EOU permitted to destroy obsolete goods on payment of duty on scrap value

Tyco Electronics Corporation India (P) Ltd. Vs Commissioner of Central Excise & Service Tax (CESTAT Bangalore)

CESTAT Bangalore held that destruction of obsolete goods allowed to EOU on payment of duty on scrap value. Accordingly, held that when goods are destroyed EOU is not liable to pay duty on original value at the time of import.

Facts- The Appellant is an EOU manufacturing connectors and other items. As part of their routine business, they have imported raw material and components and also procured goods from DTA without payment of customs duty and excise duties in terms of Customs Notification No. 52/2003-Cus dated 31.03.2003 and Notification No. 22/2003-CE dated 31.03.2003 respectively.

Since there were obsolete items in their ware house, the appellant vide letter dated 01.09.2010 sought permission from the Department for destruction or disposal of obsolete imported raw material and components. They have also informed that destroyed goods will be sold as scrap and duty would be discharged on the scrap value of obsolete raw materials.

However, Adjudicating authority directed the Appellant to destroy or dispose the goods only after payment of duty on the assessable value at the time of import with interest till date of payment of duty. Aggrieved, an appeal was filed by the appellant before the Commissioner Appeals, however, the same was rejected. Aggrieved by the said impugned order, present appeal is filed.

Conclusion- It is an admitted fact that appellant vide letter dated 01.09.2010 sought permission from the Department for destruction of obsolete imported raw material and components. They have also informed that destroyed goods would be sold as scrap and duty discharged on the scrap value of the obsolete raw materials. Thus, the adjudication authority ought to have allowed the request of the appellant for destruction of such goods either within the unit or destroyed outside the unit when it is not possible to destroy the same within the unit without insisting for payment of custom duty especially when respondent have allowed destruction of obsolete goods subject to payment of scrap value earlier.

The Notification No.34/2015 has amended condition (8) of Notification No. 52/2003-Cus dated 31.03.2003 along the lines of the above clause 6.15(b) to bring parity between the FTP provisions and the customs notifications. In view of the above, it is clear that when goods are destroyed, they are not liable to duty on the original value at the time of import.

FULL TEXT OF THE CESTAT BANGALORE ORDER

The Appellant is an EOU manufacturing connectors and other items. As part of their routine business, they have imported raw material and components and also procured goods from DTA without payment of customs duty and excise duties in terms of Customs Notification No. 52/2003-Cus dated 31.03.2003 and Notification No. 22/2003-CE dated 31.03.2003 respectively. Since there were obsolete items in their ware house, the appellant vide letter dated 01.09.2010 sought permission from the Department for destruction or disposal of obsolete imported raw material and components. They have also informed that destroyed goods will be sold as scrap and duty would be discharged on the scrap value of obsolete raw materials. However Adjudicating authority vide order dated 24.01.2011 directed the Appellant to destroy or dispose the goods only after payment of duty on the assessable value at the time of import with interest till date of payment of duty. Aggrieved by said order, an appeal was filed by the appellant before the Commissioner Appeals. In view of the Notification No. 52/2003-Cus dated 31.03.2003, Commissioner Appeals rejected the appeal. Aggrieved by the said impugned order, present appeal is filed.

2. When the matter came up for hearing, the learned Counsel for the appellant submitted that due to rapid technological development/advancement, the imported raw material/components become obsolete and unfit for manufacture and therefore they sought permission from the jurisdictional authority from time to time to destroy the goods on payment of duty on the scrap value of the destroyed goods. The Learned Counsel also submitted that the impugned order is issued without considering the provisions of Para 6.15(b) of the Foreign Trade Policy r/w Notification No.53/2003-Cus dated 31.03.2003 which reads as:-

“Capital goods and spares that have become obsolete/ surplus, may be exported or transferred to SEZ unit, transferred to another EOU/EHTP/STP/BTP/on payment of applicable GST and compensation cess or disposed of in DTA on payment of applicable GST and compensation cess and duties of Customs leviable under First Schedule of the Customs Tariff Act, 1975. Benefit of depreciation will be available in case of disposal in DTA only when the unit has achieved positive NFE taking into consideration the depreciation allowed. No duty shall be payable other than the applicable taxes under GST laws incase capital goods, raw material consumables, spares, goods manufactured, processed or packaged, and scrap/ waste/remnants /rejects are destroyed within unit after intimation to Customs authorities or destroyed outside unit with permission of Customs authorities. Destruction as stated above shall not apply to gold, silver, platinum, diamond, precious and semi­precious stones”.

3. The Learned Counsel further submits that as per Board Circular No. 60/1999-Cus dated 10.09.1999, in case of supplier of such defective/damaged or otherwise unfit for use, goods, does not insist on re-export of such goods, the same may not be re­exported subject to the condition that such goods shall be either destroyed with the AC in-charge of the unit or cleared into DTA on payment of full customs duty. They have further submitted that the impugned order is issued without considering/following the provisions of Foreign Trade Policy. It is stated that as per the General exemption No.66 Paragraph 3(c)

“3. ..

(c) To dispose of the goods or services, the articles produced, manufactured, processed and packaged in the unit, or the waste, scrap and remnants arising out of such production, manufacture, processing or packaging in the manner as provided in the [Foreign Trade Policy]and in this notification; “

And also, to dispose of the goods, the said condition was further relaxed by Condition 8

8. Subject to the satisfaction of the said officer, duty shall not be leviable in respect of

(i) the capital goods, if such capital goods are destroyed within the unit or outside the unit, when it is not possible or permissible to destroy the same within the unit, in the presence of Customs or Central Excise Officer;

(ii) the scrap or waste material or remnants arising in the course of production, manufacture, processing or packaging, if such scrap or waste material or remnants are destroyed within the unit or destroyed outside the unit when it is not possible to destroy the same within the unit:

Provided that this condition shall not apply in the case of unit engaged in manufacture and export of gem and jewellery.

4. Ld. Counsel further submitted that said condition of 8 Notification No.53/2003-Cus dated 31.03.2003 was substituted by Notification No. 34/2015-Cus dated 25.05.2015 wherein it is specifically mentioned that duty shall not be leviable. Condition of 8 is reproduced hereinbelow:

“(8) Subject to the satisfaction of the said officer, duty shall not be leviable in respect of capital goods, raw material, consumables, spares, goods manufactured processed or packaged, and scrap or waste or remnants or rejects are destroyed within the unit after intimation to Customs authorities or destroyed outside the unit with permission of Customs authorities:

Provided that this condition shall not apply in case of unit engaged in manufacture and export of gold, silver, platinum, diamond, precious and semi precious stones.”

5. Regarding Sale of Surplus/unutilised goods, Condition No.25 reads as follows:

“25. Sale of surplus/unutilised goods:

25.1 EOUs are allowed to sell surplus/unutilized goods and services, imported or procured duty free, into DTA on payment of duty on the value at the time of import/procurement and at rates in force on the date of payment of such duty, in case the unit is unable, for valid reasons, to utilize the goods. The permission for such DTA sale is given by the jurisdictional Assistant/Deputy Commissioner of Central Excise and Customs.

25.2 Unutilized goods and services may also be transferred to another EOU/EHTP/STP/BTP/SEZ unit or exported. Such transfer to another such unit would be treated as import for receiving unit.

25.3 Obsolete/surplus capital goods and spares can either be exported, transferred to another EOU/EHTP/STP/BTP/SEZ unit or disposed of in the DTA on payment of applicable duties. The benefit of depreciation, as applicable, will be available in case of disposal in DTA only when the unit has achieved positive NFE. Duty is not charged in case of obsolete/surplus capital goods, consumables, spares, goods manufactured, processed or packaged and scrap, waste, remnants are destroyed within the unit after intimation to Central Excise & Customs authorities or destroyed outside unit with the permission of Central Excise & Customs authorities.

6. Regarding disposal of such obsolete items, Circular No. 18/1998-Cus dated 16.03.1998. Same is reproduced below:-

EPZ/FTZ — Destruction of Scrap/waste in the Export Processing Zone

Circular No. 18/98-Cus., dated 16-3-1998
[From F. No. 305/215/97-FTT]

Government of India
Ministry of Finance (Department of Revenue)
New Delhi

Subject : Destruction of scrap/waste in the Export Processing Zones – Matter regarding.

I am directed to refer to Notification No. 133/94-Cus., dated 22-6-1994 governing 100% EOUs set up in various Export Processing Zones/Free Trade Zones. Under the above notification, seven earlier notifications each governing 100% EOU in an Export Processing Zone, were rescinded. In this connection, the following doubts have been raised;

(i) Whether the actions taken earlier under these seven Notifications which were issued for seven Export Processing Zones, are deemed to have been done or taken under the corresponding provisions of the current Notification No. 133/94-Cus., which has rescinded all these seven notifications.

(ii) Whether defective or sub-standard computers and its parts which are not required (useful) for current production and have also not been used can be destroyed outside the zone i.e. whether the goods which were imported under an earlier notification could be allowed destruction under the present Notification No. 133/94-Cus.

(iii) Whether the goods which are permitted for destruction within the zones can be taken for destruction outside the zones, as the notification only provides for destruction within the zone?

2. The issue has been examined by the Board. It is clarified that action taken under the rescinded seven notifications will be deemed to have been done or taken under the corresponding provisions of the current Notification No. 133/94 and the goods which were imported under any one of the earlier notifications could be allowed destruction under present notification. Under para 7 (ii) of Notification No. 133/94-Cus., the imported goods as such may be allowed destruction and under para 7(iii), the scrap/waste obtained in the process of manufacture may also be allowed destruction. In the cases where goods cannot be destroyed within the Zone because of the safety reasons or Municipal Corporation’s regulations, the Commissioner may permit destruction outside the Zone subject such conditions as may be prescribed by the Commissioner since this is only a procedural requirement and non-substantive in nature.

3. Pending cases may be processed accordingly and the receipt of this letter may kindly be acknowledged.

7. The Learned Counsel further submitted that the issue is squarely covered by the findings of this Tribunal in the matter of M/s. Saint Gobin Crystals reported in 2018 (364) E.L.T 1095), M/s Mac Million India Vs CC, Bangalore reported in 2008 (223) E.L.T 449 and in the case of M/s. Indian Actuators Pvt Ltd. reported in 2009 (244) E.L.T 573, where it was held that :-

“3. We have heard both sides. We find force in the submission of the appellants that since the relevant Exim policy had already been amended prior to the issue of show cause notice, and it provides for destruction of obsolete capital goods, raw materials and finished goods and the request for destruction was made after the issue of the show cause notice, and the impugned order was passed well after the Notification itself had been amended to provide for destruction with the permission of the Assistant Commissioner, and since there is no dispute that the capital goods and raw materials had become unfit for manufacture and become obsolete in the market for actuators, the permission sought for destruction of the capital goods, raw materials and finished goods etc. by the appellants can be accepted. We find that Circular No. 18/98-Cus., dated 16-3-1998 issued by the CBEC clarifies that destruction of waste/scrap obtained in the process of manufacture in the Export Processing Zone when goods were imported under earlier notification not providing for destruction could be permitted under the notification currently in force. The Circular reads as under :-

“Destruction of scrap/waste in the Export Processing

I am directed to refer to Notification No. 133/94-Cus., dated 22-6-1994 governing 100% EOUs set up in various Export Processing Zones/Free Trade Zones. Under the above notification, seven earlier notifications each governing 100% EOU in an Export Processing Zone, were rescinded. In this connection, the following doubts have been raised;

(i) Whether the actions taken earlier under these seven Notifications which were issued for seven Export Processing Zones, are deemed to have been done or taken under the corresponding provisions of the current Notification No. 133/94-Cus., which has rescinded all these seven notifications?

(ii) Whether defective or sub-standard computers and its parts which are not required (useful) for current production and have also not been used can be destroyed out side the zone i.e. whether the goods which were imported under an earlier notification could be allowed destruction under the present Notification No. 133/94-Cus.?

(iii) Whether the goods which are permitted for destruction within the zones can be taken for destruction outside the zones, as the notification only provides for destruction within the zone ?

