EOU duty demand must allow depreciation on used capital goods, while penalty was reduced for partial compliance and delay.

In an EOU duty demand arising from non-fulfilment of export obligation, duty concession on imported and indigenously procured capital goods had to be re-quantified by allowing depreciation for the period of use up to cancellation of the Letter of Permission; the original valuation at acquisition cost alone was unsustainable. On penalty, the Section 112(ii) customs penalty was reduced in view of partial compliance with NFEP and the prolonged dispute, while the departmental request for confiscation and additional penalty under Rule 173Q was rejected. The matter therefore resulted in partial relief to the assessee and rejection of the department's challenge.

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Issues: (i) Whether duty forgone on imported and indigenously procured goods in an EOU could be sustained without granting depreciation up to cancellation of the Letter of Permission; (ii) Whether the penalty under Section 112(ii) of the Customs Act, 1962 required reduction and whether confiscation and additional penalty in the departmental appeal were warranted.

Issue (i): Whether duty forgone on imported and indigenously procured goods in an EOU could be sustained without granting depreciation up to cancellation of the Letter of Permission.

Analysis: The assessee had availed exemption under the EOU notifications for import and domestic procurement of capital goods, consumables and spares. On failure to achieve the stipulated export obligation, liability to reverse the duty concession arose. However, for quantification, the value of used capital goods could not be taken at the original acquisition cost alone. The goods had remained in use for years before closure and cancellation of the Letter of Permission, and depreciation had to be allowed for the period of use up to cancellation. The denial of depreciation merely because formal debonding was not sought was found unsustainable.

Conclusion: The duty demand was not finally upheld on the original quantification and the matter was remanded only for re-quantification after allowing depreciation.

Issue (ii): Whether the penalty under Section 112(ii) of the Customs Act, 1962 required reduction and whether confiscation and additional penalty in the departmental appeal were warranted.

Analysis: The assessee had not fulfilled the export obligation in full, but had achieved substantial NFEP and the dispute had continued for a long period. In these circumstances, the originally imposed penalty was considered excessive and was reduced. The departmental request for confiscation of goods and for imposition of further penalty under Rule 173Q of the Central Excise Rules, 1944 was found to lack merit.

Conclusion: The penalty was reduced to Rs. 25,00,000, and the departmental appeal was rejected.

Final Conclusion: The assessee succeeded in part on quantification and penalty, while the department's challenge failed, resulting in a partial relief to the assessee and a dismissal of the departmental appeal.

Ratio Decidendi: In EOU duty demands arising from non-fulfilment of export obligation, duty forgone must be re-quantified by allowing depreciation on used capital goods up to the relevant cutoff date, and penalty may be moderated where the default is partial and the proceedings are protracted.

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