2026 (3) TMI 148 - AT - Central Excise

Conditional exemption breach: supply to DTA attracts duty and sustains penalty and extended limitation for duty-free inputs.

Notification No. 22/2003-CE grants a conditional exemption to EOUs that is forfeited when power generated from duty-free furnace oil is supplied to a unit ... Conditional exemption under Notification No. 22/2003-CE - Attraction of duty on electricity generated from duty-free furnace oil and supplied to SKS Mills (after it became DTA) - 100% Export Oriented Unit (EOU) - internal job work transfer or constitutes supply to DTA - extended period of limitation for suppression of material facts - penalty under Section 11AC for wilful suppression - manufacture of cotton terry towels falling under Chapter 63 of the First Schedule to the Central Excise Tariff Act, 1985. Attraction of duty on electricity supplied to DTA where fuel procured duty free under EOU notification - Whether electricity generated from duty-free furnace oil and supplied to SKS Mills (after it became DTA) attracts duty under Notification No. 22/2003-CE? - HELD THAT:- The third proviso to paragraph 7 of Notification No. 22/2003 CE and Appendix 14 I C read with paragraph 6.16 of the Hand Book of Procedures regulate supply of power from EOUs to the Domestic Tariff Area and require payment equivalent to duty foregone on raw materials used for generation of power supplied to DTA. Electricity itself is not excisable, but liability arises from the conditional exemption. SKS Mills exited EOU status in October 2010; thereafter supplies of electricity from the appellant's captive plant could not be treated as transfers between EOUs. The exemption must be strictly construed and substantial or outcome based compliance (i.e., eventual export use) cannot validate non observance of the notification conditions. Applying these principles, the Tribunal held that the continued supply of electricity to SKS Mills after its conversion to DTA attracted duty under the notification. [Paras 9, 10, 11, 13, 18] Answered in favour of the Department; duty liability under Notification No. 22/2003 CE is attracted. Unit wise operation of EOU scheme - transfer to DTA not excused by internal job work or corporate integration - HELD THAT: - The EOU scheme operates on a unit wise basis; once SKS Mills ceased to be an EOU, its legal character changed and movement of power from the EOU enclave into the Domestic Tariff Area falls within the regulatory concept of 'sale into DTA' under the proviso, irrespective of commercial consideration or corporate integration. The notification makes no exception for electricity supplied to a DTA unit as part of job work for the EOU. Decisions on CENVAT credit and the concept of 'factory' relied upon by the appellant were found inapposite because the present dispute arises under a conditional exemption notification with distinct regulatory requirements. [Paras 12, 14, 15] Answered in favour of the Department; the transaction legally amounted to supply to a DTA unit, not an internal job work transfer. Extended period of limitation for suppression of material facts - HELD THAT: - The appellant endorsed the exit order but did not disclose that electricity generated from duty free inputs continued to be supplied to the recipient after it became a DTA unit, nor did it obtain requisite permissions or amend procurement declarations. Suppression includes failure to disclose material facts required for correct assessment. In light of precedents on suppression, the Tribunal found that the conduct amounted to wilful contravention with intent to evade duty and sustained invocation of the extended limitation period. [Paras 16, 19] Extension of limitation is legally sustainable on account of suppression of material facts. Penalty under Section 11AC for wilful suppression - HELD THAT: - Section 11AC provides for penalty equal to duty where non payment is by reason of fraud, suppression or wilful misstatement. Given the appellant's continued availing of duty free fuel despite knowledge of the recipient's change of status and absence of requisite permissions or disclosure, the Tribunal found the imposition of penalty proper. The penalty is upheld subject to the statutory option for reduced penalty as provided by law. [Paras 17, 19] Penalty under Section 11AC upheld. Final Conclusion: The Tribunal upheld the adjudicated demand, interest and penalty: electricity supplied to SKS Mills after its exit from the EOU scheme attracted duty under Notification No. 22/2003 CE; the supply was not a job work transfer; the extended period of limitation and penalty under Section 11AC were sustainable; the appeal is dismissed. Issues: (i) Whether electricity generated from duty-free furnace oil and supplied to SKS Mills (after it became DTA) attracts duty under Notification No. 22/2003-CE? (ii) Whether the supply was a mere internal job work transfer or constitutes supply to DTA? (iii) Whether extended period is invokable? (iv) Whether penalty under Section 11AC is sustainable?Issue (i): Whether electricity generated from duty-free furnace oil and supplied to SKS Mills (after it became DTA) attracts duty under Notification No. 22/2003-CE?Analysis: Notification No. 22/2003-CE grants conditional exemption to EOUs and the third proviso to paragraph 7 requires payment equivalent to duty foregone where power is sold into the Domestic Tariff Area. Appendix 14-I-C and paragraph 6.16 of the Hand Book of Procedures distinguish transfers between EOUs from supply to DTA. The exemption is conditional and must be strictly complied with; once the recipient ceased to be an EOU, supplies to it fall within the regulatory category of DTA supply attracting the proviso.Conclusion: Electricity supplied to SKS Mills after its conversion to DTA attracts duty under Notification No. 22/2003-CE against the Appellant.Issue (ii): Whether the supply was a mere internal job work transfer or constitutes supply to DTA?Analysis: The EOU scheme is unit-wise; change of status of the recipient unit converts the legal character of transfers into DTA supplies for regulatory purposes. The notification does not exempt transfers to a DTA unit on the basis of corporate integration or absence of commercial consideration. Regulatory description of 'sale into DTA' covers movement of power out of the EOU enclave irrespective of nomenclature of the transaction.Conclusion: The supply was not a mere internal job work transfer but constituted supply to a DTA unit; findings are against the Appellant and in favour of the Department.Issue (iii): Whether extended period is invokable?Analysis: Extended limitation is triggered by suppression or failure to disclose material facts necessary for correct assessment. The appellant continued to avail duty-free inputs and supply power to a DTA unit without obtaining permissions or disclosing non-compliance; such conduct amounts to suppression for the purpose of extended limitation provisions.Conclusion: Extended period of limitation is invokable; conclusion is in favour of the Department.Issue (iv): Whether penalty under Section 11AC is sustainable?Analysis: Penalty under Section 11AC is attracted where non-payment arises from fraud, suppression or wilful misstatement. Continued availing of exemption despite knowledge of recipient's change of status and without requisite compliance or disclosure constitutes conduct falling within the statutory misstatement/suppression provisions.Conclusion: Penalty under Section 11AC is sustainable; conclusion is in favour of the Department.Final Conclusion: The impugned demand of duty, interest and penalty is upheld and the appeal is dismissed.Ratio Decidendi: Where an EOU supplies electricity generated from duty-free inputs to a unit that has ceased to be an EOU and become a DTA unit, the third proviso to paragraph 7 of Notification No. 22/2003-CE and associated Handbook provisions require payment equivalent to duty foregone on proportionate raw materials, and non-disclosure of such supplies permits invocation of extended limitation and penalty under the Central Excise Act, 1944.