Strict compliance with exemption conditions defeats diversion-based claims and preserves duty demand, limitation, and penalty consequences.

Strict compliance with exemption conditions was required under Notification No. 30/97-Customs, and diversion of duty-free inputs to a sister concern without proper stock and receipt records led to rejection of the job-work plea, loss of exemption, and sustainment of duty and penalty. The extended limitation period applied because the diversion and non-compliance were not disclosed and were uncovered through investigation, so the notice was not time-barred. Interest on duty could not be added to the penalty under Section 114A, and the penalty on the sister concern was reduced as excessive.

---

---

Issues: (i) Whether the importers violated Notification No. 30/97-Customs dated 01.04.1997 by diverting duty-free inputs to a sister concern on the plea of job work and by failing to maintain the prescribed records; (ii) whether the show cause notice and duty demand were barred by limitation; and (iii) whether interest could be added to the penalty under Section 114A of the Customs Act, 1962, and whether the penalty on the sister concern required modification.

Issue (i): Whether the importers violated Notification No. 30/97-Customs dated 01.04.1997 by diverting duty-free inputs to a sister concern on the plea of job work and by failing to maintain the prescribed records.

Analysis: The notification condition prohibiting transfer or disposal of exempt materials was construed strictly. The record showed absence of proper stock and receipt records, no reliable proof that the goods sent to the sister concern returned after processing, and substantial evidence that the goods were diverted and sold in the local market. The plea of job work and substantial compliance was rejected because the factual foundation for such plea was not established and the conditions of exemption were mandatory.

Conclusion: The condition of the exemption notification was violated, and the demand of duty and the main penalty were upheld.

Issue (ii): Whether the show cause notice and duty demand were barred by limitation.

Analysis: The alleged diversion and non-compliance were not shown to have been within the Department's knowledge. In the absence of disclosure by the importers and in view of the material gathered during investigation, the extended period was held applicable. The reliance placed on the recorded statements and surrounding evidence was accepted.

Conclusion: The show cause notice was not time-barred and the duty demand was sustained.

Issue (iii): Whether interest could be added to the penalty under Section 114A of the Customs Act, 1962, and whether the penalty on the sister concern required modification.

Analysis: The interest payable on duty was held not to form part of the quantum for penalty under Section 114A. On the facts, the penalty on the sister concern was found excessive and reduced.

Conclusion: Interest could not be included in the Section 114A penalty, and the penalty on the sister concern was reduced.

Final Conclusion: The principal demand and penalty against the importers were sustained, the departmental plea for inclusion of interest in penalty failed, and the penalty on the sister concern was reduced.

Ratio Decidendi: Conditions of an exemption notification granting duty-free import benefits must be strictly complied with, and where exempt goods are found to have been diverted or transferred in violation of those conditions, the exemption is lost and duty, along with consequential penalty, becomes payable.

---