Holding

Excise duty on the finished goods of a debonded 100% EOU is payable under Section 3(1) of the Central Excise and Salt Act, not under the proviso, because debonding and permission to sell are separate statutory functions.

Summary

Mis. SIV Industries Ltd., a 100% Export Oriented Unit, sought to withdraw (debond) from the EOU scheme and paid all customs and excise duties as required. The dispute centered on whether excise duty on the finished goods in stock at the time of debonding should be levied under Section 3(1) of the Central Excise and Salt Act or under the proviso to that section, and whether debonding itself granted permission to sell the stock in the Domestic Tariff Area. The Court held that debonding and permission to sell are distinct statutory functions; therefore the duty is payable under Section 3(1) and not the proviso, and no separate permission is needed to sell the existing stock. It also ruled that Chapter V‑A of the Central Excise Rules does not apply after debonding. Consequently, the Tribunal’s decision was set aside and the Collector’s order restored.

Issues considered

Whether excise duty on finished goods of a debonded 100% EOU is payable under Section 3(1) of the Central Excise and Salt Act or under the proviso to Section 3(1).
Whether debonding of a 100% EOU automatically confers permission to sell the closing stock in the Domestic Tariff Area.
Whether Chapter V‑A of the Central Excise Rules applies to a unit after it has been debonded from the EOU scheme.
Interpretation of the phrase “allowed to be sold in India” in the proviso to Section 3(1).

Legislation cited

Central Excise and Salt Act, 1944s. 3(1), s. proviso to 3(1)
Central Excise Ruless. Chapter V-A (Rules 100-A to 100-H)
Customs Act, 1962s. 12
Customs Tariff Act, 1975
Industrial Development and Regulation Act, 1951s. 14

Subjects

Export Oriented UnitdebondingCentral Excise dutySection 3(1)provisoDomestic Tariff AreaCentral Excise Rulessale permissioncustoms dutyEOU scheme

Judgment

Mis. SIV INDUSTRIES LTD. A
v.
COMMISSIONER OF CENTRAL EXCISE AND CUSTOMS

MARCH 10, 2000

[D.P. WADHWAANDRUMAPAL, JJ.] B

Central Excise and Salt Act, 1944-Section 3( 1)-Debonding of unit
from 100% EOU Scheme-Levy of excise duty on the finished goods lying
in stock, on the date of debonding and cleared for Domestic Tariff Area-
Whether under section 3(1) or proviso to section 3(1) read with section 12 C
Customs Act, 1962-Held, duty is leviable under Section 3(1) of the Act.

Proviso to S. 3( 1)-De bonding of unit form 100% EOU, whether deemed
to be permission to sell in India-Held, debonding and permission to sell in
India are two different things having no connection with each other-No
permission is required to sell goods manufactured by 100% EOU lying with D
it at the time approval is granted to debond-Policy of Government under
which EOU scheme came into operation and Import Export policy discussed.

Central Excises Rules-Chapter V-A (Rules 100-A to 100-H)-Held,
not applicable where EOU is outside EOU scheme after unit is debonded.
E
The appellant, a 100% EOU had sought permission for debonding
its unit from 100% EOU, for which it was granted permission in principle
by the Ministry, vide its letter dated October 18, 1993 followed by letter
dated November 3, 1993 subject to fulfilment of certain conditions, which
was duly fulfilled by the appellant, including the deposit of duties of
customs and excise on the basis of provisional assessment made by Assist- F
ant Collector o~ Central Excise. Once the debonding of the unit was
· permitted, finished goods manufactured earlier could be cleared for Do-
mestic Tariff Area (DTA) on levy of duty of Central Excise. On February
2, 1994, a formal letter was issued by the Government of India debonding
the appellant's unit and permitting it to operate as a DTA unit. G
The assessee claimed that excise duty was payable on the finished
goods under section 3(1) of the Act together with customs duty on the
imported raw materials used in the manufacture of said finished goods
lying in stock; rate of excise duty was the rate prevalent at the time when
goods were sold in India on the date when the 100% EOU was debonded, H
231
.L

' l

232 SUPREME COURT REPORTS (2000) 2 S.C.R.
A which would be the date for removal for sale in India and not from the
date of their manufacture.

