D.P Wadhwa, J.— This appeal is directed against the order dated 5-11-1997 of the Customs, Excise and Gold (Control) Appellate Tribunal (for short “the Tribunal”) allowing the appeal of the respondent and directing that duty of central excise was payable under Section 3(1) of the Central Excise and Salt Act, 1944 (for short “the Act”) and not under the proviso to Section 3(1) of the Act as claimed by the appellant.
2. Section 3(1) of the Act with the proviso, in relevant part, is as under:
“3. Duties specified in the Schedule to the Central Excise Tariff Act, 1985 to be levied.—(1) There shall be levied and collected in such manner as may be prescribed duties of excise on all excisable goods other than salt which are produced or manufactured in India and a duty on salt manufactured in, or imported by land into, any part of India as, and at the rates, set forth in the Schedule to the Central Excise Tariff Act, 1985:
Provided that the duties of excise which shall be levied and collected on any excisable goods which are produced or manufactured,—
(i) in a free trade zone and brought to any other place in India; or
(ii) by a hundred per cent export-oriented undertaking and allowed to be sold in India,
shall be an amount equal to the aggregate of the duties of customs which would be leviable under Section 12 of the Customs Act, 1962 (52 of 1962) on like goods produced or manufactured outside India if imported into India, and where the said duties of customs are chargeable by reference to their value, the value of such excisable goods shall, notwithstanding anything contained in any other provision of this Act, be determined in accordance with the provisions of Customs Act, 1962 (52 of 1962) and the Customs Tariff Act, 1975 (51 of 1975).
Explanation 1.—Where in respect of any such like goods, any duty of customs leviable under the said Section 12 is leviable at different rates, then, such duty shall, for the purposes of this proviso, be deemed to be leviable under the said Section 12 at the highest of those rates.
Explanation 2.—In this proviso,—
(i) ‘free trade zone’ means the Kandla Free Trade Zone and the Santa Cruz Electronics Export Processing Zone and includes any other free trade zone which the Central Government may, by notification in the Official Gazette, specify in this behalf;
(ii) ‘hundred per cent export-oriented undertaking’ means an undertaking which has been approved as a hundred per cent export-oriented undertaking by the Board appointed in this behalf by the Central Government in exercise of the powers conferred by Section 14 of the Industries (Development and Regulation) Act, 1951 (65 of 1951), and the rules made under that Act.”
3. Under the relevant import policy the 100% Export-Oriented Unit Scheme (EOU) envisages an industrial unit offering for export its entire production, excluding rejects or items otherwise specifically permitted to be supplied to the domestic tariff area. Industrial units approved by the Board of Approvals (BoA) set up for this purpose alone are eligible for import of capital goods, raw materials, components and spares, etc. required by them for export production under the Scheme. Based on the approval granted by the Board of Approvals a 100% EOU is eligible to import, without payment of customs duty, capital goods, office equipment, prototypes and technical samples, generating sets, raw materials, components, consumables, intermediates, packing materials, material-handling equipment like forklifts, overhead cranes and spares under open general licence subject to certain conditions. Applications for approval as 100% export-oriented unit are to be submitted to the Secretariat for Industrial Approvals, Ministry of Industry. Such EOU under no circumstances can be allowed to dispose of the export product in the domestic market unless specifically allowed by the Government.
4. The appellant was granted permission to set up a 100% export-oriented unit (EOU) for the manufacture of viscose staple fibre at its factory at Sirumugal in Coimbatore District in the State of Tamil Nadu. The letter of intent dated 18-12-1991 was issued to the appellant for the purpose by the Secretariat for Industrial Approvals (SIA), Ministry of Industry, Government of India. On 8-9-1993 the appellant made an application to the Secretary, Ministry of Commerce, Government of India and sought debonding of its unit from 100% EOU, i.e, withdrawal from 100% EOU Scheme. By letter dated 18-10-1993 of the Ministry of Commerce it was agreed in principle to allow the appellant to withdraw from the 100% EOU Scheme subject to the conditions on which withdrawal was permitted and as mentioned in the annexure to the letter. Once the debonding of the unit is permitted, finished goods earlier manufactured in the 100% EOU could be cleared for domestic tariff area (DTA) on levy of duty of central excise. The dispute is at what rate this duty is to be levied.
