Customs exemption for display assembly manufacturing inputs, including parts scrapped during production, upheld under Sl. No. 5D(b).

The dominant issue was whether exemption under Sl. No. 5D(b) of Notif. No. 57/2017-Cus for "inputs and parts for use in manufacture" of display assemblies extends to inputs that are issued to the production line but are damaged/scrapped during manufacture and do not form part of the finished display assembly. The AAR held that Rules 7 and 10 of the IGCR Rules address re-export/clearance of defective or unutilized goods and do not restrict the exemption to only those inputs that ultimately get incorporated, nor are they confined to goods defective at import in this fact situation. On a strict construction, "for use in manufacture" covers all inputs actually used in the manufacturing process, including those scrapped during processing; exemption was held available to such scrapped inputs.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether exemption at Serial No. 5D(b) of Notification No. 57/2017-Customs (nil basic customs duty for "inputs or parts for use in manufacture" of Display Assembly for use in manufacture of cellular mobile phones) remains available where the imported inputs/parts are put to the manufacturing line for display assemblies but are damaged, rendered unusable, and scrapped during the manufacturing process and therefore do not form part of the final display assemblies.

2. ISSUE-WISE DETAILED ANALYSIS

2.1 Exemption eligibility for imported inputs/parts that are scrapped during manufacture

Legal framework: The Court considered the exemption entry at Serial No. 5D(b) of Notification No. 57/2017-Customs issued under Section 25(1) of the Customs Act, providing nil duty to "inputs or parts for use in manufacture" of display assemblies (for use in manufacture of cellular mobile phones), subject to compliance with the concessional import procedure under the IGCR framework. The Court also considered the IGCR Rules, 2022 procedure (including the requirement to follow prescribed end-use/bond/accounting procedures) and examined departmental reliance on the IGCR provision dealing with "unutilised or defective goods".

Interpretation and reasoning: The Court interpreted the phrase "for use in manufacture" as focusing on the purpose and intention at the time of import and placement into the manufacturing process, not on whether the inputs ultimately get incorporated into the finished display assembly. It accepted that manufacturing inherently involves process loss and damage, and treated inputs consumed or lost during the manufacturing operations as still having been put to use in the manufacture. The Court rejected the departmental objection that the IGCR rule on "unutilised or defective goods" required duty payment or re-export for scrapped goods, holding that the IGCR provision applies where goods are "defective" as imported (or otherwise fall within that specific rule's scope), whereas the present goods were not defective at import but became damaged/destroyed during manufacturing. The Court further held that customs treatment is determined on the goods' "as-imported" condition; therefore, the later occurrence of process failure/scrapping does not negate that the goods were imported "for use" in the specified manufacture.

Conclusions: The Court conclusively ruled that the benefit of Serial No. 5D(b) of Notification No. 57/2017-Customs is available for the specified inputs/parts imported for use in manufacturing display assemblies even if such inputs/parts are damaged during the manufacturing process and are subsequently scrapped and do not form part of the final display assemblies, subject to compliance with the applicable IGCR procedural condition referenced in the notification.

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