Duty-free capital goods used for export production cannot be taxed merely for unmet export obligation; raw material duty sustained.

Customs duty could not be demanded on duty-free capital goods imported by a 100% EOU where the goods were installed and used in the factory for manufacture of export goods, because the exemption scheme treated capital goods differently from raw materials and mere non-fulfilment of export obligation did not sustain that demand. Duty liability on duty-free raw materials was, however, accepted and sustained in accordance with law. The impugned order was therefore modified to delete the demand on capital goods while maintaining the duty position on raw materials, and the appeal was allowed in part.

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Issues: (i) Whether customs duty could be demanded on capital goods imported duty free by a 100% Export Oriented Unit on failure to fulfil export obligation; (ii) whether duty liability survived in respect of duty-free raw materials.

Issue (i): Whether customs duty could be demanded on capital goods imported duty free by a 100% Export Oriented Unit on failure to fulfil export obligation.

Analysis: The Tribunal applied the settled view that the exemption scheme for capital goods permitted duty-free import for installation and use within the factory for manufacture of export goods, and that the duty demand on capital goods was not sustainable where the goods had in fact been installed and used for production. The reasoning distinguished capital goods from raw materials under the relevant exemption notification framework.

Conclusion: Duty was held not leviable on the capital goods, in favour of the assessee.

Issue (ii): Whether duty liability survived in respect of duty-free raw materials.

Analysis: The appellant accepted liability to pay duty on the raw materials as per law. The impugned demand was not interfered with on this aspect.

Conclusion: Duty liability on the raw materials was sustained, against the assessee.

Final Conclusion: The impugned order was modified by deleting the duty demand on capital goods while sustaining the duty position on raw materials, and the appeal was allowed in part.

Ratio Decidendi: Where duty-free capital goods imported by an export-oriented unit are installed and used in the factory for manufacture of export goods, customs duty cannot be demanded merely because export obligation is not fully achieved; the duty consequence under the exemption scheme applies differently to raw materials.

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