5. As noted above, it is the contention of the appellant that excise duty is payable on the finished goods under the main Section 3(1) of the Act together with customs duty on the imported raw material used in the manufacture of the said finished goods lying in the stock. The Revenue on the other hand contends that excise duty under the proviso to Section 3(1) of the Act is payable on the finished goods and with no customs duty being levied on the raw materials gone into the manufacture of finished goods.
6. It is the expression “allowed to be sold in India” appearing in the proviso to Section 3(1) of the Act which in fact is the bone of contention between the parties. The appellant contends that for the application of the proviso to Section 3(1) two conditions have to be cumulatively and simultaneously satisfied, viz., (1) goods should have been produced or manufactured by an existing 100% EOU, and (2) these goods should have been allowed to be sold in India.
7. It is not necessary for us to state the grounds on which the appellant sought debonding of its 100% EOU. By Letter No. 12/335(91)-EP dated 18-10-1993 from the Government of India in the Ministry of Commerce, the appellant was told that its request for debonding of the unit was considered by the Board of Approvals (BoA) for 100% EOUs in its meeting and had been recommended for approval subject to normal conditions of debonding. It was stated that formal letter would be issued by SIA in due course. It was also pointed out that the letter was being issued to enable the appellant to work out various modalities with the Customs Authorities and start for switching over from 100% EOU to DTA and to enable it to obtain release/dispose of the stocks/inventories on payment of applicable duties.
8. By Letter No. EO 335(91)-IL/MRTP dated 3-11-1993 from the Government of India in the Ministry of Industry, Department of Industrial Development, Secretariat for Industrial Approvals (SIA) to the appellant it was agreed in principle to allow the appellant to withdraw from the 100% EOU Scheme subject to conditions mentioned in the annexure to the letter. It will be appropriate to set out this letter as well as the annexure thereto, containing the conditions governing withdrawal from the 100% EOU Scheme:
“No. EO 335(91)-IL/MRTP,
Government of India,
Ministry of Industry,
Department of Industrial Development,
Secretariat for Industrial Approvals,
Eou Section.
M/s South India Viscose Limited,
PB No. 1844, 1977-A,
Trichy Road, Singanallur,
Coimbatore−641 005.
Subject: Letter of Permission No. PER:163(91)/EO 335(91)-IL/MRTP, dated 18-12-1991 issued for the manufacture of viscose staple fibre under 100% Export-Oriented Scheme — debonding of the unit.
[EO 335(91)-IL/MRTP]
Gentlemen,
I am directed to refer to your letter addressed to Ministry of Commerce (EP Section) on the above subject and to say that in the circumstances explained therein, Government of India agree, in principle, to allow you to withdraw from the 100% Export-Oriented Scheme, for which Letter of Permission No. PER:163(91)/EO 335(91)−IL/MRTP, dated 18-12-1991 was granted to you for the manufacture of viscose staple fibre for an annual capacity of 18,000 tons. The withdrawal from 100% EOU Scheme will be subject to the conditions mentioned in the annexure (attached).
2. After you have complied with the conditions mentioned in the annexure, you may approach your administrative ministry for issue of final debonding letter.
3. As regards surrender of Letter of Permission No. PER:163(91)/EO 235(91)-IL/MRTP, dated 18-12-1991, a separate communication will follow from the administrative ministry (viz. Ministry of Textiles — A&MMT Section), Udyog Bhawan, New Delhi.
4. All further correspondence in the matter, if any, may please be addressed to the administrative ministry viz. Ministry of Textiles — A&MMT Section, Udyog Bhawan, New Delhi.
5. Please acknowledge receipt.
Yours faithfully,
New Delhi,sd/-
3-11-1993(Baldev Raj)
Under-Secretary to
the Government of India.
