2025 (5) TMI 1224 - AT - Central Excise

100% EOU - Appellant has achieved negative NFE and had not fulfilled the obligations and conditions as provided in Para 4(b) of Notification No. 22/2003-CE and Para 3(d) of Notification No. 52/2003-Cus dated 31.03.2003 - contravention of provisions of Section 5A of Central Excise Act 1944 and violating Rule 20 of the Central Excise Rules 2002 as well as contravened Section 25(1) of the Customs Act 1962 - Extended period of limitation - HELD THAT - There is no controversy regarding the fact that appellants failed to achieve positive NFE and could not export the goods to achieve positive NFE earning for the period 2010-15 having procured goods without payment of duty. The main argument of the appellant is that they have duly complied with the condition stipulated in para 4(b) and 3(d) of exemption Notifications No. 22/2003-CE and 52/3003-Cus dated 31.03.2003 respectively by furnishing bond and hence the impugned order to recover the duty in the absence of any breach of conditions cannot be sustained. The argument of the learned Counsel for the appellant not agreed upon. From the plain reading of the provisions as contained in 4(b) and 3(d) of the exemption notifications as mentioned above it is clear that conditions stipulate the payment of duty alongwith interest in case of failure of achieving positive NFE earning and the adjudicating authority can demand duty alongwith interest in case of failure to achieve positive NFE. Learned Counsel for the appellant has also argued that encashment of bond as stipulated in para No. 4(b) and para No. 3(d) of the exemption notifications 22/2003-CE and 52/2003-Cus dated 31.03.2003 respectively is permissible only when there is permanent failure to achieve net foreign exchange earning and LOP is cancelled leading to the debonding of the EOU. In the present facts the LOP has been extended upto 12.05.2020 whereas the impugned order dated 31.03.2016 demands the excise duty and Customs duty for the period 2010-15. He contends that when the LOP is in force and not cancelled appellant are entitled to all the privileges and benefits attached to the LOP including the benefit of the exemption notification and the Revenue has no authority to recover the duty. The arguments of the learned Counsel for the appellant not agreed uponand the contention of the appellant cannot be accepted. Extended period of limitation - HELD THAT - The arguments of the learned counsel for the appellant cannot be accepted that they have regularly submitted the returns etc. disclosing the net foreign exchange earning achieved and extended period of limitation cannot be invoked. The department has rightly invoked extended period of limitation and the ingredients mentioned in provision of Section 11A of Central Excise Act 1944 and Section 28 of the Customs Act 1962 are present in the instant case. The appellant also argued that subsequent to the impugned order-in-original appellant have achieved the stipulated positive NFE earnings as required by DC KASEZ while granting an extension of the LOP period. Annual progress reports for FY 2016-17 17-18 and 18-19 submitted to SC-KASEZ establish the fact of positive NFE achieved which is enclosed by the appellant. The argument of the learned Counsel cannot be accepted because the show cause notice was issued to the appellant for violation of exemption notifications for the Financial Year 2010 to 2015 and not for the Financial Year 2016 to 2019. Conclusion - The appellant has violated the conditions of Notification No. 22/2003-CE dated 31.03.2003 and 52/3003-Cus dated 31.03.2003 having failed to achieve positive Net Foreign Exchange earnings during the period 2010-11 to 2014-15 and the appellant have contravened Section 5A of the Central Excise Act 1944 and violated Rule 20 of Central Excise Rules 2002. They have also contravened the provisions of Section 25 of the Customs Act 1962. Therefore demand of Central Excise duty of Rs. 6, 93, 932/- as per provisions of Section 4(b) of the Notification No. 22/2003-CE dated 31.03.2003 with interest and penalty and Customs duty of Rs. 42, 576/- demanded as per para 3(d) of the Notification No. 52/2003-Cus with applicable interest and penalty is liable to be upheld. Therefore the impugned order passed by Commissioner (Appeals) is liable to be confirmed whereas the appeal filed by appellant is liable to be dismissed. Appeal dismissed.

Summary

Issues Presented and Considered

The core legal questions considered by the Tribunal include:

1. Whether the demand of Central Excise duty and Customs duty along with interest and penalty was rightly imposed on the appellant for failure to achieve positive Net Foreign Exchange (NFE) earnings during the period 2010-2015 under the provisions of Notification No. 22/2003-CE and Notification No. 52/2003-Cus dated 31.03.2003.

2. Whether the appellant's compliance with the condition of furnishing a bond under para 4(b) of Notification No. 22/2003-CE and para 3(d) of Notification No. 52/2003-Cus sufficed to absolve them from liability for recovery of duties despite negative NFE earnings.

3. Whether the extension and non-cancellation of the Letter of Permission (LOP) by the Development Commissioner (DC), KASEZ, precluded the Revenue from recovering duties and penalties for the period of negative NFE earnings.

4. Whether the invocation of an extended period of limitation for demand of duty was justified.

5. Whether subsequent achievement of positive NFE earnings after the impugned period could negate liability for duties and penalties for the earlier period of negative NFE.

6. The applicability of relevant legal precedents regarding treatment of EOUs, bonded warehouses, and duty recovery in cases of failure to meet export obligations.

Issue-wise Detailed Analysis

Issue 1: Legitimacy of Demand for Central Excise and Customs Duty for Failure to Achieve Positive NFE

Legal Framework and Precedents: The demand was made under para 4(b) of Notification No. 22/2003-CE and para 3(d) of Notification No. 52/2003-Cus, which conditionally exempted duty on goods procured by EOUs subject to achieving positive NFE earnings. Section 5A of the Central Excise Act, 1944, Rule 20 of Central Excise Rules, 2002, and Section 25(1) of the Customs Act, 1962 were invoked for contravention.

Court's Interpretation and Reasoning: The Tribunal noted that these notification provisions clearly stipulate that in case of failure to achieve positive NFE, the duty equal to the proportionate amount of duty exempted shall be payable along with interest. The appellant's failure to achieve positive NFE during 2010-2015 constituted a breach of these conditions, justifying the demand.

Evidence and Findings: The Annual Performance Reports (API) and the show cause notice established negative NFE earnings. The adjudicating authority's order confirmed the demand and penalty, upheld by the Commissioner (Appeals).

Application of Law to Facts: The Tribunal held that the appellant's failure to achieve positive NFE triggered the liability to pay the duty exempted earlier, as per the bond conditions and notification provisions.

Treatment of Competing Arguments: The appellant's contention that mere furnishing of bond sufficed was rejected as the bond itself contemplated payment of duty on failure to achieve NFE. The argument that duty recovery was impermissible without cancellation of LOP was also not accepted.

Conclusion: The demand for Central Excise and Customs duty along with interest and penalty for failure to achieve positive NFE was rightly imposed.

Issue 2: Effect of Compliance with Bond Conditions on Duty Liability

Legal Framework: Para 4(b) of Notification No. 22/2003-CE and para 3(d) of Notification No. 52/2003-Cus require execution of a bond (B-17) binding the user to pay duty and interest on failure to achieve positive NFE.

Court's Interpretation: The Tribunal emphasized that the bond explicitly obligates the appellant to pay duties and interest on demand in case of failure to meet NFE targets. Compliance by furnishing the bond does not exempt the appellant from liability but rather creates enforceable obligations.

Findings: The bond conditions were examined, showing clear commitment to pay duties and interest without limitation upon failure to achieve NFE.

Application: The appellant's argument that mere bond furnishing absolved them from duty payment was rejected as the bond is a security instrument to ensure compliance and recovery.

Conclusion: Compliance with bond conditions does not preclude recovery of duties upon failure to achieve positive NFE.

Issue 3: Impact of Extension and Non-Cancellation of LOP on Duty Recovery

Legal Framework: The appellant's LOP was extended beyond the impugned period, and the DC did not cancel the LOP despite imposing penalty for non-achievement of NFE.

Court's Reasoning: The Tribunal rejected the appellant's contention that the validity and extension of LOP precluded duty recovery. It held that the LOP status does not override the statutory obligation to achieve positive NFE and pay duty on failure. The power to recover duty arises independently of LOP cancellation.

Evidence: The DC's order imposed penalty but did not cancel LOP; however, the appellant failed to achieve NFE during the relevant period.

Application: The Tribunal found no legal impediment in recovering duties despite the LOP being in force, since the breach of notification conditions was established.

Conclusion: Extension and non-cancellation of LOP do not bar recovery of duties and penalties for failure to achieve positive NFE.

Issue 4: Justification for Invocation of Extended Period of Limitation

Legal Framework: Section 11A of the Central Excise Act and Section 28 of the Customs Act allow extended limitation periods where duty has escaped assessment due to fraud or suppression.

Court's Interpretation: The Tribunal held that the appellant did not disclose negative NFE status to the department, effectively withholding material information. The demand was raised only after receipt of the DC's order confirming negative NFE, justifying invocation of extended limitation.

Evidence: The appellant's failure to inform the department about negative NFE despite filing returns was noted.

Application: The Tribunal found that the conditions for extended limitation were met and the demand was not barred by limitation.

Conclusion: Invocation of extended period of limitation was justified and proper.

Issue 5: Effect of Subsequent Achievement of Positive NFE on Liability for Earlier Period

Legal Framework: The demand related strictly to the period 2010-2015; subsequent positive NFE earnings occurred during 2016-2019.

Court's Reasoning: The Tribunal rejected the appellant's argument that subsequent positive NFE negated liability for earlier failure. The liability is period-specific and cannot be waived by later compliance.

Application: The Tribunal held that subsequent achievement of NFE does not absolve the appellant from duty liability for the period of default.

Conclusion: Subsequent positive NFE earnings do not affect the duty demand for the period 2010-2015.

Issue 6: Applicability of Precedents Relating to EOUs and Bonded Warehouses

Legal Framework and Precedents: The appellant cited decisions holding that entire EOU premises licensed as bonded warehouse cannot be treated as removal for home consumption, and that inputs consumed in EOUs with proper documentation do not attract duty.

Court's Analysis: The Tribunal distinguished these precedents on facts, noting that the present case involves violation of notification conditions due to failure to achieve positive NFE, which is a separate and independent ground for duty recovery.

Application: The legal principles in cited cases were found not applicable to the factual matrix of failure to achieve NFE and consequent duty liability.

Conclusion: Precedents on bonded warehouses and duty-free inputs consumption do not override the statutory obligation to achieve positive NFE and pay duty on failure.

Significant Holdings

"From the plain reading of the provisions as contained in 4(b) and 3(d) of the exemption notifications, it is clear that conditions stipulate the payment of duty along with interest in case of failure of achieving positive NFE earning and the adjudicating authority can demand duty along with interest in case of failure to achieve positive NFE."

"The bond executed can be enforced to demand duty and interest without any limitation."

"Extension and non-cancellation of LOP do not bar recovery of duties and penalties for failure to achieve positive NFE."

"The appellant did not come out clean before the department and chose to keep the department in dark, holding back information from the department in as much as they have never brought to the notice of the department of having not achieved positive NFE."

"Subsequent achievement of positive NFE cannot absolve the appellant from liability for the period 2010-2015 during which negative NFE was recorded."

"The appellant has violated the conditions of Notification No. 22/2003-CE and 52/2003-Cus dated 31.03.2003, having failed to achieve positive Net Foreign Exchange earnings during the period 2010-11 to 2014-15 and the appellant have contravened Section 5A of the Central Excise Act, 1944 and violated Rule 20 of Central Excise Rules, 2002. They have also contravened the provisions of Section 25 of the Customs Act, 1962."

Final determinations:

- The demand of Central Excise duty of Rs. 6,93,932/- with interest and penalty and Customs duty of Rs. 42,576/- with interest and penalty is upheld.

- The impugned order passed by Commissioner (Appeals) is confirmed.

- The appeal filed by the appellant is dismissed.