Raw Materials Transferred From Domestic Tariff Area to EOU are Not ‘Imported’ Goods: CESTAT [Read Order]

In a recent decision, the Mumbai bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) said that raw materials sent from the Domestic Tariff Area (DTA) to an Export Oriented Unit (EOU) cannot be seen as imported items just because the supplier got benefits for deemed exports under the Foreign Trade Policy.

Responsive Industries Ltd, the appellant is an Export Oriented Unit with a valid permission letter from the Development Commissioner. It works under the bonded system as per the Customs Act, 1962 and the Central Excise Act, 1944. From March 2008 to August 2008, the company sold coated cotton fabric, rejects, and PVC scrap in the Domestic Tariff Area. They paid lower duty using the benefit from Notification No. 23/2003-CE dated 31 March 2003.

The Central Excise Department objected to the availment of the exemption on the ground that the finished goods cleared into the DTA were manufactured using raw materials supplied by M/s Reliance Industries Ltd, which, according to the department, had availed deemed export benefits.

On this basis, the department alleged that the raw materials were not indigenous and treated them as deemed imports, making the appellant ineligible for the notification benefit. A show cause notice was issued and the Commissioner of Central Excise confirmed a demand of ₹1.92 crore along with interest and penalties. Penalties were also imposed on the Director and General Manager of the company.

Aggrieved by the order, the appellants approached the Tribunal. The appellants argued that the concept of deemed export exists only under the Foreign Trade Policy and has no application under the Customs Act or Central Excise law. They argued that even if the supplier had availed deemed export benefits, it did not convert the raw materials into imported goods.

The department argued that goods cleared by an EOU into the DTA are deemed to be imports and that the benefit of Notification No. 23/2003-CE was rightly denied. The department relied on the Tribunal’s decision in Sarla Performance Fibres Ltd to support its stand that the raw materials should be treated as non-indigenous.

The two-member Bench comprising Member (Judicial) Ajay Sharma and Member (Technical) C.J. Mathew observed that the expression “deemed export” is not recognised under the Customs Act, 1962 and finds relevance only under the Foreign Trade Policy. The tribunal observed that deemed exports are domestic transactions meant to promote import substitution and do not turn goods into imported goods under excise law.

The tribunal explained that the condition in Notification No. 23/2003-CE requires the finished goods to be manufactured from raw materials produced or manufactured in India. The tribunal observed that there was no evidence on record to show that the raw materials used by the appellant were imported or sourced from another EOU.

The tribunal observed that the adjudicating authority had assumed the raw materials to be non-indigenous without any supporting evidence. In view of these findings, the tribunal held that the denial of exemption under Notification No. 23/2003-CE was unsustainable. The impugned order was set aside

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