Exemption conditions for duty-free goods must be strictly met; revenue can verify breach despite development approval, with penalty dropped absent mala fide intent.

Exemption for imported or procured goods under the relevant customs and excise notifications was confined to use strictly within the notified purpose, and items used for aesthetic or building-related purposes did not qualify as capital goods or as exempt inputs for export production. Customs and Central Excise authorities could examine compliance with notification conditions even after approval by the Development Commissioner, because such approval did not bar revenue scrutiny of breach. On the facts, duty demand and interest were upheld, but penalty was set aside because the undertaking was a bonded export unit, procedural requirements had been followed, and no mala fide intent to evade duty was established.

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Issues: (i) Whether the imported/procured items were covered by the exemption notifications as capital goods or as items required in relation to production of export goods. (ii) Whether the Customs and Central Excise authorities could examine breach of the notification conditions notwithstanding approval by the Development Commissioner. (iii) Whether the duty demand, interest and penalty were sustainable on the facts.

Issue (i): Whether the imported/procured items were covered by the exemption notifications as capital goods or as items required in relation to production of export goods.

Analysis: The exemption under the relevant customs and excise notifications was available only for goods used in the manner and for the purposes contemplated by those notifications. The record showed that the items were not used strictly as declared capital goods or accessories; some were used for aesthetic or building-related purposes, and the plea of coverage as capital goods under the excise notification was not supported by a corresponding prior-approval mechanism comparable to the customs notification.

Conclusion: The goods did not fully qualify for exemption under the notifications, and the duty demand was sustainable.

Issue (ii): Whether the Customs and Central Excise authorities could examine breach of the notification conditions notwithstanding approval by the Development Commissioner.

Analysis: Approval by the Development Commissioner did not oust the jurisdiction of the customs authorities to verify compliance with the exemption conditions. Breach of notification terms remained open to scrutiny by the revenue authorities, and the existence of a licensing or development approval did not bar such examination.

Conclusion: The authorities were competent to investigate and act upon the alleged breach.

Issue (iii): Whether the duty demand, interest and penalty were sustainable on the facts.

Analysis: Since the goods were found to have been used contrary to the declared purpose, the demand of duty and interest was upheld. However, considering that the undertaking remained a bonded export unit, the procedural requirements had been followed, no mala fide intent to evade duty was established, and the goods remained within the bonded premises, penal action was considered unwarranted.

Conclusion: The duty and interest were upheld, but the penalty was set aside.

Final Conclusion: The appeal succeeded only to the limited extent of deletion of penalty, while the duty demand and interest liability were sustained.

Ratio Decidendi: Breach of exemption conditions in respect of duty-free goods may be examined by customs authorities notwithstanding developmental approval, and exemption is available only when the goods are used strictly for the notified purpose; penalty may nevertheless be set aside where mala fide intent is not established.

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