ANNEXURE
Standard conditions governing withdrawal from 100% EOU Scheme
(1) The undertaking shall pay all customs and excise duties on the imported and indigenous capital goods, raw materials, components, consumables and spares in stock as well as on the finished goods in stock, together with all penalties and other charges as per Customs Act and Rules, before the issue of final debonding letter.
(2) The undertaking shall also deposit a penalty of 10% of the c.i.f value of imported capital goods, towards non-fulfilment of export obligation, with the import licensing authority with whom it had executed a legal undertaking in respect of the 100% export-oriented unit. This penalty shall be paid before the issue of final debonding letter.
(3) In case the undertaking has availed of the facility of external commercial borrowings, the same shall be disinvested before the issue of final debonding letter.
(4) The undertaking shall obtain a fresh approval under the current industrial licensing policy to undertake the proposed activity under Domestic Tariff Area Scheme.
(5) The undertaking shall undertake an export obligation of 25% of the annual production for a period of 5 years or an amount equal to five times of the c.i.f value of imports, whichever is higher. For this purpose it shall execute a legal undertaking with the import licensing authority concerned.
(6) The undertaking shall also make such payment(s) as may be necessary for all other major benefits that it might have availed of under 100% Export-Oriented Scheme.”
9. When the appellant received letter dated 18-10-1993 from the Ministry of Commerce it approached the Assistant Collector of Central Excise for valuing the goods and the duties of customs and central excise payable. The appellant was informed by the Assistant Collector of Central Excise by his Letter No. C. No. VIII/48/3/92-Cus dated 8-11-1993 that value of the goods and duties have been worked out and it was asked to pay the same. The appellant was also informed that the assessment had been done on a provisional basis.
10. The dispute in the present case concerns the finished goods which had been manufactured prior to the date of debonding of 100% EOU of the appellant. There is no dispute that the whole of the duties of customs and central excise as demanded by the Assistant Collector of Central Excise in his Letter No. C. No. VIII/48/3/92-Cus dated 15-11-1993, had been paid and which amounted to Rs 6,62,70,540.76. It is also not disputed that all the conditions stipulated in the letter dated 3-11-1993 of the Government of India in the Ministry of Industry, Secretariat for Industrial Approvals (SIA) have also been complied with by the appellant.
11. On 2-2-1994 a formal letter was issued by the Ministry of Textiles in the Government of India debonding the appellant's unit and permitting it to operate as a DTA unit. This letter took note of the fact that on the basis of the provisional assessment by the Assistant Collector of Central Excise the appellant had deposited the amount of duties of customs and central excise and the appellant had also been allowed to clear the finished stock lying with it in its stock as on 16-11-1993 as well as the production from 8-12-1993 onwards on provisional basis. After the appellant had been allowed in principle to withdraw from the 100% EOU Scheme by letter dated 3-11-1993 of the Ministry of Industry it had recognised its manufacturing activities as a DTA unit from 6-12-1993.
12. On 21-1-1994 the Assistant Collector of Central Excise issued a show-cause notice to the appellant now seeking to assess the finished goods lying in the stock on the date of debonding and demanding excise duty under the proviso to Section 3(1) of the Act. It would appear that the Assistant Collector of Central Excise had earlier demanded duty under the main Section 3(1) of the Act. A corrigendum dated 14-2-1994 was issued by the Assistant Collector of Central Excise to the show-cause notice seeking now to demand duty in respect of clearance made from 16-11-1993 to 1-2-1994 under the proviso to Section 3(1) of the Act after deducting the duties already paid by the appellant. Yet another corrigendum was issued to the show-cause notice by the Assistant Collector of Central Excise on 21-2-1994. By his order dated 31-3-1994 the Assistant Collector of Central Excise passed his order in original in which he agreed with the appellant to the extent that the date of debonding should be taken as 15-11-1993 when the appellant paid the applicable duties and not 2-2-1994 when the formal letter of debonding was issued by the Ministry of Textiles. However, in respect of applicability of the proviso to Section 3(1) of the Act the Assistant Collector of Central Excise decided the issue against the appellant and accordingly confirmed the duty demanded. Aggrieved, the appellant filed an appeal before the Collector of Central Excise (Appeals) under Section 35 of the Act. The Collector of Central Excise (Appeals) agreed with the appellant and decided the issue in its favour thus allowing the appeal. Now it was the Revenue which felt aggrieved. The Collector of Central Excise filed an appeal before the Appellate Tribunal against the order of the Collector of Central Excise (Appeals) under Section 35-B of the Act. By order dated 5-11-1997 which is impugned, the Tribunal allowed the appeal of the Revenue holding that it was the proviso to Section 3(1) of the Act, which was applicable. We may note that the corrigendum to the show-cause notice which was issued on 14-2-1994 was later on dropped by the Assistant Collector of Central Excise himself. Now it is the appellant which has come before this Court.
13. To appreciate the rival contentions we may consider the policy of the Central Government under which the EOU Scheme came into operation.
14. Under Notification No. 13/81-Cus dated 9-2-1981 as amended from time to time (as on 15-10-1992) and issued under sub-section (1) of Section 25 of the Customs Act, 1962, the Central Government exempted specified goods when imported into India for the purpose of manufacture of articles for export out of India or for being used in connection with the production or packaging of goods for export out of India by 100% EOU approved by the Board of Approvals (BoA) from the whole of the duty of customs leviable thereon and the additional duty, if any, subject to the conditions contained in the notification. One of the conditions was
“on the clearance of five per cent of articles so manufactured or such other percentage as may be fixed by the said Board, which are allowed to be sold in India, being in the nature of rejects, the importer shall pay a sum equivalent to the duty of excise payable on such articles under Section 3(1) of the Act, which have not been exported”.
Benefit of the notification is to be availed of by the importer, if he exports out of India 100% or such other percentage, as may be fixed by the said Board, of articles manufactured wholly or partly from the goods for the period stipulated by the Board or such extended period as may be specified by the said Board. On the expiry of this period the importer is required to pay customs duty on the imported capital goods, material-handling equipment, office equipment, captive power plants, etc. on depreciated value but at the rates prevalent at the time of import and also to pay customs duty on enhanced (sic unused) imported raw materials or components on the value at the time of import and at the rates in force at the time of clearance.
15. The proviso to Section 3(1) of the Act thereafter was inserted in Section 3 of the Act by Act 14 of 1982. A circular dated 17-2-1983 was issued by the Central Government clarifying the introduction of proviso. It applied to units in Kandla Free Trade Zone and the Santa Cruz Electronics Export Processing Zone allowing them to sell their goods not exceeding 25% of the production in DTA on payment of excise duty equal to the duties of customs leviable on like goods imported from abroad. Clearance to DTA was to be allowed only after necessary permission had been obtained by the unit from the Development Commissioner/Administrator in charge of the free trade zone (FTZ). The circular pointed out that in order to levy excise duty equal to the duties of customs leviable on the like goods imported from abroad, a proviso had already been inserted in Section 3(1) of the Act. In 1984 there was further amendment to the proviso to Section 3(1) of the Act by Act 21 of 1984. The effect of the amendment was that the facility of sale in DTA was now extended to 100% EOUs as well.
16. On 29-5-1984 the Central Government issued a circular explaining further amendment to the proviso to Section 3(1) of the Act. It said that the Central Government had decided to allow 100% EOU which had been approved by the Board of Approvals (BoA) to sell their goods not exceeding 25% of their exportable production in the domestic tariff area (DTA) on payment of appropriate duty of excise. In addition these undertakings could remove 5% of such other percentage of the goods, as may be fixed by BoA provided such goods are in the nature of rejects. It was pointed out that amendment has been carried out in the proviso to Section 3(1) and that such of the goods would be liable to duty of excise equal to the aggregate of the duties of customs of like goods imported from abroad. The circular provided that application for permission to sell 25% of exportable production should be certified by the Central Excise Officer indicating the quantity of goods which had actually been produced or manufactured as on that date.
