Commissioner of Central Excise Vs Such Silk International Ltd. (Karnataka High Court)
Karnataka High Court adjudicated two appeals filed by the Revenue challenging the orders of the CESTAT, Bengaluru, concerning the levy of customs duty and penalties on capital goods imported by a 100% Export Oriented Unit (EOU). The assessee, Such Silk International Ltd., imported capital goods and raw materials duty-free under Notification No. 53/1997-Cus dated 03.06.1997, contingent on fulfilling export obligations (EO). While the unit commenced commercial production in March 2001 and initially exported goods, it later failed to fulfill the prescribed export obligations due to market disruptions and withdrawal of foreign partners. The Revenue invoked Sections 28, 61, and 72 of the Customs Act, 1962, to recover duty foregone on imported capital goods and raw materials, along with penalties under Section 112(a).
The adjudicating authority confirmed duty and penalties, which the assessee partly accepted for raw materials but contested for capital goods, arguing that the obligation on capital goods was limited to installation and usage in the unit. The CESTAT, relying on its earlier ruling in Hindustan Agrigenetics Ltd. v. Commissioner of Customs, Hyderabad (2010, 360 ELT 1042 Tri.-Bang.), held that duty is not leviable on capital goods once they are installed and used for manufacturing goods for export, irrespective of failure to achieve positive Net Foreign Exchange Earnings (NFEE). Consequentially, the CESTAT also held that penalties under Section 112(a) are not sustainable if the duty itself is not leviable, citing C. Mumbai v. M.M.K. Jewellers (2008, 225 ELT 3 SC).
The Revenue argued that Notification dated 31.03.2003 clarified the levy of duty on capital goods and should apply retrospectively, but the Court rejected this, noting that the period in question (July 2000–October 2002) predates the notification, and no retrospective application was demonstrated. The Court distinguished between raw materials, on which duty can be imposed if NFEE is not achieved, and capital goods, for which installation and use in manufacturing suffices for exemption. Ultimately, the Karnataka High Court dismissed both Revenue appeals, affirming that duty on capital goods was not leviable and consequential penalties could not be sustained.
The judgment underscores a clear distinction in customs law between raw materials and capital goods in EOUs, reaffirming that capital goods installed for production cannot attract duty merely due to non-fulfillment of NFEE, unless explicitly provided by law. It also confirms the principle that penalties under the Customs Act are contingent on the validity of the underlying duty demand.
FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT
