Duty-free EOU goods destroyed after intimation do not attract duty or penalties absent diversion or clandestine removal.

Duty-free raw materials, work-in-progress, semi-finished goods and remnants destroyed within a 100% EOU after prior intimation to the Department were treated as not attracting duty, because the goods had been procured under EOU notifications, remained within the unit premises and there was no evidence of diversion or clandestine clearance. The Tribunal also held that inputs issued for production and later rejected were used in connection with manufacture, and that the accounting description of goods as obsolete did not alter their character as remnants or leftovers within the permissible wastage limit. On that basis, the demand, extended limitation and penalties were held unsustainable for want of suppression or contumacious conduct.

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Issues: (i) Whether duty was payable on duty-free raw materials, work-in-progress, semi-finished goods and remnants destroyed within the 100% EOU premises after prior intimation to the Department. (ii) Whether the demand, extended period and penalties were sustainable.

Issue (i): Whether duty was payable on duty-free raw materials, work-in-progress, semi-finished goods and remnants destroyed within the 100% EOU premises after prior intimation to the Department.

Analysis: The goods were procured under the EOU notifications and were written off or destroyed after due intimation. The notification scheme permitted waste, scrap and remnants arising in the course of manufacture, and the destruction took place within the unit premises. The record did not show any diversion or clearance of the goods as such. Goods issued for production and later rejected in the process were treated as having been used in connection with production. The term "obsolete" used in the books was treated as referable to remnants or leftovers, and the Tribunal accepted the plea that the wastage remained within the permissible limit.

Conclusion: Duty was not payable on the destroyed goods, and the demand was unsustainable.

Issue (ii): Whether the demand, extended period and penalties were sustainable.

Analysis: Since the goods were accounted for in the books, destroyed under prior intimation and no clandestine removal or suppression was established, the foundation for invoking penal provisions and the extended period was absent. The Tribunal found no contumacious conduct on the part of the appellant.

Conclusion: The demand, extended period and penalties were not sustainable.

Final Conclusion: The appeals succeeded, the impugned orders were set aside, and consequential relief followed in accordance with law.

Ratio Decidendi: Duty-free inputs and waste arising during the manufacturing process in a 100% EOU, when destroyed within the unit after due intimation and without diversion or clandestine removal, do not attract duty or penalty merely because they are written off as obsolete in the accounts.

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