Export Oriented Unit duty demands fail without proof of permitted Indian sales and corroborated evidence of clandestine removal

For a 100% Export Oriented Unit, departmental circulars requiring intimation to the Development Commissioner were treated as binding, so adjudication without compliance was held unsustainable. Duty under the proviso to Section 3(1) of the Central Excise Act, 1944 could not be sustained without proof that the goods were allowed to be sold in India by the Development Commissioner. Confiscation, redemption fine and penalty also failed because the seized slabs, stock records and bank records did not sufficiently establish clandestine removal, and RG.1 entries alone could not support that presumption.

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Issues: (i) Whether the adjudication and show cause proceedings against a 100% Export Oriented Unit could proceed without following the departmental circulars requiring intimation to the Development Commissioner. (ii) Whether duty demand under the proviso to Section 3(1) of the Central Excise Act, 1944 could be sustained in the absence of proof that the goods were allowed to be sold in India by the Development Commissioner. (iii) Whether confiscation, redemption fine and penalty could be sustained on the basis of the seized slabs, stock records and bank records.

Issue (i): Whether the adjudication and show cause proceedings against a 100% Export Oriented Unit could proceed without following the departmental circulars requiring intimation to the Development Commissioner.

Analysis: The record showed that the departmental instructions governing 100% E.O.U. cases required notice to the Development Commissioner before adjudication. Those circulars were treated as binding administrative directions. Since the adjudicating authority had proceeded without showing compliance with that requirement or dealing with the jurisdictional objection in the manner contemplated by the circulars, the proceedings were held to be unsustainable on that ground.

Conclusion: The objection to jurisdiction succeeded.

Issue (ii): Whether duty demand under the proviso to Section 3(1) of the Central Excise Act, 1944 could be sustained in the absence of proof that the goods were allowed to be sold in India by the Development Commissioner.

Analysis: The proviso to Section 3(1) applies to goods produced by a 100% E.O.U. only to the extent they are allowed to be sold in India. The decision emphasized that the phrase "allowed to be sold" is material and that the Revenue had produced no evidence of sales made with the requisite permission. In the absence of proof of permitted DTA sale, the demand could not be supported under that proviso.

Conclusion: The duty demand was not sustainable.

Issue (iii): Whether confiscation, redemption fine and penalty could be sustained on the basis of the seized slabs, stock records and bank records.

Analysis: The seized slabs could not be satisfactorily correlated with the alleged clearances from the factory, and the explanation based on transfer slips and re-working could not be rejected as an afterthought on the materials before the authority. The record also showed that the RG.1 register was not a statutory requirement for a 100% E.O.U. and therefore its entries did not by themselves justify a presumption of clandestine manufacture or clearance. On that footing, the evidentiary basis for confiscation, penalty and consequential redemption fine was lacking.

Conclusion: The confiscation, redemption fine and penalty were not sustainable.

Final Conclusion: The order of adjudication was set aside and the appeal was allowed, with all consequential demands and confiscatory penalties falling with the failure of the Revenue's case.

Ratio Decidendi: For a 100% E.O.U., duty can be demanded under the proviso to Section 3(1) of the Central Excise Act, 1944 only on goods shown to have been allowed for sale in India, and confiscation or penalty cannot rest on uncorroborated stock records or presumptions of clandestine removal.

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