(2) The Issue has been examined by Board. It is clarified that action taken under the rescinded seven notifications will be deemed to have been done or taken under the corresponding provisions of the current Notification No. 133/94 and the goods which were imported under any one of the earlier notifications could be allowed destruction under present notification. Under para 7(ii) of Notification No. 133/94-Cus., the imported goods as such may be allowed destruction and under para 7(iii), the scrap/waste obtained in the process of manufacture may also be allowed destruction. In the cases where goods cannot be destroyed within the Zone because of the safety reasons or Municipal Corporation’s regulations, the Commissioner may permit destruction outside the Zone subject such conditions as may be prescribed by the Commissioner since this is only a procedural requirement and non-substantive in nature.

(3) Pending cases may be processed accordingly and the receipt of this letter may kindly be acknowledged.”

4. In the light of the above discussion, we direct that the application for permission to destroy the obsolete goods be allowed by the appropriate authority in terms of Notification No. 71/2000-Cus., dated 22-5-2000.

5. The appeal is disposed of in the above terms.

8. The Learned Counsel further submits that once the Notification52/2003 is amended vide Notification No.34/2015-Cus. dated 25.5.2015 to incorporate the condition laid down with para 6.15 of the FTP to bring parity between the two provisions the above amendment would necessarily have retrospective effect from the date of the original notification. To substantiate the same, he has drawn our attention to the judgment of Hon’ble Supreme Court in the matter of Government of India Vs Indian Tobacco Association reported in 2005 (187) E.L.T 162 (SC); CCE vs. Fosroc Chemicals reported in 2015 (318) E.L.T 240, M/s. Mehler Engineered Products India Pvt. Ltd. Vs Union of India: 2018 (364) ELT 27(Mad.).

9. It is also submitted that the Department had in the past permitted for destruction of obsolete goods and to pay duty on the scrap value vide orders in C.No.VIII/48/280/2002 EOU IV dated 28.02.2009 and C.No.VIII/48/73/2003 EOU IV dated 28.07.2009 and therefore, the Revenue cannot contradict itself with its previous permissions in the appellants own case.

10. Learned Authorised Representative on behalf of the Revenue reiterated the finding in the impugned order and submitted that once the appellant failed to use the goods for the specific purpose within the prescribed time limit, they are liable to pay customs duty. The waste scrap or remnant arising in the course of manufacture only can be destroyed without payment of duty but duty has to be paid on obsolete goods. The Learned AR relied on the Final order of the Tribunal in the matter of Santox Pvt Ltd reported in 2012 (278) E.L.T 259 (Tri.-Mumbai) and M/s. S.K Patnaik reported in 2000 (115) E.LT 9 (SC).

11. Heard both sides. The only dispute is whether the raw materials/components procured without payment of duty under notification 52/2003-cus dated 31.03.2003 can be permitted to be destroyed without payment of duty when the goods become obsolete and unfit for manufacture.

12. As per the Circular dated 10.9.1999, the supplier of such defective/damaged or otherwise unfit for use, goods, does not insist on re-export of such goods, the same may not be re­exported subject to the condition that such goods shall be either destroyed with the permission of the Assistant Commissioner in-charge of the unit or cleared into DTA on payment of full Customs duty. Board Circular No. 60/1999-Cus dated 10.09.1999 is reproduced below:

EOU/EPZ/STP units — Replacement of goods exported or imported and found damaged or defective or otherwise unfit for use

Circular No. 60/99-Cus., dated 10-9-1999
[From F. No. 305/111/99-FTT]

Government of India
Ministry of Finance (Department of Revenue)
Central Board of Excise & Customs, New Delhi

Subject : Difficulty being faced by EOU/EPZ/EHTP/STP units in regard to replacement of goods exported or imported and found damaged or defective or otherwise unfit for use – Regarding.

It has been brought to the notice of the Board by the Ministry of Commerce that EOU/EPZ/EHTP/STP units are facing difficulties in sending replacement of goods exported and found defective, damaged or otherwise unfit for use and in getting replacement of goods imported and found defective/damaged or unfit for use.

2. The matter has been examined. I am directed to say that following instructions may be followed in this regard :

(A) Goods exported and found defective, damaged or otherwise unfit for use <+><+><+><+><+>by foreign buyer

(i) The units may be allowed to make free replacement of the goods exported and found defective, damaged or otherwise unfit for use prior to physical re-import of the such goods subject to grant of GR Waiver by Reserve Bank of India. However, such defective, damaged or otherwise unfit for use goods shall be subsequently brought back to the country.

