CESTAT Chennai- No Duty on Destruction of Duty-Free Raw Materials in EOUs Under FTP Framework

Aadrikaa Legal Services (ALS) – IDT Tax I Arbitration I Litigation

Date: 14.07.2026

CESTAT Chennai- No Duty on Destruction of Duty-Free Raw Materials in EOUs Under FTP Framework

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT) Chennai recently delivered a significant judgment in favor of Mylan Laboratories Limited, a 100% Export Oriented Unit (EOU), clarifying the legal position on the destruction of duty-free procured raw materials within EOUs.

This article provides a detailed analysis of the case, the legal issues involved, and the broader implications for EOUs operating under the Foreign Trade Policy (FTP) and related exemption notifications.

Background of the Case

Mylan Laboratories Limited, operating under a valid Letter of Permission as an EOU, procured raw materials duty-free under Notification No. 52/2003-Cus and Notification No. 22/2003-CE. During the relevant period (2014–2015), certain raw materials became obsolete or unusable and were destroyed within the factory after due intimation to the customs authorities.

The department raised demands for Customs and Central Excise duties, interest, and penalties, arguing that, prior to 2015 amendments, the notifications did not permit destruction without payment of duty.

Key Legal Issues Examined

1. Duty Liability on Destroyed Raw Materials

The central question was whether EOUs are liable to pay duty on raw materials procured duty-free and subsequently destroyed within the factory under intimation to the department. The Tribunal noted:

• The EOU scheme is a composite statutory framework, with the FTP providing the substantive policy and exemption notifications operationalizing it.
• Para 6.15 of the FTP expressly permits destruction of raw materials within the unit after intimation to customs authorities.
• Judicial precedents (e.g., Indian Tobacco Association, Mehler Engineered Products, Tyco Electronics) support the view that destruction under FTP does not attract duty, provided there is no diversion or misuse.
• The Tribunal distinguished contrary decisions (e.g., Sandoz Pvt. Ltd., Teva API India) as fact-specific and not applicable where procedural compliance is established.

2. Nature of the 2015 Amendments

In 2015, explicit provisions were inserted into the relevant notifications permitting destruction of raw materials within the unit after intimation. The Tribunal held:

• The amendments were clarificatory, aligning the notifications with the FTP, and thus retrospective in effect.
• The absence of an explicit provision in pre-amended notifications did not amount to a prohibition.

3. Sustainability of Duty, Interest, and Penalties

Given the above findings:

• The demands for duty and interest were held unsustainable.
• Penalties were also set aside, as the appellant had acted transparently, with no evidence of intent to evade duty or procedural violations.

Tribunal’s Final Decision

The CESTAT Chennai set aside the impugned orders, allowing all appeals filed by Mylan Laboratories. The Tribunal confirmed that destruction of duty-free raw materials within an EOU, under intimation to authorities and in accordance with the FTP, does not attract Customs or Central Excise duties.

The 2015 amendments were deemed clarificatory and retrospective, and the benefit of exemption cannot be denied by interpreting notifications in isolation from the FTP.

Implications for EOUs and Industry

This ruling provides much-needed clarity for EOUs regarding the disposal of obsolete or unusable raw materials:

1. Policy Alignment: EOUs can rely on the FTP provisions for destruction of materials, provided procedural compliance is ensured.
2. Retrospective Relief: The clarificatory nature of the 2015 amendments means past actions, if compliant with FTP and proper intimation, are protected.
3. Reduced Litigation: The judgment harmonizes policy and notifications, reducing interpretational disputes and potential litigation.

Conclusion

The CESTAT Chennai’s decision in the Mylan Laboratories case is a landmark for EOUs, reinforcing the principle that beneficial schemes must be interpreted holistically and in alignment with policy objectives. EOUs should ensure strict compliance with procedural requirements and maintain transparent records to avail themselves of these benefits.

Connected Matter

Madras High Court on Retrospective Application of Amended Customs Exemption

Source: CESTAT Chennai

Disclaimer

Handy Download:

Write to us at office@aadrikaalaw.com

Tel: +91-11-4999 2707 I +91-9999005379

www.aadrikaalaw.com