Depreciation for unused capital goods denied, but penalty removed where value addition was achieved and only formalities were missed.

Depreciation for a 100% EOU was available only for capital goods actually used during the export obligation period; where the disputed computers were kept in stores and not put to use, the duty demand was upheld. On penalty, removal had been permitted subject to compliance with value-addition and customs/excise formalities, and since value addition was achieved and only procedural lapses were found, the conduct did not justify penalty. The duty demand survived, but the penalty was set aside.

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Issues: (i) Whether duty demand was sustainable on the ground that the computers were not used in or in relation to manufacture and depreciation was therefore unavailable; (ii) Whether penalty was justified where removal was permitted subject to compliance with value-addition and customs/excise formalities.

Issue (i): Whether duty demand was sustainable on the ground that the computers were not used in or in relation to manufacture and depreciation was therefore unavailable.

Analysis: The computers in question were found to have been kept in stores, while only the remaining computers were in use in the factory. On that factual basis, the conclusion was that the disputed computers had not been put to use during the relevant period. For a 100% EOU, depreciation was held to be available only in respect of capital goods actually used during the export obligation period. The Board's circular referred to in the order supported that position.

Conclusion: The duty demand was upheld and this issue was decided against the assessee.

Issue (ii): Whether penalty was justified where removal was permitted subject to compliance with value-addition and customs/excise formalities.

Analysis: Permission for removal had been granted by the competent development authority subject to adherence to the value-addition condition and observance of customs and central excise formalities. Value addition had been achieved, and the only lapse found was non-observance of formalities. In those circumstances, the conduct was held insufficient to warrant penalty.

Conclusion: The penalty was set aside and this issue was decided in favour of the assessee.

Final Conclusion: The duty demand survived, but the penalty was deleted, resulting in a partial allowance of the appeal.

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