A) ABSTRACT / HEADNOTE

The judgment addresses the fiscal consequences arising from contravention of Export-Import Policy conditions by a 100% Export Oriented Unit (EOU) engaged in floriculture. The appellant had availed customs duty exemption on imported inputs under Notification No. 126/94-Cus dated 03.06.1994 but effected Domestic Tariff Area (DTA) sales of cut flowers without prior approval of the Development Commissioner and without achieving the prescribed positive Net Foreign Exchange Earnings (NFE) under the EXIM Policy 1997–2002. The Court examined whether customs duty could be imposed when the final goods were non-excisable and domestically grown, and whether the amending Notification No. 56/01-Cus dated 18.05.2001 operated retrospectively.

The Supreme Court held that exemption notifications are conditional and require strict compliance. Once the EOU violated EXIM Policy conditions, the exemption stood withdrawn, and customs duty became recoverable on imported inputs used in the manufacture of goods sold in DTA, even where the final goods were non-excisable. The Court clarified that the duty demand did not treat cut flowers as imported goods but used a legal fiction only for quantification of duty on imported inputs. On retrospectivity, the Court ruled that the amendment was substantive and not clarificatory, applying only prospectively. The judgment reinforces the doctrine of strict construction of exemption notifications and reiterates settled principles governing retrospective operation of fiscal legislation.

Keywords:
Export Oriented Unit; Domestic Tariff Area; Non-Excisable Goods; Customs Duty; Retrospective Legislation; Exemption Notification

B) CASE DETAILS

C) INTRODUCTION AND BACKGROUND OF JUDGEMENT

The dispute arose within the regulatory framework governing 100% Export Oriented Units, which are granted fiscal incentives to promote exports. Under the applicable regime, EOUs enjoy duty-free import of inputs subject to strict adherence to export obligations and conditional permission for DTA sales. The appellant, operating in the floriculture sector, imported capital goods, live rose plants, and consumables without payment of customs duty under Notification No. 126/94-Cus. The exemption was conditional upon compliance with the EXIM Policy 1997–2002, which allowed limited DTA sales only after achieving 20% positive Net Foreign Exchange Earnings and obtaining prior approval from the Development Commissioner.

Despite these mandatory requirements, the appellant effected DTA sales during the years 1998-99 to 2000-01 without approval and without meeting the export threshold. These sales were detected by the excise authorities, leading to issuance of a show cause notice invoking Section 28 of the Customs Act, 1962. The authorities treated the exemption as forfeited due to policy violation and demanded customs duty on imported inputs used in producing cut flowers sold domestically.

The appellant challenged the demand on the ground that cut flowers are non-excisable goods and are grown on Indian soil, contending that customs duty cannot be levied on such goods. Further, reliance was placed on the amendment notification of 2001, arguing that it was clarificatory and retrospective. The adjudicatory journey culminated before the Supreme Court, presenting significant questions concerning the nature of duty liability, legal fiction in fiscal statutes, and retrospectivity of subordinate legislation.

D) FACTS OF THE CASE

The appellant company was approved as a 100% Export Oriented Unit engaged in the cultivation and export of cut flowers. Pursuant to such approval, it imported greenhouse equipment, live rose plants, fertilizers, and planting materials without payment of customs duty under Notification No. 126/94-Cus. The EXIM Policy governing the relevant period permitted floriculture EOUs to sell up to 50% of production in the Domestic Tariff Area, provided the unit achieved 20% positive NFE and obtained express authorization from the Development Commissioner.

Between 1998-99 and December 2000, the appellant sold cut flowers worth approximately Rs. 38.40 lakhs in the domestic market without fulfilling the export obligation and without seeking prior approval. The export performance during this period was substantially lower than the prorated import value, resulting in negative NFE. The appellant later sought ex-post facto approval, which was not granted.

A show cause notice dated 16.03.2001 alleged wilful suppression of facts and proposed recovery of customs duty, interest, and penalty. The adjudicating authority concluded that the appellant had violated the EXIM Policy and the conditions of the exemption notification. It held that cut flowers were non-excisable goods under the Central Excise Tariff Act, 1985, and therefore customs duty was leviable on imported inputs used for DTA sales, invoking Sections 28, 28AB, and 114A of the Customs Act, 1962.

Appeals before the Commissioner (Appeals) and the CESTAT were dismissed. The Tribunal affirmed that the 2001 amendment was prospective. Aggrieved, the appellant approached the Supreme Court.

E) LEGAL ISSUES RAISED

i. Whether customs duty can be charged on non-excisable goods produced in India and sold in the Domestic Tariff Area by a 100% Export Oriented Unit?
ii. Whether Notification No. 56/01-Cus dated 18.05.2001 operates retrospectively or prospectively?

F) PETITIONER / APPELLANT’S ARGUMENTS

The counsels for the appellant submitted that DTA sales by EOUs attract only excise duty and not customs duty. Since cut flowers are non-excisable goods grown domestically, no duty could be levied under the Customs Act. It was argued that Section 12 of the Customs Act, 1962 applies only to imported goods, and legal fiction cannot be extended beyond its purpose.

The appellant relied upon Vikram Ispat v. Commissioner of Central Excise and Cosco Blossoms Pvt. Ltd. v. Commissioner of Customs to contend that EOU clearances into DTA cannot be treated as imports. It was further argued that the 2001 amendment was merely clarificatory, intended to remove an anomaly, and should therefore apply retrospectively, supported by Vatika Township Pvt. Ltd. and Zile Singh v. State of Haryana.

G) RESPONDENT’S ARGUMENTS

The counsels for the respondent submitted that exemption under Notification No. 126/94-Cus was conditional and stood withdrawn upon violation of the EXIM Policy. Once the conditions were breached, the appellant was liable to customs duty on imported inputs used in goods sold domestically, irrespective of excisability.

It was argued that the amendment notification introduced a substantive change and was prospective. Reliance was placed on Commissioner of Central Excise v. Hari Chand Shri Gopal and Union of India v. IndusInd Bank Ltd. to emphasize strict interpretation of exemption clauses and prospective operation of fiscal amendments.

H) RELATED LEGAL PROVISIONS

i. Section 12, Customs Act, 1962
ii. Section 25, Customs Act, 1962
iii. Section 28, 28AB, 114A, Customs Act, 1962
iv. Section 3, Central Excise Act, 1944
v. EXIM Policy 1997–2002
vi. Notification No. 126/94-Cus
vii. Notification No. 56/01-Cus

I) JUDGEMENT 

The Supreme Court held that exemption notifications form a complete code and must be read harmoniously with the EXIM Policy. The Court observed that DTA sales in conformity with policy conditions attract excise duty for excisable goods. However, once the conditions are violated, the exemption is lost, and goods become liable to customs duty as if imported.

The Court clarified that the demand was not on cut flowers as goods but on imported inputs used in producing non-excisable goods sold in DTA. The legal fiction was employed only for quantification. The Court rejected reliance on earlier tribunal decisions, distinguishing them on facts and context.

On retrospectivity, the Court applied settled principles that legislation is prospective unless expressly or impliedly retrospective. The 2001 amendment altered the charging mechanism and was not clarificatory. The Court relied on Vatika Township and Hari Chand Shri Gopal to hold that ambiguity in exemption must favour the State.

The invocation of extended limitation under Section 28 was upheld due to wilful suppression, noting the appellant’s failure to disclose DTA sales and incorrect claims regarding use of imported inputs.

a) RATIO DECIDENDI

The ratio of the judgment lies in the principle that violation of conditional exemption results in complete withdrawal of fiscal benefits. Once the EOU breached EXIM Policy conditions, customs duty became leviable on imported inputs used for goods sold in DTA, even if the final goods were non-excisable. The Court also affirmed that substantive amendments to exemption notifications operate prospectively.

b) OBITER DICTA

The Court observed that exemption regimes in fiscal statutes are policy instruments and courts must refrain from expanding their scope through interpretative generosity. Any parity sought between EOUs and DTA units must emanate from legislative action and not judicial interpretation.

c) GUIDELINES

i. Compliance with EXIM Policy is mandatory for availing exemption benefits.
ii. Exemption notifications must be strictly construed.
iii. Legal fiction in fiscal law is limited to its purpose.
iv. Amendments altering duty computation are substantive unless clearly declaratory.
v. Suppression of material facts justifies extended limitation.

J) CONCLUSION & COMMENTS

The judgment reinforces fiscal discipline in export-oriented schemes. It underscores that incentives are conditional privileges and not vested rights. By affirming strict construction of exemption notifications, the Court protected revenue interests while maintaining doctrinal consistency in tax jurisprudence. The decision provides clarity on treatment of non-excisable goods under EOU schemes and settles the law on retrospectivity of customs notifications.

K) REFERENCES

a) Important Cases Referred

i. Commissioner of Income Tax v. Vatika Township Pvt. Ltd., [2014] 12 SCR 1037
ii. Commissioner of Central Excise v. Hari Chand Shri Gopal, [2010] 13 SCR 820
iii. Union of India v. IndusInd Bank Ltd., [2016] 11 SCR 700
iv. Uniworth Textiles Ltd. v. Commissioner of Central Excise, [2013] 3 SCR 27

b) Important Statutes Referred

i. Customs Act, 1962
ii. Central Excise Act, 1944
iii. Customs Tariff Act, 1975
iv. EXIM Policy 1997–2002