FTP Para 6.15 | Destruction of Duty-Free Inputs by 100% EOUs Does Not Attract Customs/Excise Duty: CESTAT Chennai Holds 2015 Amendments Retrospective

The Chennai Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has delivered a significant ruling clarifying the liability of 100% Export Oriented Units (EOUs) under the Foreign Trade Policy (FTP) when destroying duty-free procured inputs. The Tribunal held that destruction of obsolete or unusable raw materials within the factory, under intimation to customs authorities, does not attract Customs or Central Excise duty, and that the 2015 amendments permitting such destruction are clarificatory and retrospective in nature.

Background & Facts

The Dispute

The appellant, M/s. Mylan Laboratories Limited, operates a 100% Export Oriented Unit (EOU) in Hosur, Tamil Nadu, engaged in the manufacture of pharmaceutical products. The unit procured raw materials duty-free under Notification No. 52/2003-Cus and Notification No. 22/2003-CE, issued under the Customs Act, 1962, and Central Excise Act, 1944, respectively. During the period from March 2014 to November 2015, certain raw materials became obsolete or unusable and were destroyed within the factory premises after due intimation to the jurisdictional customs authorities.

The Revenue initiated proceedings on the premise that the notifications, prior to their amendment in 2015, did not explicitly permit destruction of inputs without payment of duty. Consequently, demands were confirmed for Basic Customs Duty (BCD), Countervailing Duty (CVD), Special Additional Duty (SAD), and Central Excise duty, along with interest and penalties. The appellant challenged these demands before CESTAT, contending that the destruction was permissible under Para 6.15 of the Foreign Trade Policy (FTP) and that the 2015 amendments were clarificatory in nature.

Key Facts

• The appellant operates under a valid Letter of Permission issued by the Development Commissioner under the FTP.
• Raw materials were procured duty-free under Notification No. 52/2003-Cus (Customs) and Notification No. 22/2003-CE (Central Excise).
• Obsolete/unusable raw materials were destroyed within the factory after intimation to customs authorities.
• The FTP, under Para 6.15, expressly permits destruction of raw materials within the unit.
• The notifications were amended in 2015 (Notification No. 30/2015-CE and Notification No. 34/2015-Cus) to explicitly permit destruction of inputs under intimation.
• The Revenue contended that the pre-amended notifications did not permit destruction without duty payment and that the FTP could not override statutory provisions.

Procedural History

The dispute progressed through the following stages:

• 27.09.2017: Commissioner (Appeals), Salem, passed Order-in-Appeal No. 43/2017-SLM-CEX, confirming demands for Customs and Central Excise duties, interest, and penalties for the period March 2014 to November 2014.
• 31.10.2017: Commissioner (Appeals) passed Order-in-Appeal No. 52/2017-CE, confirming similar demands for the period December 2014 to November 2015.
• 2017-2018: The appellant filed four appeals before CESTAT Chennai, challenging the above orders:
  • Customs Appeal No. 42658/2017 (arising from Order-in-Appeal No. 43/2017-SLM-CEX)
  • Excise Appeal No. 42659/2017 (arising from Order-in-Appeal No. 43/2017-SLM-CEX)
  • Customs Appeal No. 40333/2018 (arising from Order-in-Appeal No. 52/2017-CE)
  • Excise Appeal No. 40308/2018 (arising from Order-in-Appeal No. 52/2017-CE)

The appeals were clubbed for hearing due to the commonality of the issue.

Relief Sought

The appellant sought:

• Setting aside of the impugned Orders-in-Appeal confirming demands of Customs and Central Excise duties, interest, and penalties.
• A declaration that destruction of duty-free inputs under intimation to customs authorities does not attract duty liability.
• A holding that the 2015 amendments to the notifications are clarificatory and retrospective in nature.

The Legal Issue

The Tribunal framed the following questions for determination:

1. Whether duty is payable on raw materials procured duty-free by the appellant and subsequently destroyed within the factory under intimation to Department officials?
2. Whether the amendments made in 2015 permitting destruction of inputs are clarificatory and retrospective or prospective in nature?
3. Whether the demand of duty, interest, and penalties are sustainable in law?

Arguments Presented

For the Appellant

• FTP Para 6.15 expressly permits destruction of raw materials within the unit after intimation to customs authorities. The notifications must be interpreted harmoniously with the FTP framework.
• The 2015 amendments to the notifications (Notification No. 30/2015-CE and Notification No. 34/2015-Cus) merely aligned the notifications with the FTP and are clarificatory in nature, applying retrospectively.
• The appellant acted bona fide and in compliance with the FTP and Letter of Permission, with no allegation of diversion or misuse.
• Reliance was placed on judicial precedents, including:
  • Government of India vs. Indian Tobacco Association [2005 (187) E.L.T. 162 (S.C.)], which held that beneficial notifications must be interpreted with reference to the object sought to be achieved.
  • Mehler Engineered Products India Pvt. Ltd. vs. Union of India [2018 (364) E.L.T. 27 (Mad.)], which held that amendments intended to correct or align notifications are retrospective.
  • Sandoz Pvt. Ltd. vs. Commissioner of Central Excise, Belapur [2025 (TMI) 1283 - CESTAT Mumbai], which recognized that destruction of inputs under supervision/intimation is part of operational control and does not amount to diversion.
  • Tyco Electronics Corporation India Pvt. Ltd. vs. Commissioner [2024 (14) Centax 29 (Tri. - Bang.)], which held that destruction of obsolete materials by EOUs is permissible without duty.

For the Respondent

• Exemption notifications must be strictly construed, and the FTP cannot override statutory provisions under the Customs Act and Central Excise Act.
• Prior to the 2015 amendments, the notifications did not permit destruction of inputs without payment of duty, and the amendments are prospective in nature.
• Reliance was placed on:
  • Sandoz Pvt. Ltd. vs. Commissioner of Central Excise [2012 (278) E.L.T. 259 (Tri.-Mumbai)], which held that the FTP cannot extinguish duty liability in the absence of a corresponding provision in the notifications.
  • Principal Commissioner vs. Teva API India Pvt. Ltd. [2019 (367) E.L.T. 618 (M.P.)], affirmed by the Supreme Court [2020 (371) E.L.T. A252 (S.C.)], which denied exemption due to non-compliance with notification conditions.
  • Bell Match Company vs. Commissioner of Customs [2019 (367) E.L.T. 427 (Mad.)], which denied exemption due to failure to comply with mandatory conditions.

The Court's Analysis

The Tribunal conducted a detailed analysis of the legal framework governing EOUs, the interplay between the FTP and exemption notifications, and the judicial precedents cited by both parties.

Issue No. (i): Duty Liability on Destruction of Duty-Free Inputs

The Tribunal observed that the EOU scheme is a composite statutory scheme, wherein the FTP lays down the substantive framework, and the exemption notifications provide the mechanism for implementation. Notification No. 52/2003-Cus and Notification No. 22/2003-CE grant exemption to goods imported or procured by EOUs, subject to conditions relating to their use in the manufacture of export goods. The Tribunal emphasized that these notifications must be interpreted in the context of the policy they are intended to operationalize, rather than in isolation.

"The destruction of unusable inputs is a recognized commercial reality and is expressly permitted under Para 6.15 of the FTP. In the absence of any allegation of diversion or misuse, to insist on payment of duty would result in an artificial liability not contemplated by the scheme."

The Tribunal distinguished the Revenue's reliance on Sandoz Pvt. Ltd. (2012), noting that the decision was confined to its facts and did not apply to the present case, where the appellant had complied with all procedural requirements and acted in accordance with the FTP. The Tribunal also distinguished Teva API India Pvt. Ltd. and Bell Match Company, as both cases involved non-compliance with notification conditions, whereas the appellant had adhered to the FTP and Letter of Permission.

The Tribunal relied on a consistent line of judicial precedents supporting the appellant's contention, including:

• Indian Tobacco Association, which held that beneficial notifications must be interpreted with reference to their object.
• Mehler Engineered Products, which held that amendments intended to align notifications with policy are retrospective.
• Tyco Electronics Corporation India Pvt. Ltd., which held that destruction of obsolete materials by EOUs is permissible without duty.
• TE-Connectivity India Pvt. Ltd. vs. Commissioner of Central Excise and Service Tax [2024 (18) CENTAX 46 (Tri. Bang.)], wherein the Tribunal, on identical facts, held that destruction of inputs under FTP Para 6.15 does not attract duty liability.

The Tribunal concluded that the destruction of raw materials within the factory under intimation does not attract duty liability, as it is in accordance with the FTP and the operational framework of the EOU scheme.

