EOU duty-free input exemption survives later permission where substantive export conditions were satisfied and circulars required waiting for approval.

Duty-free procurement of inputs by a 100% EOU was upheld where the exemption notifications did not require each final product to be specifically included in the Letter of Permission before procurement, and later approval by the Development Commissioner regularised the position. Departmental recovery proceedings were also found unsustainable because the relevant products were pending approval when notice was issued, and binding circulars required the department to await a definite decision from the Development Commissioner. The demand was therefore set aside on the basis that the dispute concerned only a procedural lapse, while the substantive conditions for exemption, manufacture and export had been satisfied.

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Issues: (i) Whether duty-free procurement of inputs by a 100% EOU could be denied merely because the relevant products were added to the Letter of Permission later, when the exemption notifications did not require prior inclusion of each final product in the LOP. (ii) Whether departmental proceedings for recovery of duty saved on inputs were sustainable when the Development Commissioner's approval proceedings were still pending and the circulars required the department to await a definite conclusion.

Issue (i): Whether duty-free procurement of inputs by a 100% EOU could be denied merely because the relevant products were added to the Letter of Permission later, when the exemption notifications did not require prior inclusion of each final product in the LOP.

Analysis: The exemption scheme under the relevant customs and central excise notifications was available to an EOU for procurement of inputs for manufacture and export. The notifications did not impose a condition that each final product must already stand specifically approved in the LOP before duty-free procurement could take place. The factual position was that the inputs were procured under the prescribed procedure, entered in records, verified by the department, and used in exported goods. The later approval by the Development Commissioner regularised the gap period, and the delay in formal amendment could not defeat the substantive entitlement.

Conclusion: The demand of duty on this ground was unsustainable and the finding was in favour of the assessee.

Issue (ii): Whether departmental proceedings for recovery of duty saved on inputs were sustainable when the Development Commissioner's approval proceedings were still pending and the circulars required the department to await a definite conclusion.

Analysis: The applications for inclusion of additional products were pending before the Development Commissioner when the show cause notice was issued. The circulars relied upon required the department to proceed only after a definite conclusion from the Development Commissioner. The later retrospective approval and the administrative finding that there was no substantive violation reinforced that the dispute was only procedural, not one justifying immediate recovery. On that footing, the proceedings were contrary to the binding circular instructions.

Conclusion: The proceedings and the resulting duty demand were not sustainable and this issue was decided in favour of the assessee.

Final Conclusion: The impugned demand was set aside because the case involved only a procedural lapse in obtaining and recording approval, while the substantive conditions for duty-free procurement and export were satisfied.

Ratio Decidendi: Where the exemption conditions for an EOU are otherwise fulfilled and the competent authority subsequently grants or regularises approval, mere delay in formal approval does not defeat the exemption, and binding departmental circulars requiring the authority to await the Development Commissioner's decision must be followed.

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