17. On 18-6-1992 Public Notice No. 16-ITC(PN)/92-97 was issued, being one of the import and export public notices, laying down guidelines for sale of goods in DTA by EOUs and units in the export-processing zone (EPZs). The public notice referred to the export and import policies and the Handbook of Procedures (1992-97) providing for sale of goods in DTA by EOUs and units in EPZs up to 25% and then laid down the guidelines which would govern sales in DTA. This public notice could not be applicable to EOU when it is debonded in view of the norms laid in the public notice which could apply only to the unit not withdrawing from the EOU Scheme.
18. The contention of the Revenue is that permission to withdraw from the Scheme is itself a permission to sell in India, i.e, when the unit is permitted to debond, it would be deemed to have been permitted to sell the goods in India. But then permission to sell in India has to be in terms or in accordance with the provisions of the export-import policy. Permission to sell in India by 100% EOU consists of all those factors like value addition, fulfilment of export obligation, sale of a general currency licence-holder, item being not mentioned in the negative list and then there being a limit of 25%, etc. When permission to debond is given, none of these criteria or aspects are applied by the Board of Approvals (BoA) to the closing stock of finished goods. The Board of Approvals is a statutory authority, which permits debonding. It is created under the Industrial (Development and Regulation) Act. On the other hand permission to sell the goods in India under and in accordance with the import policy has to be given by the Development Commissioner in the Ministry of Commerce. The Board of Approvals and the Development Commissioner are two different authorities constituted for two different purposes. Permission to debond is a statutory function exercised by one statutory authority. On the other hand permission to sell in India is to be exercised by a different statutory authority. If reference is made to para 102 of the relevant import-export policy permission of the Development Commissioner is required for selling the goods in India up to a limit of 25% by 100% EOU. Para 117 of the policy deals with debonding of 100% EOU. Thus it is apparent that debonding and permission to sell in India are two different things having no connection with each other. It also becomes apparent that in view of the EOU Scheme as modified from time to time and corresponding amendments to Section 3 of the Act the expression “allowed to be sold in India” in the proviso to Section 3(1) of the Act is applicable only to sales made up to 25% of production by 100% EOU in DTA and with the permission of the Development Commissioner. No permission is required to sell goods manufactured by 100% EOU lying with it at the time approval is granted to debond.
19. The Revenue has proceeded on the assumption that by debonding permission has been granted by BoA for selling the closing stock of finished goods in India. This cannot be so. BoA does not concern itself with the manner of the disposal of the closing stock of the finished goods. After debonding it is open to the erstwhile 100% EOU, which is now like any other manufacturing unit in India to sell the goods in India or export it by following the normal procedure.
20. By its application dated 8-9-1993 the appellant had only asked the Central Government for permission to debond the unit. Pending formal debonding clearance, the appellant requested the Central Government that it might allow it to sell the goods in India. This request of the appellant was never acceded to by the authority concerned and letter of debonding was issued. This application of the appellant, therefore, could not be treated as an application for permission to sell in India as contended by the Revenue and the debonding letter of BoA cannot be construed as permission to sell in India. The argument of the Revenue that debonding assumes allowing all closing stock of the goods on the date of debonding to be sold in India would be stretching the matter a little too far. Conditions for sale of 25% of the finished products by EOU and sale of finished stock by a debonded 100% EOU on the date of debonding are different.
21. It was contended by Mr Lakshmikumaran, learned counsel for the appellant that under Rule 9-A(1)(ii) of the Central Excise Rules framed under the Act duty is chargeable at the rate on the date of removal of the goods and not from the date of their manufacture (see Wallace Flour Mills Co. Ltd. v. CCE (1989) 4 SCC 592). He said it is not material when the goods were manufactured and that it is the date of removal for sale in India that matters. He, therefore, submitted that central excise duty could be charged at the rate prevalent at the time when the goods were sold by the appellant in India on the date when 100% EOU was debonded which would be the date for removal for sale in India.
22. We may also refer to the counter-affidavit filed by the Revenue in this appeal. It is stated that in December 1991 the appellant started 100% EOU and was following all the rules and regulations set out for running an EOU. Owing to poor running of the unit the appellant applied for debonding of the unit, which was accepted in October 1993. The Department issued show-cause notices demanding duty on the stock of finished goods lying on the date of debonding, which is equal to customs duty leviable under Section 12 of the Customs Act, 1962 as per proviso to Section 3(1) of the Act which provides for charging duty on 25% of goods sold by an EOU in DTA. It will thus be seen that it is the stand of the Revenue itself that the proviso to Section 3(1) of the Act is applicable to 25% of the goods sold by an EOU in DTA.
23. The concept of bonding or debonding is well understood both under the Act and the Customs Act, 1962. The entire operations of an EOU are to be in customs-bonded factory, unless otherwise specifically exempted from physical bonding. The approved unit is required to execute a bond/legal undertaking with the Development Commissioner concerned in the form prescribed. Under the conditions laid for EOU, bonding period for units under the EOU Scheme is ten years. This period may be reduced to five years by the Board of Approvals in case of products liable to rapid technological change. On completion of the bonding period it shall be open to the unit to continue under the Scheme or opt out of the Scheme. Such debonding is, however, subject to the industrial policy in force at the time the option is exercised. On the satisfaction of the Board of Approvals, EOU may be debonded on its inability to achieve export obligations, value addition or other requirements. Such debonding is subject to such penalty as may be imposed and levy of the following duties:
(a) customs duty on capital goods at depreciated value but at rates prevalent on the dates of import;
(b) customs duty on unused raw materials and components on the value on the dates of import and at rates in force on the dates of clearance.
24. Unless there is a specific prohibition EOU is permitted sale in DTA all rejects up to 5% production or such percentage as may be fixed by the Board of Approvals subject to payment of applicable duties and other conditions. DTA sale entitlement is 25%. It is to be determined in relation to the ex-factory value of the total production, excluding permissible levels of rejects. DTA sale entitlement may be up to 25% of the total production provided the value of indigenous constituents of the final products excluding water, power, services and spares for capital goods is in excess of 30% of the cost of the product. Such entitlement may be up to 15% only if the value of indigenous constituents is less than 30% of the total cost.
25. Chapter V-A of the Central Excise Rules contains provisions for removal from a free trade zone or from a 100% EOU of excisable goods for home consumption. This chapter was made applicable to units under the EOU Scheme by Notification No. 130/84-CE dated 26-5-1984. This chapter contains Rules 100-A to 100-H. Rule 100-A provides that the provisions of this chapter shall apply to a person permitted under any law for the time being in force to produce or manufacture excisable goods in a 100% export-oriented undertaking and who has been allowed by the proper officer to remove such excisable goods for being sold in India on payment of duty of excise leviable thereon. It will be thus seen that this Chapter V-A would not be applicable where EOU is outside the EOU Scheme after the unit is debonded. Under Rule 100-H, Rule 57-A and other Rules mentioned therein shall not apply to excisable goods produced or manufactured by a 100% export-oriented undertaking. Rule 57-A relates to allowing credit of any duty of excise or the additional duty under Section 3 of the Customs Tariff Act, 1975 as may be specified by the Central Government in the notification, paid on the goods used in or in relation to the manufacture of the final products and for utilising the credit so allowed towards payment of duty of excise leviable on the final products.
26. Considering the whole aspect of the matter, we are of the opinion that the Tribunal was not right in holding that duty is to be leviable in terms of the proviso to Section 3(1) of the Central Excise Act, 1944. We, therefore, set aside the impugned judgment of the Tribunal and restore that of the Collector of Central Excise dated 11-10-1994. The appeal is accordingly allowed. There shall be no order as to costs.