Inter-EOU Transfer Procedural Breach Cannot Trigger Duty Demand Without Substantive Violation: CESTAT Hyderabad

Overview of the Dispute

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Hyderabad, recently adjudicated a significant matter involving a 100% Export Oriented Unit (EOU) engaged in the manufacture of granite products. The case arose from an Order-in-Original dated 29.01.2013, through which the adjudicating authority had confirmed multiple demands of Central Excise duty as well as Customs duty against the assessee. The Tribunal's ruling touches upon two fundamentally important questions — correct classification of granite goods and the legal consequences of procedural lapses in inter-EOU transfers.

Case: Madhucon Granites Ltd Vs Commissioner of Central Excise & Service Tax (CESTAT Hyderabad)

Background and Nature of the Assessee's Operations

The assessee, M/s Madhucon Granites Ltd, operated as a 100% Export Oriented Unit primarily engaged in manufacturing granite slabs, dimensional blocks, and allied granite articles. During the relevant period from 01.04.2006 to 31.08.2007, the assessee had availed duty-free procurement and importation of capital goods, raw materials, and inputs under the following exemption notifications:

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

These notifications permitted EOUs to source goods without payment of applicable duties, subject to fulfilment of prescribed conditions, including Net Foreign Exchange (NFE) obligations.

What the Department Alleged

The revenue authorities raised objections on multiple fronts:

  1. DTA Clearances Without Duty Payment: The assessee had cleared certain consignments to the Domestic Tariff Area (DTA) without discharging the applicable excise and customs duty liabilities.

  2. Irregular Inter-EOU Transfers: Goods were transferred to a sister concern — also an EOU — without adhering to the procedure stipulated under Para 6.13 of the Handbook of Procedures (HBP).

  3. Quantity Discrepancies: Differences were noted between the quantities dispatched by the assessee's unit and those accounted for at the recipient EOU in Hosur.

  4. Non-Addition to NFE Formula: The recipient unit had allegedly not incorporated the value of received goods into the NFE computation formula.

  5. No Evidence of Post Facto Approval: Although the assessee claimed to have obtained post facto approval from the Development Commissioner, no documentary evidence was produced before the adjudicating authority during original proceedings.

Classification Controversy: Chapter 25 vs. Chapter 68

The Department's Stand

The adjudicating authority classified the granite goods cleared to the DTA under CETH 6802 (Chapter 68), holding that these were not merely rough or dressed stones but processed granite products that had undergone working and processing beyond basic quarrying operations. Accordingly, Central Excise duty was held to be applicable.

The Assessee's Counter-Arguments

The assessee strongly contested this classification, arguing that: