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Issues: (i) Whether duty is payable on duty-free raw materials destroyed within an Export Oriented Unit after intimation to the department; (ii) whether the 2015 amendments permitting destruction of inputs are clarificatory and retrospective; and (iii) whether the demands of duty, interest and penalties are sustainable.
Issue (i): Whether destruction of duty-free raw materials within the factory under intimation attracts Customs or Central Excise duty.
Analysis: The EOU scheme comprises the Foreign Trade Policy, the Development Commissioner's permissions and the exemption notifications issued under the Customs and Central Excise laws. Paragraph 6.15 of the Foreign Trade Policy permitted destruction of obsolete or unusable inputs within the unit after intimation to Customs authorities. The notifications were therefore required to be read harmoniously with the policy rather than in isolation. The materials were destroyed because of obsolescence, after prior intimation, without any allegation of diversion, misuse or breach of the scheme. In those circumstances, destruction did not amount to clearance for home consumption or diversion attracting duty.
Conclusion: Destruction of the duty-free raw materials within the factory under due intimation did not attract Customs or Central Excise duty.
Issue (ii): Whether the amendments introduced by Notification No. 30/2015-CE and Notification No. 34/2015-Cus permitting destruction of inputs were clarificatory and retrospective.
Analysis: The Foreign Trade Policy already permitted destruction of obsolete inputs before the amendments. The amendments expressly aligned the exemption notifications with that existing policy framework, removed an ambiguity and did not create a new substantive right or impose a new condition. They were consequently clarificatory in character.
Conclusion: The 2015 amendments were clarificatory and operated retrospectively.
Issue (iii): Whether the demands of duty, interest and penalties were sustainable.
Analysis: Since no duty was payable on the destruction, the consequential interest demand also failed. The appellant had acted transparently after intimating the department and there was no suppression, wilful misstatement, intent to evade duty or other material establishing mens rea. The penalties therefore lacked a sustainable legal basis.
Conclusion: The demands of duty, interest and penalties were not sustainable.
Final Conclusion: The benefit of the EOU scheme could not be denied where obsolete inputs were destroyed in accordance with the Foreign Trade Policy and after due intimation, and the 2015 amendments confirmed the pre-existing position.
Ratio Decidendi: In an EOU scheme, exemption notifications must be harmoniously construed with the governing Foreign Trade Policy; destruction of obsolete duty-free inputs within the unit after due intimation does not attract duty where there is no diversion or misuse, and amendments aligning the notifications with that policy are clarificatory and retrospective.
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