the inputs contained in such wastage was not justified, and confiscation and penalty were unsustainable.

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Issues: Whether customs duty could be recovered on the inputs contained in excess wastage generated during manufacture by a 100% EOU, and whether confiscation and penalty were sustainable when the wastage was cleared on payment of duty under Notification No. 53/97-Cus.

Analysis: The assessee had imported duty-free raw material under Notification No. 53/97-Cus. and the disputed wastage was cleared on payment of Central Excise duty. The Tribunal noted that the notification did not prescribe any wastage norm as a condition for denial of benefit; its requirement was only that the wastage, if excisable, be cleared on payment of duty. The excess generation of wastage was marginal, and there was no finding of any diversion or misuse of the exemption. In these circumstances, recovery of customs duty on the raw material attributable to such wastage was not justified.

Conclusion: Customs duty was not recoverable on the inputs contained in the excess wastage, and the confiscation and penalty were unsustainable.

Final Conclusion: The impugned order was set aside and the appeal was allowed with consequential relief.

Ratio Decidendi: Where wastage generated in the course of manufacture is cleared on payment of duty and the governing exemption notification does not itself impose a wastage-limit condition for denial of benefit, proportionate customs duty cannot be demanded on the inputs contained in such wastage absent any finding of diversion or abuse of exemption.

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