EOU exemption and domestic clearances: capital goods relief upheld, duty on remaining demands sent back for fresh adjudication

Exemption on capital goods used in an export oriented unit was treated as sustainable where no notification condition required exclusive use for the unit's own production and the alleged misuse was not supported by independent material, while job work for a domestic unit remained permissible. Duty on clearances to the domestic tariff area was treated as not fastenable on the export oriented unit where the relevant policy treated such supplies as duty-free and any liability, if at all, lay on the purchaser. The note also records that incomplete consideration of documentary objections and statement evidence required de novo adjudication of the remaining demands and penalty.

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Issues: (i) Whether the customs and central excise demands raised on imported and indigenous capital goods installed in the export oriented unit could be sustained for alleged breach of the exemption conditions. (ii) Whether duty could be demanded on clearances made by the export oriented unit to the domestic tariff area under the Exim Policy. (iii) Whether the demands in Annexures A, B and C and the consequential penalty required reconsideration and remand.

Issue (i): Whether the customs and central excise demands raised on imported and indigenous capital goods installed in the export oriented unit could be sustained for alleged breach of the exemption conditions.

Analysis: The demands on the capital goods were found unsustainable because the exemption notifications did not provide that the imported or indigenous capital goods in the export oriented unit had to be used exclusively for the unit's own production. The export oriented unit and the domestic supply unit were treated as separate operations, and the finding of misuse of the machinery was not supported by independent material. The view taken by the adjudicating authority was held to be contrary to the settled position that job work by an export oriented unit for a domestic unit is permissible.

Conclusion: The demands in Annexures D and E were set aside in favour of the assessee.

Issue (ii): Whether duty could be demanded on clearances made by the export oriented unit to the domestic tariff area under the Exim Policy.

Analysis: The clearances under the relevant Exim Policy provision were treated as duty-free supplies from the export oriented unit, and the duty liability, if any, was regarded as falling on the purchaser and not on the seller. The reasoning adopted in the impugned order was therefore not accepted for fastening duty on the export oriented unit itself.

Conclusion: The demand in Annexure F was set aside in favour of the assessee.

Issue (iii): Whether the demands in Annexures A, B and C and the consequential penalty required reconsideration and remand.

Analysis: The adjudication on the demands in Annexures A, B and C was found incomplete because the assessee's factual objections, documentary evidence, and the plea that the clearances were covered by the domestic tariff area sale provisions and the relevant exemption notification had not been properly considered. The statements relied upon by the department also required examination. Since these aspects were not properly adjudicated, the matter was required to be sent back for fresh decision on all relevant issues, with the question of penalty also left open.

Conclusion: The demands in Annexures A, B and C and the penalty issue were remanded for de novo adjudication.

Final Conclusion: The impugned order was interfered with to the extent of deleting the confirmed demands on the capital goods and on the domestic clearances covered by Annexure F, while the remaining disputed demands and the consequential penalty were sent back for fresh adjudication.

Ratio Decidendi: In the absence of a specific notification condition or supported factual finding showing misuse, exemption on capital goods in an export oriented unit cannot be denied; duty-free supplies by an export oriented unit under the relevant policy cannot be fastened on the seller as duty liability; and incomplete consideration of material objections warrants remand for de novo adjudication.

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