Debonding of 100% Export Oriented Units: capital goods treatment, depreciation timing, and stock duty depend on the notification terms.

Jigs and fixtures imported by a 100% Export Oriented Unit were treated as capital goods because they formed part of production equipment and were included in the approved import list. On debonding, depreciation for valuation of capital goods ran up to the date of payment of duty, not merely to the date of the debonding application. Shortfall in export obligation did not, by itself, enlarge duty liability on debonding because that obligation remained separate from customs duty consequences. Manufactured goods lying in stock were not liable to duty at the moment of debonding; duty arose only when the goods were removed from the factory.

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Issues: (i) Whether jigs and fixtures imported by a 100% Export Oriented Unit were covered as capital goods under Notification No. 13/81-Cus.; (ii) whether depreciation for valuation of capital goods on debonding was allowable only up to the date of application for debonding or up to the date of payment of duty; (iii) whether shortfall in export obligation could be linked to duty liability on debonding; and (iv) whether duty on manufactured goods lying in stock was payable at the time of debonding.

Issue (i): Whether jigs and fixtures imported by a 100% Export Oriented Unit were covered as capital goods under Notification No. 13/81-Cus.

Analysis: Jigs and fixtures are items intended for repeated and long-term use in manufacture and are therefore part of production equipment rather than consumables. They were also specifically included in the approved list of capital goods for import under the scheme. The later insertion of an express entry for tools, jigs, gauges, fixtures, moulds, dies, instruments and accessories did not alter their substantive character as capital goods.

Conclusion: The objection to their treatment as capital goods was rejected and the assessee succeeded on this issue.

Issue (ii): Whether depreciation for valuation of capital goods on debonding was allowable only up to the date of application for debonding or up to the date of payment of duty.

Analysis: The notification provided that depreciation was to be allowed for the period from the relevant point until the date of payment of duty. The valuation could not be cut off at the date of filing the debonding application because the text of the notification fixed the terminal point as the date of payment of duty, not the date of application.

Conclusion: Depreciation was allowable up to the date of payment of duty, and the assessee succeeded on this issue.

Issue (iii): Whether shortfall in export obligation could be linked to duty liability on debonding.

Analysis: The exemption under the EOU scheme operated while the goods were used for production of export goods, but once debonding occurred the goods were treated as ordinary imported goods for duty purposes. The duty consequence on debonding was not made dependent on discharge of export obligation, which remained a separate matter under the undertaking with the export authority.

Conclusion: The Revenue could not link export obligation shortfall to duty liability on debonding, and the assessee succeeded on this issue.

Issue (iv): Whether duty on manufactured goods lying in stock was payable at the time of debonding.

Analysis: After debonding, the unit functioned as a domestic tariff area manufacturing unit. Goods in stock were liable to central excise duty only when removed from the place of manufacture, not merely because debonding had occurred. A demand at the time of debonding was therefore premature.

Conclusion: Duty could not be demanded on the manufactured goods in stock at the time of debonding, and the assessee succeeded on this issue.

Final Conclusion: The assessee's appeal was allowed and the Revenue's appeal was rejected, with the duty consequences on debonding resolved in favour of the assessee.

Ratio Decidendi: On debonding of a 100% Export Oriented Unit, duty liability is governed by the terms of the exemption notification itself, depreciation runs up to the date of payment of duty, export obligation shortfall does not by itself enlarge the duty liability, and duty on stock arises only on removal from the factory.

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