Destruction of Duty-Free Raw Materials by 100% EOU: CESTAT Chennai Allows Exemption

Mylan Laboratories Limited, a 100% Export Oriented Unit (EOU) engaged in the manufacture of pharmaceutical products, approached the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Chennai, challenging demands of Customs duty and Central Excise duty on duty-free inputs that were rendered obsolete and destroyed within the factory premises after prior intimation to the Department.

The Tribunal, after examining the Foreign Trade Policy (FTP), exemption notifications and relevant precedents, decided in favour of the assessee and set aside the demands of duty, interest and penalties in full.

Background of the Dispute

Mylan Laboratories Limited operates as a 100% EOU under a valid Letter of Permission (LoP) issued by the Development Commissioner under the applicable Foreign Trade Policy. In terms of the EOU scheme, the unit procured inputs without payment of duty under:

  • Notification No. 52/2003-Cus dated 31.03.2003
  • Notification No. 22/2003-CE dated 31.03.2003

During the relevant periods, some of the imported/procured raw materials became obsolete or unfit for use in the manufacture of export products. These unusable inputs were destroyed inside the EOU after informing the jurisdictional authorities.

The Department took the position that, prior to the amendments made in 2015 to the above notifications, there was no explicit provision permitting destruction of raw materials without payment of duty, and accordingly raised demands of:

  • Basic Customs Duty (BCD)
  • Countervailing Duty (CVD)
  • Special Additional Duty (SAD)
  • Central Excise duty

along with interest and penalties.

Four appeals were filed by the assessee against two Orders-in-Appeal, all involving the same legal issue and therefore heard together.

Appeals and Demand Details

The matters before CESTAT related to the following four appeals:

  1. Appeal No. C/42658/2017-DB

    • OIA No. 43/2017 SLM-CEX dated 27.09.2017
    • Period: 03/2014 to 11/2014
    • Nature: Customs
    • Duty demand: ₹ 6,63,018/- + ₹ 5,58,524/-
    • Interest: As applicable
    • Penalty: ₹ 12,21,542/-

  2. Appeal No. E/42659/2017-DB

    • OIA No. 43/2017 SLM-CEX dated 27.09.2017
    • Period: 03/2014 to 11/2014
    • Nature: Central Excise
    • Duty demand: ₹ 1,42,069/- + ₹ 26,668/-
    • Interest: As applicable
    • Penalty: ₹ 5,000/-

  3. Appeal No. C/40333/2018-DB

    • OIA No. 52/2017 (SLM-CEX) dated 31.10.2017
    • Period: 12/2014 to 11/2015
    • Nature: Customs
    • Duty demand: ₹ 96,388/-
    • Interest: As applicable
    • Penalty: NIL

  4. Appeal No. E/40308/2018-DB

    • OIA No. 52/2017 (SLM-CEX) dated 31.10.2017
    • Period: 12/2014 to 11/2015
    • Nature: Central Excise
    • Duty demand: ₹ 88,583/-
    • Interest: As applicable
    • Penalty: ₹ 5,000/-

Rival Contentions

Submissions on Behalf of the Assessee

The assessee argued that:

  • Para 6.15 of the Foreign Trade Policy expressly permits destruction of capital goods, raw materials, consumables, spares, finished goods and scrap/waste within the EOU premises after intimation to Customs authorities, with no duty liability (except in the case of specified precious commodities).
  • The EOU scheme is a unified statutory mechanism where the Foreign Trade Policy provides the substantive framework, and the Customs and Central Excise exemption notifications are meant to give effect to this framework.
  • Consequently, the notifications under which the duty-free imports were made must be read in conjunction with and not divorced from the FTP.
  • The 2015 amendments made via Notification No. 30/2015-CE and Notification No. 34/2015-Cus, which brought in explicit language permitting destruction of raw materials without duty, were clarificatory in character and merely aligned the notifications with the existing FTP provision.
  • Several judicial precedents were cited to show that:
    • Beneficial schemes such as the EOU scheme must be liberally interpreted,
    • Amendments aiming to correct or clarify the law are to be treated as retrospective when they are introduced to remove an inconsistency with higher policy, and
    • Notifications must be interpreted with due regard to the policy objective.

The assessee also stressed that:

  • Destruction was carried out only because the materials had become unusable or obsolete;
  • There was no allegation of diversion, clandestine removal or misuse;
  • Proper intimation was given to the jurisdictional authorities in advance;
  • The conduct was bona fide and fully in line with the EOU operational framework.

Submissions on Behalf of the Revenue

The Department contended that: