- 1 - HC-KAR NC: 2025:KHC:29341-DB CSTA No. 8 of 2018 C/W CSTA No. 1 of 2021 IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 30TH DAY OF JULY, 2025 PRESENT THE HON'BLE MR. JUSTICE S.G.PANDIT AND THE HON'BLE MR. JUSTICE K. V. ARAVIND CUSTOMS APPEAL No. 8 OF 2018 C/W CUSTOMS APPEAL No. 1 OF 2021 IN CSTA No. 8/2018 BETWEEN: 1. COMMISSIONER OF CENTRAL EXCISE, CUSTOMS AND SERVICE TAX, MYSORE, S1-S2, VINAYA MARGA, SIDDHARATHA NAGAR, MYSORE-570011. PRESENTLY, COMMISSIONER OF CUSTOMS, NEW CUSTOMS HOUSE, PANAMBUR, MANGALORE - 575010 …APPELLANT (BY SRI JEEVAN J. NEERALGI, ADVOCATE) AND: 1. M/S SUCH SILK INTERNATIONAL LTD., PLOT No.45, KIADB INDUSTRIAL AREA, Digitally signed by VALLI MARIMUTHU Location: HIGH COURT OF KARNATAKA - 2 - HC-KAR NC: 2025:KHC:29341-DB CSTA No. 8 of 2018 C/W CSTA No. 1 of 2021 KATHIHALLI, HASSAN - 572201. …RESPONDENT (BY SRI RAVI RAGHAVAN, ADVOCATE AND SRI K.M. NISCHAL, ADVOCATE) THIS CSTA / CUSTOMS APPEAL IS FILED UNDER SECTION 130 OF THE CUSTOMS ACT, ARISING OUT OF ORDER DATED 06.02.2018 PASSED IN FINAL ORDER No.20072/2018, PRAYING TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW FRAMED ABOVE BY ANSWERING THE SAME IN FAVOR OF THE APPELLANT AND ALLOW THE APPEAL OF THE APPELLANT IN THE INTEREST OF JUSTICE AND EQUITY. AND SET ASIDE THE FINAL ORDER No.20072/2018 DATED 06.02.2018 PASSED BY THE CESTAT, BANGALORE IN THE INTEREST OF JUSTICE AND EQUITY. IN CSTA No. 1/2021 BETWEEN: 1. COMMISSIONER OF CENTRAL EXCISE, CUSTOMS, S1-S2, VINAYA MARGA, SIDDHARTHA NAGAR, MYSORE-570011. NOW COMMISSIONER OF CUSTOMS, NEW COSTOM HOUSE, PANAMBUR, MANGALORE-575010. ...APPELLANT (BY SRI. JEEVAN J NEERALGI, ADVOCATE) AND: 1. M/S. SUCH SILK INTERNATIONAL LTD., KIADB INDUSTRIAL AREA, - 3 - HC-KAR NC: 2025:KHC:29341-DB CSTA No. 8 of 2018 C/W CSTA No. 1 of 2021 ARASIKERE ROAD, HASSAN-572201. ...RESPONDENT (BY SRI RAVI RAGHAVAN, ADVOCATE AND SRI K.M. NISCHAL, ADVOCATE) THIS CSTA / CUSTOMS APPEAL IS FILED UNDER SECTION 130 OF THE CUSTOMS ACT, PRAYING TO SET ASIDE THE IMPUGNED ORDER DATED 17.12.2019 PASSED BY CESTAT, BENGALURU IN MISC. ORDER No.20766-20767/2019 BY THE CESTAT, SOUTH ZONAL BENCH, BENGALURU. THESE APPEALS COMING ON FOR HEARING THIS DAY, JUDGMENT WAS DELIVERED THEREIN AS UNDER: CORAM: HON'BLE MR. JUSTICE S.G.PANDIT and HON'BLE MR. JUSTICE K. V. ARAVIND ORAL JUDGMENT (PER: HON'BLE MR. JUSTICE K.V. ARAVIND) The Revenue has filed these appeals, raising the following substantial questions of law. In CSTA No.8/2018, "1) WHETHER, in the present facts and circumstances of the case, the Hon'ble CESTAT, Bengaluru is justified/correct in setting aside the demand confirmed by the Adjudicating Authority for recovery of duty for non-fulfillment of the condition 6(i) of the Notification No.53/1997 Cus dated 03.06.1997 read with Section 72 of the Customs Act, 1962? 2) WHETHER, the demand of duty foregone in respect of the imported capital goods is not sustainable when the unit has lost the EOU status - 4 - HC-KAR NC: 2025:KHC:29341-DB CSTA No. 8 of 2018 C/W CSTA No. 1 of 2021 with effect from March 2006 (i.e., 5 years from commencement of commercial production) and not achieved the positive NFEE as prescribed under the exemption Notification. 3. WHETHER, the demand of duty foregone in respect of the imported capital goods is not justifiable under Section 72(1)(b) of the Act, which declares that the goods stored in the warehouse beyond the warehouse period shall be treated as 'improperly removed from the warehouse'? 4 WHETHER, the department is not justified in demanding the duty foregone, for violations of the conditions laid down in the B-17 Bond which is executed in terms of EXIM policy 1997-2002 readwith Section 61 of the Customs Act, 1962 and Notification No.53/1997 Cus. dated 03.06.1997? 