EOU clearances to domestic tariff area attract effective duty rate, and penalty falls when the dispute is only interpretive.

Goods cleared by an export oriented unit to the domestic tariff area are assessable under the proviso to Section 3(1) of the Central Excise Act, 1944 at the effective rate prescribed by the applicable notification, not at the tariff rate, and duty must be recomputed accordingly. Penalty under Rule 209 of the Central Excise Rules is not warranted where the clearance was made with departmental knowledge and on prescribed documents, and the dispute concerns interpretation rather than fraud or contumacious conduct.

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Issues: (i) Whether goods cleared by an export oriented unit to the domestic tariff area were liable to duty at the tariff rate or at the effective rate under the applicable notification; (ii) whether penalty under Rule 209 of the Central Excise Rules was justified.

Issue (i): Whether goods cleared by an export oriented unit to the domestic tariff area were liable to duty at the tariff rate or at the effective rate under the applicable notification.

Analysis: Goods cleared by an export oriented unit to the domestic tariff area attract duty under the proviso to Section 3(1) of the Central Excise Act, 1944. The applicable levy is at the effective rate of duty prescribed under Notification No. 13/98 dated 2-6-98 and not at the tariff rate. Duty therefore had to be recomputed on that basis.

Conclusion: The demand was upheld only to the extent of liability under the proviso to Section 3(1), but duty was directed to be recalculated at the effective rate under Notification No. 13/98, in favour of the assessee.

Issue (ii): Whether penalty under Rule 209 of the Central Excise Rules was justified.

Analysis: The clearances were made with the knowledge of the Central Excise authorities and under prescribed documents. The dispute turned on whether the Development Commissioner's permission covered the goods, which was treated as a matter of interpretation rather than fraud or contumacious conduct.

Conclusion: Penalty under Rule 209 was not justified and was set aside, in favour of the assessee.

Final Conclusion: The appeal succeeded on the question of penalty and on the quantum of duty, with duty confined to the effective rate and the penalty annulled.

Ratio Decidendi: Clearances by an export oriented unit to the domestic tariff area are assessable under the proviso to Section 3(1) of the Central Excise Act, 1944 at the effective rate prescribed by the applicable notification, and penalty is not attracted where the dispute is one of interpretation without fraudulent or contumacious conduct.

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