EOU debonding under EPCG scheme turns on specific exemption, depreciation at debonding, and authorisation coverage for spare parts.

An EOU exiting under the EPCG scheme cannot clear indigenous capital goods at concessional duty without a specific exemption notification; the applicable FTP and exemption framework did not support the claim, and revenue neutrality did not defeat the duty demand. Depreciation at debonding was to be computed with reference to the debonding date under the prescribed notification regime, and fire control systems and water storage tanks were treated as capital goods for that purpose. Imported spare parts were covered by the EPCG authorisation, and penalty was not exigible because no breach of the Central Excise Rules was established.

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Issues: (i) whether an EOU exiting under the EPCG scheme could clear indigenous capital goods on concessional duty without a specific exemption notification; (ii) whether depreciation on capital goods at debonding had to be computed with reference to the date of debonding and whether items like fire control system and water storage tank could be treated as capital goods; and (iii) whether imported spare parts were covered by the EPCG authorisation and whether penalty was exigible.

Issue (i): Whether an EOU exiting under the EPCG scheme could clear indigenous capital goods on concessional duty without a specific exemption notification.

Analysis: Paragraph 6.18(d) of the Foreign Trade Policy permitted exit from the EOU scheme on payment of duty on capital goods under the prevailing EPCG scheme, subject to fulfilment of the prescribed conditions. The exemption mechanism under Notification No. 22/2003-CE governed debonding of goods brought into EOU and did not provide a separate exemption for capital goods cleared under EPCG for indigenous procurement. In the absence of a specific exemption notification covering the situation, the concessional duty claim was not accepted. The plea of revenue neutrality was also held insufficient to defeat the duty demand itself.

Conclusion: The demand of differential Central Excise duty on indigenous capital goods was upheld against the assessee.

Issue (ii): Whether depreciation on capital goods at debonding had to be computed with reference to the date of debonding and whether items like fire control system and water storage tank could be treated as capital goods.

Analysis: The debonding was effected under Notification No. 22/2003-CE, and the depreciation methodology prescribed therein was applied correctly by reference to the debonding stage. The approach urged by the Revenue, based on the procurement date and another notification regime, was not accepted. On classification, the items in question were examined in the context of the Foreign Trade Policy, the Handbook of Procedure and trade parlance, and were held to fall within the scope of capital goods for the purpose of depreciation.

Conclusion: The assessee's case on depreciation and capital-goods classification was accepted and the Revenue's challenge failed.

Issue (iii): Whether imported spare parts were covered by the EPCG authorisation and whether penalty was exigible.

Analysis: The EPCG application and authorisation covered the imported as well as locally procured spares and accessories, and the Revenue did not establish any error in the original authority's findings on eligibility. The finding that there was no breach of Rule 25 was also sustained, as the goods were not removed in contravention of the Central Excise Rules.

Conclusion: The findings in favour of the assessee on imported spare parts and penalty were upheld.

Final Conclusion: Both appeals were rejected and the impugned order was sustained in full, resulting in confirmation of the main duty demand while preserving the reliefs granted on depreciation, spare parts and penalty.

Ratio Decidendi: In the absence of a specific exemption notification, debonding of EOU capital goods under the EPCG scheme must be governed by the applicable statutory and notification framework, while depreciation and eligibility questions are to be decided according to the regime expressly prescribed for debonding and the factual coverage of the authorisation.

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