Foreign Trade Policy-linked exemption: FOB ceiling, indigenous raw material clearance, and no extended limitation for disclosed DTA sales.

An exemption notification implementing the Foreign Trade Policy must be construed in harmony with the policy scheme, so the 50% FOB ceiling for DTA sales is linked to the year of accrual of entitlement and permitted utilisation, not the year of actual clearance. Serial no. 3 exemption applies where the particular DTA-cleared goods are manufactured wholly from indigenous raw material, and the mere use of imported inputs for other goods does not disqualify the unit. Where clearances and export values were disclosed in returns and departmental officers had countersigned invoices, suppression was not established, extended limitation could not be invoked, and penalty under section 11AC could not survive.

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Issues: (i) Whether the ceiling of 50% of FOB value in Notification No. 23/2003-CE is to be applied with reference to the financial year of clearance or with reference to the year of accrual of DTA sale entitlement under the Foreign Trade Policy; (ii) Whether clearances of goods manufactured wholly from indigenous raw material were eligible for exemption under serial no. 3 of the notification; (iii) Whether the demand was barred by limitation and penalty was sustainable.

Issue (i): Whether the ceiling of 50% of FOB value in Notification No. 23/2003-CE is to be applied with reference to the financial year of clearance or with reference to the year of accrual of DTA sale entitlement under the Foreign Trade Policy.

Analysis: The exemption notification was held to be intended to implement the Foreign Trade Policy and therefore had to be read in harmony with paragraph 6.8 of the policy and the accompanying guidelines. The entitlement to DTA sale accrued on the basis of export performance and positive NFE, and the permission could be availed within the permitted period. The expression "during the year" in the notification was treated as a measure for determining the quantum of exports in the relevant qualifying period, not as a restriction requiring accrual and utilisation of entitlement within the same financial year. A contrary reading was found to make the scheme and the three-year utilisation period unworkable.

Conclusion: The 50% FOB limit was held to relate to the year of accrual of entitlement and the related permission, not to the year of actual DTA clearance, in favour of the assessee.

Issue (ii): Whether clearances of goods manufactured wholly from indigenous raw material were eligible for exemption under serial no. 3 of the notification.

Analysis: Serial no. 3 was read as requiring that the goods cleared into DTA be produced wholly from raw materials produced or manufactured in India. The notification did not exclude an EOU merely because it also used imported raw material for other goods. The relevant inquiry was whether the particular goods cleared in DTA were made wholly from indigenous raw material, and the record showed separate quantities of such goods had been claimed. The department had not undertaken verification to disprove that claim.

Conclusion: The assessee was held entitled to exemption under serial no. 3 for goods manufactured wholly from indigenous raw material.

Issue (iii): Whether the demand was barred by limitation and penalty was sustainable.

Analysis: The clearances and export values were disclosed in ER-2 returns and the DTA invoices were countersigned by departmental officers. The unit was under physical supervision, and earlier disputes on similar clearances showed departmental knowledge of the relevant facts. On these facts, suppression or intent to evade duty was not established, so invocation of the extended period was not justified. Since the demand itself was unsustainable, penalty under section 11AC also could not survive.

Conclusion: The demand was held time-barred and the penalty was held unsustainable, in favour of the assessee.

Final Conclusion: The duty demand and penalty were set aside, and the appeal succeeded with consequential relief.

Ratio Decidendi: An exemption notification issued to implement the Foreign Trade Policy must be construed in conformity with the policy scheme, and the expression governing DTA sale value cannot be read so as to defeat the accrued entitlement or the permitted period of utilisation; where the relevant facts are disclosed to the department, extended limitation and penalty for suppression are not attracted.

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