5. WHETHER, the Hon'ble Tribunal order is complete when the Tribunal has overlooked the confiscation of the goods and imposition of various penalties by the adjudicating authority and not expressed its judgment on the said issues?" In CSTA No.1/2021, "i. Whether the Hon'ble Tribunal is correct in holding that penalty under Section 112 (a) of the Customs Act 1962 is not imposable when duty is set aside? ii. The issues decided in the Hon'ble Tribunal's order or in the appeal preferred by the claimant before the Hon'ble Tribunal does not relate to rate of duty of customs or value of the goods for assessment purpose but it relates to imposition of penalty for non-fulfilment of export obligation." - 5 - HC-KAR NC: 2025:KHC:29341-DB CSTA No. 8 of 2018 C/W CSTA No. 1 of 2021 2. Both appeals relate to a common issue arising out of the order in the original proceedings and are, therefore, being considered and disposed of by this common judgment. 3. Heard Sri. Jeevan J. Neeralgi, learned Senior Standing counsel for the appellant and Sri. Ravi Raghavan & Sri. K.M. Nischal, learned counsel for the respondent. 4. The respondent was permitted by the Department of Industrial Development to set up a 100% Export Oriented Unit (EOU) and is registered under the Central Excise Act, 1944, and the Customs Act, 1962. The respondent imported duty-free capital goods and raw materials/consumables by availing exemptions under the erstwhile Notification No. 53/1997-Customs dated 03.06.1997 (now Notification No. 52/2003-Customs dated 31.03.2003). The respondent also procured duty-free capital goods and raw materials/consumables indigenously by availing the benefits of the Notifications. For the period from 05.06.2000 to 20.03.2003, the respondent–assessee imported capital goods and raw materials/consumables, availing exemption from - 6 - HC-KAR NC: 2025:KHC:29341-DB CSTA No. 8 of 2018 C/W CSTA No. 1 of 2021 payment of customs duty under Notification No. 53/1997 dated 03.06.1997. 5. The Notification contemplates that the imported raw materials and consumables should be utilized in the production of the final products. It is the case of the Revenue that, although the assessee commenced commercial production in March 2001 and initially exported the goods, the unit subsequently became defunct and failed to fulfill the required export obligations, thereby violating the specified conditions. The Revenue held that the assessee contravened the provisions of the Notification by not utilizing the imported duty-free goods and the capital goods and consumables procured in accordance with the approvals granted. 6. Proceedings were initiated under Sections 28 and 72 of the Customs Act, 1962, to recover duty on the imported capital goods and raw materials/consumables. Accordingly, a Show-Cause Notice was issued. In response, the respondent– assessee contended that commercial production had commenced and exports were made, but the export obligation could not be fulfilled due to the sudden cancellation of orders - 7 - HC-KAR NC: 2025:KHC:29341-DB CSTA No. 8 of 2018 C/W CSTA No. 1 of 2021 and withdrawal of their foreign partner by US importers. It was further contended that, in respect of capital goods, the obligation merely required the installation of such goods in the manufacturing facility for export purposes, and any failure to meet the export obligation would not entail the levy of duty on the capital goods. These contentions were rejected, and by order dated 06.02.2012, duty was levied along with a penalty of Rs.50 lakhs under Section 112(a) of the Customs Act, 1962, in respect of the capital goods. Further duties and penalties were also levied with regard to capital goods and raw materials under other provisions of the Act. 7. The assessee accepted the order imposing duty on unutilized raw materials and consumables and paid the duty along with the penalty. However, the respondent–assessee disputed the levy on the import of capital goods by filing an appeal before the Tribunal. The Tribunal, following its earlier decision in Hindustan Agrigenetics Limited v. Commissioner of Customs, Hyderabad, in Final Order Nos. 960 & 961/2010 dated 20.05.2010, reported in 2018 (360) E.L.T. 1042 (Tri.