Substantive compliance under advance licence scheme preserves exemption where DGFT regularises a procedural lapse in LUT redemption.

Where an import under advance licence satisfies the substantive conditions of the exemption scheme, Customs cannot deny Notification No. 203/92-C.E. merely because redemption of the LUT was delayed. The export obligation had been fully discharged, export proceeds realised, Modvat credit reversed, and the DGFT regularised the sale under para 21 of the Export-Import Policy, 1992-97. That regularisation cured the procedural lapse, and the same irregularity could not be treated as fatal again by Customs. On that basis, the exemption benefit was available and the demand, confiscation, and penalty were unsustainable.

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Issues: Whether the appellants were entitled to the benefit of Notification No. 203/92-C.E. despite sale of the imported goods before redemption of LUT, when export obligation had been fully discharged, export proceeds realised, Modvat credit reversed, and the DGFT had regularised the sale under para 21 of the Export-Import Policy, 1992-97.

Analysis: The imported timber logs were covered by advance licences and the appellants had already fulfilled the export obligation and realised the export proceeds. The Modvat credit initially availed on inputs used in the exported goods was reversed, which restored the position as if no such credit had been taken. The DGFT, exercising power under para 21 of the Policy, relaxed the condition relating to LUT redemption and regularised the sale of the imported goods. Once the competent licensing authority had condoned the procedural irregularity and regularised the transaction, the Customs authorities could not deny the exemption by treating the same lapse as fatal. The denial would amount to questioning the DGFT's regularisation and ignoring substantive compliance with the scheme.

Conclusion: The appellants were entitled to the notification benefit, and the demand, confiscation, and penalty could not be sustained.

Ratio Decidendi: Where the licensing authority competent to relax policy conditions regularises the transaction and substantive conditions of the exemption scheme are fulfilled, a merely procedural lapse such as delayed redemption of LUT does not justify denial of exemption by Customs.

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