(ii) The units may be allowed to re-import part consignment/full consignment not necessarily for the purpose or re-export in case of failure of the foreign buyer to take the delivery.

(B) Goods imported and found defective/damaged or otherwise unfit for use

(i) The units may be allowed to receive free replacement of the goods imported and found defective, damaged or otherwise unfit for use, prior to re-export of the same. However, re-export of such defective/damaged or otherwise unfit for use goods may be subsequently made later.

(ii) In case, the supplier of such defective, damaged or otherwise unfit for use goods does not insist on re-export of such goods, the same may not be re-exported subject to the condition that such goods shall be either destroyed with the permission of Assistant Commissioner of Customs/Central Excise in charge of unit or cleared into DTA on payment of full customs duty.

3. The instructions may be given wide publicity in the form of Public Notice.

4. Kindly acknowledge receipt of this Circular. Difficulties, if any, faced in the implementation of the above changes, may be brought to the notice of the Board immediately.

It is an admitted fact that appellant vide letter dated 01.09.2010 sought permission from the Department for destruction of obsolete imported raw material and components. They have also informed that destroyed goods would be sold as scrap and duty discharged on the scrap value of the obsolete raw materials. Thus, the adjudication authority ought to have allowed the request of the appellant for destruction of such goods either within the unit or destroyed outside the unit when it is not possible to destroy the same within the unit without insisting for payment of custom duty especially when respondent have allowed destruction of obsolete goods subject to payment of scrap value earlier.

13. Moreover para 6.15 (b) of the Foreign Trade Policy clearly

states that ——- “no duty shall be payable in case capital goods, raw material, consumables, space, goods manufactured, processed and packaged, and scrap/waste/remnants/rejects are destroyed within unit after intermission to customs authority or destroyed outside unit with permission of customs authorities”. The Notification No.34/2015 has amended condition (8) of notification 52/2003 along the lines of the above clause 6.15(b) to bring parity between the FTP provisions and the customs notifications. In view of the above, it is clear that when goods are destroyed, they are not liable to duty on the original value at the time of import.

14. The reliance placed by the revenue on Santox Pvt Ltd reported in 2012 (278) E.L.T 259 (Tri.Mumbai) also does not help the case of revenue in as much as the matter was remanded for demand of duty not on the original value but on the value of the deteriorated goods. Tribunal has held that “duty can be demanded only on the value of the deteriorated goods which have to be determined in accordance with sub-section (3) of Section 22 of the Customs Act. It is for the appellant to establish that the goods which they have proposed to destroy has no commercial value whatsoever and no duty liability would be involved. Therefore, the matter has to go back to the original adjudicating authority, namely, the jurisdictional Assistant Commissioner/Dy. Commissioner for considering the case of the appellant under Section 22 of the Customs Act to determine the appellant’s duty liability in accordance thereof ”.

15. In the instant case, there is no dispute that the appellant had vide letter dated 29.11.2010 had requested the Department for permission to destroy the goods that were obsolete and unfit for use and they had also agreed to pay duty on the scrap value of the goods.

16. The Hon’ble High Court in the case of Commissioner of Central Excise Delhi vs. Pure Rice Ltd relying upon the Notification 60/99 dated 10.9.99 has category been held that:

“a perusal of the aforementioned clause makes it evident that in case the goods supplied are unfit for use in the supplier does not insist on re-export when such goods are required either to be distracted with the permission of the resident Commissioner of Customs Central Excise in charge of the unit or cleared into DTA on payment of full customs duty the circular appear to have been issued on account of difficulties being faced by the export oriented units like the petitioner in regard to replacement of goods imported or exported which have been found to be damaged or defective or otherwise unfit for use. Therefore, there arises no substantial question of law warranting admission of the appeal. The appeal is wholly without any merit in the same is accordingly dismissed”.

17. In view of the above facts and the decisions rendered by the Tribunal and the Hon’ble High Court, we do not find any merit in the impugned orders. Appeals are allowed.

(Order pronounced in open court 20/11/2023.)