-Bang.), held that once the capital goods are - 8 - HC-KAR NC: 2025:KHC:29341-DB CSTA No. 8 of 2018 C/W CSTA No. 1 of 2021 installed and used for the manufacture of goods for export duty is not leviable for failure to achieve the export obligation. The said order is under challenge and is impugned in CSTA No. 8/2018. 8. The Tribunal, in the impugned order, held that duty is not leviable in respect of capital goods. However, no specific order was passed regarding the penalty under Section 112(a) of the Customs Act, 1962. Consequently, a miscellaneous petition was filed before the Tribunal, which was rejected. Thereafter, in appeal by the respondent–assessee in CSTA No. 10/2018, this Court set aside the order and directed the Tribunal to consider the issue relating to the penalty. In compliance with the directions of this Court, the Tribunal, by its impugned order dated 17.12.2019 (Miscellaneous Order No. M/20766-20767/2019), held that once duty is not leviable, the penalty under Section 112(a) of the Customs Act, 1962 cannot be sustained. This order is now impugned in CSTA No. 1/2021. 9. Sri Jeevan J. Neeralgi, learned Senior Standing Counsel, appearing for the appellant–Revenue, submits that the petitioner availed duty-free import of capital goods with an - 9 - HC-KAR NC: 2025:KHC:29341-DB CSTA No. 8 of 2018 C/W CSTA No. 1 of 2021 export obligation. The unit was registered as a 100% Export Oriented Unit (EOU) and has ceased production and manufacturing activities, thereby failing to fulfill the export obligation in terms of Notification No. 53/1997 dated 03.06.1997. It is submitted that goods imported with an export obligation, but in respect of which the export obligation is not fulfilled, would attract the levy of duty. Learned Senior Standing Counsel further submits that Notification dated 31.03.2003 was issued, imposing the levy of duty on the import of capital goods, and that the same is clarificatory in nature and applies retrospectively. 10. On the other hand, Sri Ravi Raghavan and Sri K.M. Nischal, learned counsels appearing for the respondent– assessee, submit that the issue is covered by the earlier order of the Tribunal in Hindustan Agrigenetics Limited (supra), which has attained finality. Learned counsels further submit that Notification dated 31.03.2003 has no retrospective application, as the period involved is from July 2000 to October 2002. Insofar as the penalty is concerned, it is submitted that - 10 - HC-KAR NC: 2025:KHC:29341-DB CSTA No. 8 of 2018 C/W CSTA No. 1 of 2021 once duty is not leviable, the levy of a consequential penalty cannot be sustained. 11. We have given thoughtful consideration to the submissions of the learend counsel for both the parties and perused the appeal papers. 12. The respondent–assessee, being a 100% EOU, imported capital goods and raw materials/consumables for the purpose of export under the scheme, without payment of customs duty. It is not in dispute that the respondent–assessee did not fulfill its export obligation as per the conditions of the scheme. The respondent–assessee contends that the obligation could not be met due to sudden changes in the market conditions of the importing country. Be that as it may, this Court is not required to examine the issue regarding the levy of duty on the import of raw materials/consumables, as the respondent–assessee has accepted the liability and paid the duty along with the penalty. 