Deemed exports and inter-unit EOU supplies must be counted as export value and not treated as imported inputs for exemption limits.

Deemed exports were held to count toward export value when computing the free on board limit for Domestic Tariff Area clearance under the exemption regime, because the notification used the term "exports" without express exclusion and the scheme had to be read harmoniously. Inter-unit supplies from another 100% Export Oriented Unit were also not to be treated as imported materials for denying exemption, as that approach was inconsistent with the legal character of Export Oriented Units and the notification. On that reasoning, the exemption denial was unsustainable and the consequential duty and penalty demands were set aside.

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Issues: (i) Whether deemed exports were to be excluded while computing the free on board value of exports for determining the permissible Domestic Tariff Area clearance of a 100% Export Oriented Unit under the relevant exemption regime. (ii) Whether the benefit of exemption could be denied on the ground that raw materials received from another 100% Export Oriented Unit were treated as imported materials.

Issue (i): Whether deemed exports were to be excluded while computing the free on board value of exports for determining the permissible Domestic Tariff Area clearance of a 100% Export Oriented Unit under the relevant exemption regime.

Analysis: The notification conditioned exemption on clearance within 50% of the free on board value of exports. The expression used was "exports", and the Customs Act distinguished export only in the statutory sense, with no separate exclusion for deemed exports in the policy text. The reasoning adopted harmonised the exemption notification with the export policy and rejected an interpretation that would render the third proviso ineffective. On that construction, deemed exports formed part of the export value for computing the permissible clearance limit.

Conclusion: The exclusion of deemed exports was not justified, and the assessee was entitled to compute the limit on the basis of total export value including deemed exports.

Issue (ii): Whether the benefit of exemption could be denied on the ground that raw materials received from another 100% Export Oriented Unit were treated as imported materials.

Analysis: The exemption claim was rejected by treating inter-unit supplies from another 100% Export Oriented Unit as imported inputs. That approach was found inconsistent with the legal character of Export Oriented Units and with the exemption notification. The materials used in the manufacture by such units were not to be denied the benefit merely because they were sourced from another Export Oriented Unit.

Conclusion: The denial of exemption on that ground was unsustainable, and the assessee was entitled to the benefit of the notification absent any other disqualification.

Final Conclusion: The assessee succeeded on the substantive exemption issue, and the consequential duty and penalty demands were set aside.

Ratio Decidendi: Where an exemption notification refers to export value without expressly excluding deemed exports, deemed exports cannot be ignored in computing the permissible limit unless the policy or notification clearly so provides, and exemption conditions must be construed harmoniously so that each part of the scheme has effect.

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