Strict construction of exemption notification: supplies between export oriented units do not become deemed imports, but indigenous material use still matters.

Exemption under Notification 8/97 could not be denied merely because processed fabrics were supplied by another 100% export oriented unit. The notification had to be construed on its own terms, and the Import Export Policy fiction of deemed export could not be expanded into a deemed import under the Customs Act, 1962 or the Central Excise Act, 1944. An earlier observation treating export oriented units as insulated from domestic restrictions was only obiter and not the governing ratio. However, entitlement still depended on whether the finished goods were made from wholly indigenous materials, so the presence of any imported raw material had to be verified before duty liability was determined.

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Issues: Whether goods processed in a 100% export oriented unit from fabrics supplied by another 100% export oriented unit were entitled to exemption under Notification 8/97, and whether the exemption could be denied on the footing that such inter-unit supplies were to be treated as imported goods.

Analysis: The exemption was held to depend on the language of the notification and could not be curtailed by importing into it a broader fiction from the Import Export Policy. The policy concept of deemed export was confined to the benefits expressly attached to such supplies and did not mean that goods supplied by one 100% export oriented unit to another became deemed imports for the purposes of the Customs Act, 1962 or the Central Excise Act, 1944. The reliance placed on an observation in an earlier decision treating export oriented units as insulated from domestic restrictions was found to be obiter and not the ratio. The notification had to be strictly construed, and there was no basis to deny the exemption merely because the processed fabrics had come from another export oriented unit. At the same time, the record did not conclusively establish whether any imported raw material had been used, and that factual aspect required verification because the exemption was available only where the finished goods were manufactured from wholly indigenous materials.

Conclusion: The denial of exemption on the sole ground that the inputs came from another 100% export oriented unit was unsustainable, but the matter had to be examined afresh to verify the use of any imported raw materials and to determine the duty, if any, payable.

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