13. The only question that requires consideration by this Court is the levy of duty and penalty insofar as the import - 11 - HC-KAR NC: 2025:KHC:29341-DB CSTA No. 8 of 2018 C/W CSTA No. 1 of 2021 of capital goods is concerned. General Exemption No. 42, as available in the Customs Tariff of India 2002–2003, operative as on 10.08.2002, has been placed before us. According to General Exemption No. 42, the requirement in respect of imported capital goods is their installation or use within the bonded premises within a period of one year from the date of importation. In the case of raw materials, non-fulfillment of the export obligation, measured in terms of Net Foreign Exchange Earnings as a Percentage of Exports (NFEP), results in the levy of duty. Notification dated 31.03.2003, however, introduced a different criterion. 14. The Tribunal, in its referred order, has categorically held that the duty forgone on capital goods is excluded from the levy of duty, as the condition for exemption in respect of capital goods is limited only to their installation and use within the unit for the manufacture of goods for export. It is held that when the procurement and installation of capital goods is not in dispute, the demand for duty on such capital goods cannot be sustained merely because the unit failed to achieve the NFEP. The Tribunal, following its earlier order, held that duty on - 12 - HC-KAR NC: 2025:KHC:29341-DB CSTA No. 8 of 2018 C/W CSTA No. 1 of 2021 capital goods is not leviable when such goods are installed and used primarily for the manufacture of goods for export, even in the event of non-compliance with the NFEP. 15. We find no reason to take a different view. General Exemption No. 42 clearly provides that when raw materials or consumables are imported duty-free and the unit fails to achieve the NFEP within one year of importation or procurement, the authority is entitled to levy duty. No such provision exists for the levy of duty on capital goods imported in the event of failure to achieve the NFEP. In the absence of an enabling provision, the levy of duty on capital goods is impermissible. The Revenue contends that the levy of duty on capital goods due to failure to achieve the NFEP is enabled by Notification dated 31.03.2003. However, the said Notification cannot be applied retrospectively, as the period of default involved is from July 2000 to October 2002. The Revenue has not demonstrated any retrospective application of the Notification. In the absence of such retrospective effect, the Notification cannot be applied to the present case. - 13 - HC-KAR NC: 2025:KHC:29341-DB CSTA No. 8 of 2018 C/W CSTA No. 1 of 2021 16. Insofar as the penalty under Section 112(a) of the Customs Act, 1962 is concerned, the Tribunal set aside the same, following the judgment of the Hon’ble Supreme Court in C.C. Mumbai v. M.M.K. Jewellers, reported in 2008 (225) E.L.T. 3 (SC), holding that no penalty is imposable where the demand of duty itself is not sustainable. 17. In view of our finding that customs duty on capital goods is not leviable due to the failure to achieve the NFEP, the consequential penalty is also not sustainable. We find no reason to interfere with the orders passed by the CESTAT. 18. Accordingly, the following, O R D E R (i) Both the appeals are dismissed. (ii) Substantial questions of law are answered in favour of the assessee and against the revenue. Sd/- (S.G.PANDIT) JUDGE Sd/- (K. V. ARAVIND) JUDGE VBS/List No.: 1 Sl No.: 26