Customs duty on duty-free EOU raw materials cannot be demanded again when finished goods are cleared on full excise duty.

When a 100% EOU clears finished goods into the Domestic Tariff Area on payment of full excise duty equivalent to customs duties, customs duty cannot again be demanded on duty-free imported raw materials consumed in those goods because the duty foregone stands subsumed in the duty paid on the final products; the separate demand was therefore unsustainable. The extended period of limitation was also unavailable because the clearances were disclosed in excise invoices and ER-2 returns, and there was no suppression, misstatement, or intent to evade duty. On both merits and limitation, the demand failed.

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Issues: (i) Whether customs duty could be demanded on duty-free imported raw materials consumed in the manufacture of finished goods cleared by a 100% EOU in the Domestic Tariff Area on payment of excise duty. (ii) Whether the demand was barred by limitation and the extended period under the Central Excise Act, 1944 was invocable.

Issue (i): Whether customs duty could be demanded on duty-free imported raw materials consumed in the manufacture of finished goods cleared by a 100% EOU in the Domestic Tariff Area on payment of excise duty.

Analysis: The clearance of finished goods in the Domestic Tariff Area was on payment of full excise duty equivalent to the customs duties. Once the imported raw materials had been consumed in such finished goods and the finished goods had suffered duty on DTA clearance, the customs duty foregone at the time of import stood subsumed in the duty paid on the final products. Demanding customs duty again on the same raw materials would amount to double recovery. The exemption condition could not be used to sustain a separate demand on the raw materials in these facts.

Conclusion: The demand of customs duty on the imported raw materials was not sustainable and this issue was decided in favour of the assessee.

Issue (ii): Whether the demand was barred by limitation and the extended period under the Central Excise Act, 1944 was invocable.

Analysis: The clearances were reflected in excise invoices and ER-2 returns, placing the material facts before the department. In the absence of suppression, misstatement, or any circumstance showing an intent to evade duty, the prerequisites for invoking the extended period were not established. The demand, therefore, could not be sustained on limitation as well.

Conclusion: The extended period of limitation was not invocable and this issue was also decided in favour of the assessee.

Final Conclusion: The impugned orders were set aside and the appeals were allowed because the customs demand failed on both merits and limitation.

Ratio Decidendi: Where a 100% EOU clears finished goods in the Domestic Tariff Area on payment of excise duty, customs duty cannot again be demanded on the duty-free imported raw materials used in those goods, and the extended period cannot be invoked in the absence of suppression or intent to evade duty.

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