The Assistant Collector of Central Excise by its order dated March
31, 1994, did not agree with the stand taken by the assessee. He, however,
agreed with the assessee to the extent that the date of debonding was to be .
B .taken as November 15, 1993, when the assessee paid the applicable duties
and not February 2, 1997, when formal letter of debonding was issued by
the Ministry. On appeal, the Collector of Central Excise decided the issue
in favour of the assessee. CEGAT by its order dated November 5, 1997
allowed the appeal of Revenue holding that proviso to Section 3(1) of the
C Act was applicabler Hence, the present appeal.

Allowing the appeal, this Court

HELD : 1. CEGAT was not right in holding that duty is Ieviable in
terms of proviso to section 3(1) of the Central Excises & Salt Act. On
debonding, levy of excise duty on finished goods earlier manufactured in
D
100% EOU and cleared for Domestic Tariff Area, will be under Section
3(1) of the Act. [245-E]

2.1. Condition for sale of 25% of the finished products by EOU and
sale of finished stock by a debonded lOO'fo EOU on date of debonding are
E different. In view of the EOU scheme as modified from time to time and
amendment 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 upto 25 % of production by 100 % EOU in DTA and with 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
F to debond. After debonding, it is open to the EOU, which is now like any
other manufacturing unit in India, to sell the goods in In~.or export it by
following the normal procedure. [243-D; 242-G; 243-B]

2.2. Debonding and permission to sell in India are two different
aspects, which functions are exercised by two different authorities consti-
G tuted for two different purposes, having no connection with one another.
Permission to sell in India has to be in accordance with the provisions of
the export-import policy and consists of all those factors like value addi·
tion, fulfilment of export obligation, sale of general currency licence
holder, item not being in negative list and then there being a limit of 25 %
H etc. Permission to sell the goods in India in accordance with the import
SN INDUSTRIES LTD. i: C.C.E. 233
policy has to be given by the Development Commissioner in the Ministry A
of Commerce. On the other hand, when permission to debond is given,
none of the aforesaid aspects are applied by the Board of Approvals (BOA)
which is the statutory body [created by the Industrial (Development and
Regulation) Act] that permits debonding. The BOA is not concerned in
any way with the manner or the disposal of the closing stock of the finished
B
goods. [242-C-E]

3. Chapter V-A of Central Excise Rules, apply to person permitted
under any law for the time being in force to produce or manufacture goods
in a 100 % EOU and who has been allowed to remove such exci~able goods
for being sold in india on payment of excise duty leviable thereon. This c
Chapter would p.ot be applicable where EOU is outside the EOU scheme
after the unit is debonded. [245-B]

Wallace Flour Mills Co. Lid. v. Collector of Central Excise, Bombay
Division III, [1989) 4 SCC 592, referred tO.
D
CIVIL APPELLATE JURISDICTION Civil Appeal No. 1787 of
1998.

From the Judgment and Order dated 5.11.97 of the Central Excise
Customs & Gold (Control) Appellate Tribunal, Madras in A. No. E/SB/5262/
95 in F.O. No. 3024 of 1997. E

V. Sridharan, V. Balachandran, V. Lakshmikumaran, K. Srinivas,
Senthil Jagadeesan, A.T.M. Sampath and P.P. Sharma for the Appellant.

A.K. Ganguli, L.K. Gupta, Dileep Tandon, P. Parmeswaran, Rishi
Malhotra and M. Gouri Shankar Murthy for the Respondent. F
The Judgment of the Court was delivered by

D.P. WADHWA, J. This appeal is directed against the order dated
November 5, 1997 of the Customs, Excise and Gold (Control)
Appellate Tribunal (for sh01t the 'Tribunal') allowing the appeal of G
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 proviso to Section 3(1) of the Act as
claimed by the appellant.

Section 3(1) of the Act with proviso, in relevant part, is as under: - H
234 SUPREME COURT REPORTS [2000) 2 S.C.R.
A "Section 3. Duties specified in the Schedule to the Central Excise
Tari.ff 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
B
the Central Excise Tari.ff Act, 1985:

Provided that the duties of excise which shall be levied and
collected on any excisable goods which are produced or manufac-
tured, -
c
(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,
D
shall be an amount equal to the aggregate of the duties of customs
which would be Ieviable under section 12 of the Customs Act, 1962
(52 of 1962), on like goods produced or manufact:Ured 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
E
goods shall, notwithstanding anything contained in any other pro-
vision of this Act, be determined in accordance with the provisions
of Customs Act, 1962 (52of1962) and the Customs Tari.ff Act, 1975
(51 of 1975).

