Depreciation-based duty valuation for EOU capital goods on debonding defeated the duty demand and penalty

Duty liability on capital goods in an export oriented unit on debonding had to be computed under the exemption notification in force at the relevant time, and the substituted regime required depreciation for machinery already put to use. Because commercial production had commenced years earlier, the capital goods could not be valued as unused warehoused goods and depreciation reduced the assessable value to nil over the relevant ten-year period. The demand and penalty were therefore unsustainable and the impugned order was set aside.

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Issues: (i) Whether the duty liability on capital goods in an export oriented unit had to be worked out with reference to the substituted exemption regime and depreciation, and whether the demand and penalty could survive on the facts of debonding.

Analysis: The exemption scheme for export oriented units operates through notifications issued under section 25 of the Customs Act, 1962 and section 5A of the Central Excise Act, 1944, and the conditions attached to the exemption are governed by the notification in force at the relevant time. The scheme underwent material changes, and the amending notification substituted the earlier regime. For capital goods, the duty liability on debonding is linked to the depreciated value, and machinery put to use over the relevant period cannot be assessed as if it were unused warehoused goods. Since commercial production had commenced years earlier, depreciation had to be allowed over the period of use, reducing the value to nil by the end of the relevant ten-year period.

Conclusion: The demand of duty on the capital goods and the penalty were unsustainable, and the impugned order was set aside.

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