EOU domestic clearances in foreign exchange qualify only within policy limits, and penalty fails on bona fide interpretation.

Clearances by a 100% export-oriented unit to the domestic tariff area against payment in foreign exchange were treated as export-performance supplies for policy purposes, but the concessional duty benefit under Notification 2/95 was confined to the extent permitted by Paragraph 9.9(b) and remained subject to the minimum net foreign exchange performance condition. The duty liability therefore required recomputation on that restricted basis. Penalty under Rule 173Q was not justified because the dispute arose from a bona fide and debatable interpretation of the notification and policy provisions, without concealment of facts or wilful defiance of law, and was set aside.

---

---

Issues: (i) Whether clearances by a 100% export oriented unit to the domestic tariff area against payment in foreign exchange were entitled to the concessional duty benefit under Notification 2/95 read with Paragraphs 9.9 and 9.10 of the Export and Import Policy; (ii) Whether the penalty imposed for such clearances was sustainable.

Issue (i): Whether clearances by a 100% export oriented unit to the domestic tariff area against payment in foreign exchange were entitled to the concessional duty benefit under Notification 2/95 read with Paragraphs 9.9 and 9.10 of the Export and Import Policy.

Analysis: The duty on domestic tariff area clearances of a 100% EOU was examined with reference to the proviso to Section 3(1) of the Central Excise Act, 1944 and Section 12 of the Customs Act, 1962. The exemption under Notification 2/95 was read with Paragraph 9.9, which governs domestic tariff area sales, and Paragraph 9.10, which deems certain supplies against foreign exchange to count towards export performance. The supplies against foreign exchange were treated on the same footing as physical exports for the purpose of counting export performance, but the full value of such clearances could not automatically receive the concessional exemption. The benefit was confined to the extent permissible under Paragraph 9.9(b) and remained subject to fulfilment of the minimum net foreign exchange performance condition.

Conclusion: The assessee was entitled to the notification benefit only to the limited extent contemplated by Paragraph 9.9(b), and the matter required recomputation by the Commissioner.

Issue (ii): Whether the penalty imposed for such clearances was sustainable.

Analysis: The dispute turned on interpretation of the notification and policy provisions. In the absence of concealment of facts or wilful defiance of law, and given that the issue was debatable, penalty under Rule 173Q was not justified.

Conclusion: The penalty was set aside in favour of the assessee.

Final Conclusion: The duty liability was left to be recalculated on the restricted basis permitted by the policy, while the penalty stood annulled.

Ratio Decidendi: Supplies by a 100% EOU to the domestic tariff area against foreign exchange may be treated as export-performance supplies for policy purposes, but the concessional duty exemption cannot exceed the statutory policy limit and remains subject to the prescribed net foreign exchange condition; penalty is not warranted where the issue is one of bona fide interpretation without wilful defiance.

---