F Explanation 1. - Where in respect of any such like goods, any duty
of customs leviable under the said section 12 is Ieviable 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.

G Explanation 2 - In this proviso, -

(i) "free trade zone" means the Kandla Free Trade Zone and the
Santa Cruz Electronic~ Export Processing Zone and includes
•
any other free trade zone which the Central Government may,
H by notification in this Official Gazette, specify in this behalf;
SN INDUSTRIES LTD. v. C.C.E. [D.P. WADHWA, J.] 235
(ii) "hundred per cent export-oriented undertaking" means an A
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
B
that Act."

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 pennitted to be
supplied to the Domestic Tariff Area. Industrial units approved by the Board C
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, proto-types and technical
samples, generating sets, raw materials, components consumables, intermedi- D
ates, packing materials, material handling equipment like fork lifts, 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 E
domestic market unless specifically allowed by the Government.

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 December 19, 1991 was issued to the appellant for the purpose F
by the Secretariat for Industrial Approvals (SIA), Ministry of Industry,
Government of India. On September 8, 1993 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 October 18, 1993 of the Ministry of Commerce it
G
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 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. H
( .

236 SUPREME COURT REPORTS (2000] 2 S.C.R.
A As noted above, it is the contention of the appellant that excise duty
is payable on the finished goods under main Section 3(1) of the Act together
with customs duty on the imported raw material used ~u the manufacture of
said finished goods lying in the stock. The Reveriiie on the other hand
contends that excise duty under proviso to Section 3(1) of the Act is payable
on the finished goods and with no customs duty being levied on the raw
B materials gone into the manufacture of finished goods.
It is the expression "allowed to be sold in India" appearing in proviso ·
to Section 3(1) of the Act which in fact is the bone of contention between
the parties. Appellant contends that for the application of proviso to Section
3(1) two conditions have to be cumulatively and simultaneously satisfied,
c 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.

It is not necessary for us to state the grounds on which appellant sought
debonding of its Hl0% EOU. By letter No. 12/335/91-EP dated October,
1993 from the Government of India in the Ministry of Commerce, appellant
D 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 ~e appellant to work
out various modalities with the Customs Authorities and start for switching
E
over from 100% EOU to DTA and to enable it to obtain release/dispose of
the stocks/inventories on payment of applicable duties.
By letter No. E.0.335(91)-IL/MRTP dated November 3, 1993 from the
Government of India in the Ministry of Industry, Department of Industrial
Development, Secretariat for Industrial Approvals (SIA) to the appellant it
F was agreed in principle to allow the appellant to withdraw from 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 100% EOU Scheme: -
"No.E.0.335(91)-ILIMRTP
G Government of India
Ministry of Industry
Department of Industrial
Development Secretariat for Industrial Approvals
EOU SECTION
H New Delhi, the 3rd November, 1993
SIV INDUSTRIES LTD. v. C.C.E. [D.P. WADHWA, J.] 237
Mis. South India Viscose Limited., A
P.B. No.1844, 1977-A,
Trichy Road, Singanallur,
Coimbatore - 641 005.

Subject:- Letter of permission No. PER:163 (91) /E.0.335(91)-
IL(MRTP), dated 18.12.1991 issued for the manufacture B
of viscose staple fibre under 100% Export Oriented
Scheme - Debonding of the unit. (E.0.335/91-IL/(MRTP)-

Gentlemen,

I am directed to refer to your letter addressed to Ministry of c
Commerce (BP 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)/E.0.335(91)
-IL(MRTP), dated 18.12.1991 was granted to you for the manufac- D
ture of viscose staple fibre for an annual capacity of 18,000 tonnes.
The withdrawal from 100% BOU 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 E
of final debonding letter.

3. As regards surrender of Letter of Permission No. PER:163(91)/
E.0.235(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. F
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. G

Yours faithfully,

- Sd/-
(Baldev Raj)
Under Secretary to the Government of India." H
238 SUPREME COURT REPORTS [2000] 2 S.C.R.
A "Anilexure

STANDARD CONDITIONS GOVERNING WITHDRAWAL FROM
100% EOU SCHEME

(1) The unde1taking shall pay all customs and excise duties on the
imported and Indigenous capital goods, raw materials, compo-
B
nents, 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 CIF
c value of imported capital goods, towards non-fulfillment of
export obligation, with the import licensing authority with
whom it had executed a legal unde1taking in respect of the
100% Export Oriented Unit. This penalty shall be paid before
the issue of fmal debonding letter.
D
(3) In case the undertaking has availed of the facility of external
commercial borrowings, the same shall be disinvested before
the issue of fmal debonding letter.

