Use of Imported Raw Materials Does Not Disqualify Customs Exemption If DTA Goods Are Made from Indigenous Inputs: CESTAT [Read Order]

The Ahmedabad Bench of the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) ruled that the use of imported raw materials does not disqualify a 100% Export Oriented Unit (EOU) from claiming customs exemption, provided the goods cleared to the Domestic Tariff Area (DTA) are manufactured from indigenous inputs.

Stay Updated with the Latest Audit Report Formats & Audit Trials Requirements! Click here 

Bharat Resins Ltd., the appellant, is a 100% EOU engaged in manufacturing goods from both imported and indigenous raw materials. For the period from August 2015 to March 2016, the appellant cleared certain finished goods to the DTA and claimed exemption from duty under Serial No. 3 of Notification No. 23/2003-CE. The department issued a show cause notice on 17.05.2017 alleging that since imported raw materials were used in manufacturing, the appellant was not eligible for the exemption. The show cause notice proposed recovery of duty and imposition of penalties.

The appellant’s counsel argued that the demand was time-barred as the show cause notice was issued beyond the one-year limitation period. They pointed out that an earlier show cause notice had already been issued on the same issue for the previous period (July 2013 to July 2015), proving that the department was well aware of the facts and circumstances.

They argued that there was no suppression or intent to evade duty. On merits, they relied on the CESTAT decision in Eurotex Industries and Exports Ltd. v. CCE, Pune, which held that the exemption under the said notification is not denied merely because imported raw materials are used in general production, as long as the DTA clearances are made from indigenous inputs.

The revenue counsel countered that the term "wholly" in the notification must be strictly interpreted to exclude any use of imported materials. According to them, if imported inputs are used anywhere in the production process, the exemption under Serial No. 3 of the notification would not apply. The department did not confirm whether any appeal had been filed against the Eurotex Industries decision but insisted that its interpretation was correct.

The single-member bench comprising Somesh Arora (Judicial Member) observed that the Eurotex Industries decision correctly clarified that the use of imported materials in general does not disqualify a unit from exemption, as long as goods cleared into the DTA are made wholly from indigenous raw materials. The tribunal also found merit in the limitation argument. Since the issue was already under departmental audit and an earlier show cause notice had been issued on the same matter, the department could not invoke the extended period. The tribunal stated that there was no intent to evade duty, and legal interpretation alone could not justify the delay.

The tribunal allowed the appeal on the ground of limitation and did not go into the merits further. The show cause notice and consequent demand were set aside, and the appellant was granted consequential relief.

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates