EOU export processing can qualify as manufacture, preserving exemption and defeating confiscation and duty demands.

For 100% EOUs under the export policy, testing, packing, re-packing, labelling and re-labelling of imported goods may qualify as manufacture where the policy defines manufacture broadly and the goods are processed under an approved, bonded export scheme. On that basis, exemption under Notification No. 52/2003-Cus. cannot be denied merely because the goods are exported as such. Where the goods are used in the approved export operations and export obligations are fulfilled, confiscation under Section 111(o), redemption fine, penalties and duty demands are not sustainable, and limitation may also bar the demand.

---

---

Issues: (i) Whether testing, packing, re-packing, labelling and re-labelling of imported goods exported by 100% EOUs amounted to manufacture for the purpose of Notification No. 52/2003-Cus. and the export policy, and whether the exemption benefit could be denied on the ground that the goods were exported as such; (ii) Whether, on the facts, confiscation under Section 111(o) of the Customs Act, 1962, redemption fine, penalties and the duty demands were sustainable, including on limitation.

Issue (i): Whether testing, packing, re-packing, labelling and re-labelling of imported goods exported by 100% EOUs amounted to manufacture for the purpose of Notification No. 52/2003-Cus. and the export policy, and whether the exemption benefit could be denied on the ground that the goods were exported as such.

Analysis: The exported items were not treated as mere trading goods. The record showed that the goods were imported under the approved scheme, bonded, accounted for and subjected to processes such as testing, re-packing and re-labelling before export. The definition of manufacture under the export policy was broader than the definition under central excise law and expressly included such processes. The appellants had not claimed any special benefit under the notification clauses dealing with after-sale-service spares, and the small proportion of goods exported in the manner alleged by the department did not alter the basic character of the activities carried out. In this setting, the policy-based understanding of manufacture had to be applied.

Conclusion: The activity constituted manufacture for the purpose of the export scheme, and the exemption benefit could not be denied on the footing that the goods were exported as such.

Issue (ii): Whether, on the facts, confiscation under Section 111(o) of the Customs Act, 1962, redemption fine, penalties and the duty demands were sustainable, including on limitation.

Analysis: Since the goods were used in the approved export process and the export obligations were fulfilled, there was no violation of the notification conditions warranting confiscation under Section 111(o). The consequent redemption fine and penalties could not survive once confiscability failed. The demand also could not be sustained as the facts did not justify invocation of the extended period, and the dispute essentially turned on interpretation of the notification and the meaning of manufacture under the export policy. On that basis, the department's demand was held unsustainable.

Conclusion: Confiscation, redemption fine, penalties and the duty demands were not sustainable, and the limitation plea also succeeded.

Final Conclusion: The appeals succeeded in full, with the impugned orders set aside and consequential relief granted to the appellants.

Ratio Decidendi: For 100% EOUs operating under the export policy, processes such as testing, packing, re-packing, labelling and re-labelling may amount to manufacture, and where the import goods are used in the approved export operations and the export obligations are fulfilled, denial of exemption, confiscation under Section 111(o) and related duty demands cannot be sustained.

---