(4) The undertaking shall obtain a fresh approval under the current
E Industrial Licensing Policy to undertake the proposal activity
r
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 CIF value of imports whichever is
F 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% Exp01t Oriented Scheme."
G When the appellant received letter dated October 18, 1993 from the
Ministry of Commerce it approached the Assistant Collector of Central
Excise for valuing the goods and the duties of customs and centrcl excise
payable. Appellant was informed by the Assistant Collector of Central Excise
by his letter No. C.No.VIll/48/3/92-Cus. dated November 8, 1993 that value
H of the goods and duties have been worked out and it was asked to pay the
SN INDUSTRIES LTD. v. C.C.E. [D.P. WADHWA, J.) 239
same. Appellant was also informed that the assessment had been done on a A
provisional basis.

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 whole of the duties of customs and central
excise as demanded by the Assistant Collector of Central Excise in his letter B
No. C.No.VIW48/3/92-Cus dated November 15, 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 November 3, 1993 of the Government
of India in the Ministry of Industry, Secretariat for Industrial Approvals (SIA)
have also been complied with by the appellant. c
On February 2, 1994 a fo1mal letter was issued by the Ministry of
Textile 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 appellant had deposited the amount of duties of customs and D
central excise and the appellant had also been allowed to clear the finished
stock lying with it in its stock as on November 16, 1993 as well as the
production from December 8, 1993 onwards on provisional basis. After the
appellant had been allowed in p1inciple to withdraw from the 100% EOU
Scheme by letter dated November 3, 1993 of the Ministry of Industry it had E
recognised its manufacturing activities as a DTA unit from December 6,
1993.

On January 21, 1994 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 F
proviso to Section 3(1) of the Act. It would appear that the Assistant
Collector of Central Excise had earlier demanded duty under main Section
3(1) of the Act. A corrigendum dated February 14, 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 November 16, 1993 to
February 1, 1994 under proviso to Section 3(1) of the Act after deducting
G
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
February 21, 1994. By 'his order dated March 31, 1994 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 H
240 SUPREME COURT REPORTS [2000] 2 S.C.R.
A November 15, 1993 when the appellant paid the applicable duties and not
February 2, 1994 when formal letter of debonding was issued by the Ministry
of Textiles. However, in respect of applicability of proviso to Section 3(1)
of the Act Assistant Collector of Central Excise decided the issue against the
appellant and accordingly confirmed the duty demanded. Aggrieved appel-
lant filed an appeal before the Collector of Central Excise (Appeals) under
B
Section 35 of the Act. 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. Collector of Central Excise filed
appeal before the Appellate Tribunal against the order of the Collector of
Central Excise (Appeals) under Section 35B of the Act. By order dated
c November 5, 1997 which· is impugned; Tribunal allowed the appeal of the
Revenue holding that it was the proviso to Section 3(1) of the Act, which
was applica~le. We may note that corrigendum to show cause notice which
was issued on February 14, 1994 was later on dropped by the Assistant
Collector of Central Excise himself. Now it is the appellant which has come
D before this Court.

To appreciate the rival contentions we may consider the policy of the
Central Government ~.m.der which EOU Scheme came into operation.

Under Notification No. 13/81-Cus. dated February 9, 1981 as amended
from time to time (as on October 15, 1992) and issued under sub-section (1)
E of Section 25 of the Customs Act, 1962, Central Government exempted
specified goods when imp01ted 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 whole of the duty of
F customs Ieviable 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)
G 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
H period the importer is required to pay customs duty on the imported capital
(

SIV INQ_USTRIES LTD. v. C.C.E. [D.P. WADHWA, J.] 241
· ·goods, material handling equipment, office equipment, captive power plants, A
etc. gn depreciated value but at the rates prevalent at the time of import and
also to pay customs duty on enhanced imported raw materials or components
on the value at the time of imp01t and at the rates in force at the time of
clearance.

Proviso to Section 3(1) of the Act thereafter was inserted in Section B
3 of the Act by Act 14 of 1982. A circular dated February 17, 1983 was
issued by the Central Government clarifying the introduction of proviso. It
applied to units in Kandla Free Trade Zone and 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 c
customs leviable on like goods imported from abroad. Clearance to the 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 imp01ted from
abroad, a proviso had already been inserted in Section 3(1) of the Act. In D
1984 there was further amendment to 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.

