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M/S.L.R.Brothers, Indo Flora Ltd. v. Commissioner of Central Excise

Civil Appeal · 2020 INSC 525Decided 1 Sept 2020
Civil Appeal No. 7157 of 2008
Justice A.M. Khanwilkar · Justice Dinesh Maheshwari

Background

The appellant, a 100% Export Oriented Unit (EOU) growing cut flowers, was permitted duty-free import of inputs (like plants, fertilizers and greenhouse equipment) on condition it exported its produce, with limited domestic ("DTA") sales allowed only with government approval and subject to maintaining positive net foreign exchange earnings. The appellant made substantial domestic sales of cut flowers worth over Rs 38 lakh without the required Development Commissioner's approval and without meeting the foreign-exchange condition, and was issued a demand for customs duty, interest and penalty, which was upheld by the excise authorities, the Commissioner (Appeals) and the CESTAT tribunal.

Decision Breakdown

The Supreme Court held that although cut flowers themselves are non-excisable goods (so ordinary excise duty could not apply to them), the exemption notification governing the EOU's duty-free imports made it liable to pay customs duty measured by the value of the imported inputs used in production, once the appellant breached the domestic-sales conditions of the applicable Export-Import Policy. The Court rejected the appellant's argument that a 2001 amendment changing how this input-duty was calculated should apply retrospectively, holding it was a substantive policy change benefiting EOUs going forward, not a clarification of a pre-existing error. It also upheld invocation of the extended five-year limitation period under Section 28 of the Customs Act, finding the appellant had wilfully suppressed its use of imported inputs when seeking after-the-fact approval for its unauthorised domestic sales, and accordingly dismissed the appeal.

Lesson Learnt

An export-oriented business that receives duty-free import benefits cannot sidestep those obligations by selling goods domestically in breach of the approval conditions, and a taxpayer claiming a tax exemption bears the burden of proving every condition was met, with any ambiguity resolved in favour of the tax authority, not the claimant.

Official source (sci.gov.in)View Judgment (PDF)

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