Issue No. (ii): Retrospective Nature of 2015 Amendments

The Tribunal examined whether the amendments introduced vide Notification No. 30/2015-CE and Notification No. 34/2015-Cus were clarificatory and retrospective. The amendments expressly incorporated a provision permitting destruction of inputs within the unit under intimation to customs authorities.

The Tribunal noted that Para 6.15 of the FTP already permitted such destruction even prior to the amendments. Applying the ratio of Indian Tobacco Association and Mehler Engineered Products, the Tribunal held that the amendments were intended to align the notifications with the FTP and were therefore clarificatory and retrospective in nature. The Revenue failed to demonstrate that the amendments introduced any new condition or right.

Issue No. (iii): Sustainability of Demand, Interest, and Penalties

In light of its findings on the first two issues, the Tribunal held that the demand of duty itself is not sustainable, as the destruction of inputs does not attract duty liability and the 2015 amendments are clarificatory. Consequently, the demand of interest also fails.

Regarding penalties, the Tribunal relied on judicial precedents holding that penalties cannot be imposed in cases involving bona fide interpretation of law and absence of mens rea. The appellant had acted transparently, intimated the department prior to destruction, and followed the policy framework. There was no evidence of suppression, wilful misstatement, or intent to evade duty. Accordingly, the Tribunal held that the penalties imposed are not sustainable.

The Verdict

The Tribunal allowed the appeals in their entirety, setting aside the impugned Orders-in-Appeal. The key holdings are:

1. The appellant is not liable to pay Customs or Central Excise duties on duty-free inputs destroyed within the factory under intimation to customs authorities, as such destruction is in accordance with Para 6.15 of the FTP and the EOU scheme.
2. The amendments introduced in 2015 (Notification No. 30/2015-CE and Notification No. 34/2015-Cus) are clarificatory and retrospective in nature.
3. The Foreign Trade Policy, Development Commissioner's permissions, and exemption notifications must be read harmoniously, and the benefit of exemption cannot be denied by interpreting the notifications in isolation.
4. The demands of duty, interest, and penalties are not sustainable in law.

The Tribunal directed consequential relief in accordance with the law.

What This Means For Similar Cases

Harmonious Interpretation of FTP and Exemption Notifications

This judgment reinforces the principle that the Foreign Trade Policy and exemption notifications must be read harmoniously to give effect to the EOU scheme. Practitioners should note:

• The FTP provides the substantive framework, while notifications under the Customs Act and Central Excise Act provide the mechanism for implementation.
• Fragmented interpretation of notifications, divorced from the FTP, is impermissible and defeats the object of the scheme.
• Courts will uphold the policy intent of beneficial schemes like the EOU framework, particularly where procedural ambiguities exist.

Retrospective Effect of Clarificatory Amendments

The Tribunal's holding that the 2015 amendments are clarificatory and retrospective has significant implications for EOUs:

• Amendments intended to align notifications with existing policy provisions (e.g., FTP Para 6.15) will be treated as retrospective, even if the notifications were silent prior to amendment.
• Practitioners can argue that similar amendments in other exemption notifications are clarificatory where they merely codify existing policy permissions.
• Revenue's reliance on pre-amendment silence in notifications will not suffice to deny exemption where the policy already permits the activity (e.g., destruction of inputs).

Penalties and Bona Fide Compliance

The Tribunal's observations on penalties provide actionable guidance for EOUs and legal practitioners:

• Penalties cannot be imposed where the assessee acts in bona fide compliance with policy and procedural requirements.
• Transparency and prior intimation to authorities (e.g., customs) are critical to establishing bona fides.
• Absence of mens rea (e.g., no suppression, diversion, or intent to evade duty) is a complete defense against penalty imposition.
• Practitioners should emphasize procedural compliance and policy adherence to resist penalty demands in similar cases.

Precedential Value of Tribunal Decisions

The Tribunal's reliance on its own earlier decision in TE-Connectivity India Pvt. Ltd. underscores the precedential value of Tribunal rulings in identical factual scenarios:

• Consistency in Tribunal decisions strengthens arguments for similarly placed EOUs.
• Practitioners should cite co-ordinate bench decisions where the facts and legal issues align closely.
• Distinguishing adverse precedents on factual grounds (e.g., non-compliance vs. compliance) remains a viable strategy.

This judgment provides a robust legal framework for EOUs to resist duty, interest, and penalty demands where inputs are destroyed in accordance with the FTP, even in periods prior to the 2015 amendments.