Capital goods under EOU exemption: export-performance shortfall alone does not justify customs duty or consequential penalty.

Under the exemption scheme for a 100% EOU, customs duty on imported capital goods was not attracted merely because the unit failed to achieve the prescribed export obligation or NFEP. The governing condition for capital goods was their import, installation and use within the bonded premises for export-oriented manufacture, and the record showed compliance with that requirement. A later notification invoked by the Revenue was treated as inapplicable because the default period pre-dated it and no retrospective operation was shown. As the substantive duty demand failed, the consequential penalty under Section 112(a) of the Customs Act also could not survive.

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Issues: (i) Whether customs duty was leviable on imported capital goods on the ground that the 100% EOU failed to achieve the prescribed export obligation or NFEP under the exemption notification and Section 72 of the Customs Act, 1962. (ii) Whether penalty under Section 112(a) of the Customs Act, 1962 could be sustained when the demand of duty on capital goods was not sustainable.

Issue (i): Whether customs duty was leviable on imported capital goods on the ground that the 100% EOU failed to achieve the prescribed export obligation or NFEP under the exemption notification and Section 72 of the Customs Act, 1962.

Analysis: The applicable exemption scheme distinguished between raw materials and capital goods. For raw materials and consumables, failure to achieve the prescribed NFEP could attract duty. For capital goods, the controlling condition was installation and use within the bonded premises for export-oriented manufacture. The record showed that the capital goods were imported and installed for the unit's export operations. The later notification of 31.03.2003, relied upon by the Revenue, was held inapplicable because the default period pre-dated it and no retrospective effect was established.

Conclusion: Customs duty on the imported capital goods was not leviable; the finding is in favour of the assessee.

Issue (ii): Whether penalty under Section 112(a) of the Customs Act, 1962 could be sustained when the demand of duty on capital goods was not sustainable.

Analysis: The penalty was consequential to the duty demand. Once the demand of duty on the capital goods failed, the basis for imposing penalty also disappeared. The penalty could not survive independently when the substantive levy itself was held impermissible.

Conclusion: The penalty under Section 112(a) of the Customs Act, 1962 was not sustainable; the finding is in favour of the assessee.

Final Conclusion: The common judgment upheld the Tribunal's view that no customs duty was recoverable on the imported capital goods for the alleged failure to achieve the export-performance benchmark, and the associated penalty also fell with the duty demand.

Ratio Decidendi: Where the exemption scheme for capital goods requires only installation and use for export-oriented manufacture, failure to achieve the export-performance benchmark does not by itself justify duty on such capital goods absent an express enabling provision, and a consequential penalty cannot survive once the duty demand is unsustainable.

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