EOU customs exemption for segregation and recycling upheld where policy treated the activity as manufacture.

An export oriented unit was treated as eligible for customs exemption on imported machinery and scrap used for segregation and recycling, because the notification covered goods used for manufacture or for production-related export activity. The unit was specifically authorised to recycle imported scrap, the development authority had confirmed the activity as manufacturing, and the foreign trade policy gave manufacture a broader meaning that included segregation. The narrower Central Excise Act test was not decisive for the exemption claim, and a later public notice also supported eligibility for the relevant period. On that basis, denial of exemption, duty demand, confiscation, redemption fine and penalty were unsustainable.

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Issues: Whether an export oriented unit was entitled to customs exemption under Notification No. 52/03-Cus. when imported machinery and scrap items were subjected to segregation and recycling, and whether denial of exemption, demand of duty and consequential confiscation, redemption fine and penalty were sustainable.

Analysis: The exemption under the notification was available to goods imported for manufacture of articles for export or for use in connection with production, packing or job work for export by an EOU. The imported goods were used for segregation of scrap from worn-out machinery items, and the relevant foreign trade policy itself included segregation within the definition of manufacture. The unit was specifically authorised to recycle imported scrap, and the competent development authority had also clarified that the activity undertaken amounted to manufacturing activity. A broader view of manufacture was required for EOUs, and the notification could not be denied merely because the activity did not satisfy the narrower test under Section 2(f) of the Central Excise Act. The later public notice also permitted segregation activities for eligible units within the prescribed period, and the disputed activity fell within that period.

Conclusion: The assessee was entitled to the benefit of the exemption notification, and the demand of duty, confiscation, redemption fine and penalty were unsustainable.

Final Conclusion: The appeal succeeded, and all consequential adverse orders were set aside.

Ratio Decidendi: For EOUs, manufacture for the purpose of an exemption notification may receive a broader policy-based meaning that includes segregation or similar authorised processing, and exemption cannot be denied solely because the activity does not amount to manufacture under the narrower central excise test.

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