On May 29, 1984 Central Government issued a circular explaining
E
further amendment to 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 the F
BOA provided such goods are in the nature of rejects. It was pointed out that
amendment has been carried out in 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. Circular provided that
application for permission to sell 25% of exportable production should be G
certified by the Central Excise Officer indicating the quantity of goods which
had actually been produced or manufactured as on that date.

On June 18, 1992 a Public Notice No. 16-ITC(PN)/92-97 was issued,
being one of the import and export public notices, laying down guidelin'es
for sale of goods in DTA by EOUs and units in the Export Processing Zone H
242 SUPREME COURT REPORTS [2000] 2 S.C.R.
A (EPZs). The Public Notice referred to the export and import policies and the
Handbook of Procedures (1992-97) providing for sale of goods in the 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 Public
Notice which could apply only to the unit not withdrawing from EOU.
B
Scheme.

Contention of the Revenue is that permission to withdraw from scheme
is itself a permission to sell in India, i.e., when unit is permitted to debond,
it would be deemed to have been permitted to sell the goods in India. But
c then permission to sell in India has to be in terms or in accordance with the
provisions of the export import policy. Permiss10n to sell in India by 100%
EOU consists of all those factors like value addition, fulfillment 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
D by Board of Approvals (BOA) to the closing stock of finished goods. 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
E of Commerce. Board of Approvals and the Development Commissioner are
two different authorities constituted for two ~erent 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 different statutory
authority. If reference is made to para 102 ofthe relevant import export policy
permission of the Development Commissioner is required for selling the
F goods in India up to 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 correspon~ing amendments to Section 3 of
G the Act the expression "allowed to be sold in India" in 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 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.

H Revenue has proceeded on the assumption that by debonding permis-
SN INDUSTRIES LTD. v. C.C.E. [D.P. WADHWA, J.] 243
sion has been granted by the BOA for selling the closing stock of finished A
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.
B
By its application dated September 8, 1993 appellant had only asked
the Central Government for permission to debond the unit Pending formal
debonding clearance, 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 concerned authority and letter of debonding was issued. This c
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 the BOA cannot be construed as permission to sell in India. 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 D
and sale of finished stock by a debonded 100% EOU on the date of debonding
are different.

It was contended by Mr. Lakshmikumaran, learned counsel for the
appellant, that under Rule 9A(l)(ii) of the Central Excise Rules framed under
E
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.
Collector of Central Excise, Bombay, Division Ill, (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 F
... were sold by the appellant in India on the date when I 00% EOU was debonded
which would be the date for removal for sale in India.

We may also refer to the counter affidavit filed by the Revenue in this
appeal. It is stated that in December, 1991 appellant started 100% EOU and
was following all the rules and regulations set out for running an EOU.
G
Owing to poor running of the unit 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 H
i

244 SUPREME COURT REPORTS [2000) 2 S.C.R.
A 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 proviso to Section
3(1) of the Act is applicable to 25% of goods sold by an EOU in DTA.

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
B 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 fo:r EOU, bonding period for units
under the EOU Scheme is ten years. This period may be reduced to five years
c 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 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
D 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;
E
(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.

Unless there is a specific prohibition EOU is permitted sale in the DTA
F all rejects up to 5% production or such percentage as may be fixed by the
Board of Approvals subjec~ 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
G
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.

Chapter V-A of the Central Excise Rules contains provisions for
H removal from a free trade Zone or from a 100% EOU of excisable goods for
SN INDUSTRIES LTD. v. C.C.E. [D.P. WADHWA, J.] 245
home consumption. This Chapter was made applicable to units under the A
EOU Scheme by a notification No. 130/84-C.E. dated May 26, 1984. This
Chapter contains Rules lOOA to lOOH. Rule lOOA 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
B
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 lOOH Rule 57A and other Rules mentioned
therein shall not apply to excisable goods produced or manufactured by
10G% Export Oriented Undertaking. Rule 57A relates to allowing credit of ·c
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 tJie 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.
D
Considering the whole aspect of the matter, we are of the opinion that
the Tribunal was nqt 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 October 11, 1994. The appeal is accordingly allowed. E
There shall be no order as to costs.

R.D.R. Appeal allowed.

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