SARLA PERFORMANCE FIBERS LIMITED ETC. versus COMMISSIONER OF CENTRAL EXCISE, SURAT-II
[2016] 7 S.C.R. 201, Supreme Court of India, 2016
Outcome: Appeal(s) allowed (Granted)
Segment: Ratio
[2016] 7 S.C:R. 201 
SARLA PERFORMANCE FIBERS LIMITED ETC. 
A 
v. 
COMMISSIONER OF CENTRAL EXCISE, SURAT -II 
(Civil Appeal Nos. 3555-3560of2012) 
JUNE 03, 2016 
[DIPAK MISRA AND SHIVA KIRT! SINGH, JJ.] 
Central Excise Act, 1944: s. 3 (1) and its proviso -
Chargeability under s.3(1) or under proviso of 3(1) - Assessee, a 
100% Export Oriented Unit - Clearance of goods without 
permission of Development Commissioner - Held: Duty is,payable 
uls.3(1) of the Act - If goods are not allowed to be sold in India, the 
proviso to s.3(1) shall not be applicable. 
Allowing the appeals, the Court 
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HELD: The expression "allowed to be sold in India" used 
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in proviso to Section 3(1) of the Act would be applicable only to 
sales made in DTA of the production by 100% EOUs, which are 
allowed to be sold into India as per the provisions of the Exim 
Policy. (Para 35] (221-G-H] 
SIV Industries Ltd. v. CCE & Customs 2000 (2) SCR 
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231 : (2000) 3 SCC 367; CCE v. NCC Blue Water 
Products Ltd. 2010 (11) SCR 741 : 2010 (258) ELT 
161 - relied on. 
J.K. Synthetics Ltd. v. Collector of Central Excise 1996 
(86) ELT 472 (SC); Shrichakra Tyres Ltd. .v. CCE 
F 
Madras 1999 (108) ELT 61 (T); Sterlite Optical 
Technologies Ltd. v. CC&CE Aurangabad 2005 (188) 
ELT 201 (T); CCE Delhi v. Mis. Maruti Udyog Ltd. 
2002 (141) ELT 3 (SC); Himalaya. International Ltd. v. 
Commissioner of C.Ex. Chandigarh (2003) 154 ELT 
, 580 - referred to. 
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Case Law Reference 
1996 (86) ELT 472 (SC) 
2000 (2) SCR
231 
referred to 
relied on 
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Para6 
Para8 
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[2016] 7 S.C.R. 
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1999 (108) ELT 61 (T) 
2005 (188) ELT 201 (T) 
2002 (141) ELT 3 (SC) 
2010 (11) SCR 741 
referred to 
referred to 
referred to 
relied on 
referred to 
Paras 
Para9 
Para 12 
Para 14 
Para 19 
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(2003) 154 ELT 580 
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CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 3555-
3560of2012. 
From the Judgment and Order Nos. M/2113/WZB/AHD/2010, 
M/2114/WZB/ AHD/2010, M/2115/WZB/ AHD/2010, M/2116/WZB/ 
AHD/2010, M/2117/WZB/AHD/2010, M/2119 /WZB/AHD/2010, 
passed in Appeal Nos. E/2806/02, E/2807/02, E/2808/02, E/2809/02, 
E/2810 and E/2812/02 dated 16.12.20 I 0 of the Customs, Excise and 
Service Tax Appellate Tribunal, West Zonal Bench, Ahmedabad. 
S. K. Bagaria, Sr. Adv., Rohan P. Shah, Rohit Jain, Alok Yadav, 
Dhruv Bhattacharya, UditJain, Praveen Kumar, K. Ajit Singh, V. Lakshmi 
Kumaran, Jay Savla, S. Vasudevan, Ms. Renuka Sahu, Advs. for the 
Appellant. 
K. Radhakrishnan, A. K. Panda, Sr. Advs., Ms. Nisha Bagchi, 
Arjit Prasad, Ms. Pooja Sharma, B. Krishna Prasad, Praveen Kumar, 
Advs. for the Respondent. 
The Judgment of the Court was delivered by 
DIPAK MISRA, J. I. The appellant is a company registered 
under the Companies Act, 1956 and is engaged, inter alia, in the 
manufacture of excisable goods, namely, synthetic yam and for that 
purpose it has a factory at Unit-I, Survey No. 59/1/14, Amii, Piparia 
Industrial Estate, Silvassa (U.T. ofD.N.&H). The said factory is a I 00% 
Export Oriented Unit (EOU). Prior to
61h November, 2006, Sarla 
Performance Fibers Limited was known as Sarla Polyesters Ltd. Shri 
Madhusudan Jhunjhunwala and Shri Satish Kumar Sharma were the 
Chaimlan and the excise in-charge respectively of Sarla Performance 
Fibers Limited. Shri Dineshchandra Pandey was the dispatch in-charge 
ofM/s. Hindustan Cotton Company, a paitnership firm, engaged inter 
alia, in trading of Polyester Textured/Twisted Dyed Yarn since 1988. 
Sh. Gopal Bhagwan Dutt Sharma was the Manager of Sarla Performance 
Fibers Limited at the relevant time. The reference to appellants herein
SARLA PERFORMANCE FIBERS LTD. v. COMMISSIONER OF 
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CENTRAL EXCISE, SURAT-II [DIPAK MISRA, J.] 
will mean and include all the appellants. 
2. The appellants had procured partial oriented yarn (POY) falling 
under Chapter 54 without payment of duty for the manufacture of various 
types of yam, namely, polyestertexturised yarn, nylon covered yarn and 
polyester covered yarn. A show cause notice No. V(Ch.54)15-6/0A/ 
2000 dated I 61h May, 2001 was issued by the Commissioner of Central 
Excise, Surat - II requiring the appellant to explain why central excise 
duty of Rs.32,92,854/-should not be recovered on the texturised yarn 
allegedly removed by the appellants without payment of duty. The said 
show cause notice also required the appellants to explain why penalty 
should not be imposed under Section 1 JAC of the Central Excise Act, 
1944 (for short, 'tl1e Act'). That apart, the show cause notice also 
sought to confiscate the nylon covered yarn valued at Rs.1,72, 186/-and 
further to recover duty thereon of Rs.55,202.96. 
3. After the show cause notice was issued, the appellants made 
payment aggregating to Rs.14,89,349.00 as against the duty payable under 
Section 3(1) of the Act (after taking into account the cum-duty benefit) 
and Rs. I I, 19,775.00 payable in the event the benefit ofNotification No. 
2105 was allowed. 
4. After the reply to the show cause notice was filed, the 
Commissioner of Central Excise, Surat-II, by his order-in-original no. 
l l/MP/2002 dated
21" March, 2002 (i) confiscated the seized nylon 
covered yarn weighing 245.980 kgs. valued at Rs.1,72, 186/- and 
appropriated a sum of Rs.86,093/- which was given as bank guarantee; 
(ii) demanded Rs.55,202.96 as differential duty on the corifiscated goods 
which were released provisionally before the adjudication; and (iii) 
confirmed the central excise duty amounting to Rs.32,92,854/- and ordered 
recovery of interest under Section 11 AB and imposed a penalty of 
Rs.33,48,060/- on the appellants. The adjudicating authority also imposed 
penalties on various persons set out in the impugned order. 
5. Being aggrieved by the aforesaid order, the appellant preferred 
appeals before the Customs, Excise and Service Tax Appellate Tribunal 
(CESTAT) (for short, 'the tribunal') under Section 35B of the Act to the 
extent the said order was adverse to it. The revenue also preferred an 
appeal before the tribunal as certain aspects were adverse to it. The 
tribunal referred the issue to the Larger Bench of the tribunal for 
consideration whether the goods cleared by the appellant were eligible 
·for exemption under Notification No. I 25/84 dated 26.05.1984. The 
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SUPREME COURT REPORTS 
[20 l 6] 7 S.C.R. 
Larger Bench vide order dated 03.08.2007 held that in case the goods 
cleared by the 100% EOU and sold in India whether with or without 
permission, the assessment shall be made under proviso to Section 3(1) 
of the Act and the exemption under Notification No. 125/84 shall not be 
applicable. After the matter was placed before the Division Bench of 
the tribunal vide its order dated 15.11.2007 referred to the Larger Bench 
decision and reiterated the view of the Full Bench by opining that the 
goods cleared by the I 00% EOU and sold in India whether with or 
without permission of the Development Commissioner, the assessment 
shall be made under proviso to Section 3( l) of the Act and exemption 
under Notification No. 125/84 shall not be applicable but granted some 
reliefas regards the imposition of penalty. Resultantly, the tribunal vide 
order dated 15.11.2007 disposed of the appeal of the appellants and 
dismissed the appeal of the revenue. 
6. As the facts would unfold, the appellants filed an application 
before the tribunal for recall of order dated 15 .11.2007 in tenns of judgment 
in J.K. Syntlletics Lt<I. v. Collector of Central Excise
1
, which was 
dismissed on the ground that appeals were decided on merits and a 
detailed order considering all aspects was passed by the tribunal and as 
such it could not be said that the Bench defaulted in considering the 
merits of the case. 
7. The aforesaid
orders were assailed before the High Court in 
Writ Petition No. 4758 of 2008 and the Division Bench of the High 
Court taking note of the submissions of the learned counsel for the 
parties, directed as follows:-
"3. There were certain Appeals filed by the Petitioners and also 
there were certain Appeals filed by the Department. Mr. Desai, 
the learned Senior Counsel for the Respondents, has no objection 
if all the Appeals are heard together denovo including the Appeals 
filed by the Department since the Petitioners were not heard in 
the Appeals. The learned Counsel for the Petitioners also has no 
objection for the same. 
4. Under the aforesaid facts and circumstances, both the impugned 
orders d!lted 21" April, 2008 and J 5th November, 2007 passed by 
the CESTAT in the aforesaid Appeals are hereby quashed and 
set aside, and all the aforesaid Appeals stand restored to file. The 
CESTAT is directed to hear all the Appeals menti.~med hereinabove 
I 1996 (86) ELT 472 (SC)
SARLA PERFORMANCE FIBERS LTD. v. COMMISSIONER OF 
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CENTRAL EXCISE, SURAT -II [DIPAK MISRA, J.] 
afresh denovo without being influenced by their earlier orders in 
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any manner." 
8. After the remit, it was contended before the tribunal that the 
allegation of clandestine removal was based on a computer sheet and no 
other records had been recovered; that the reliance by the department 
to establish clandestine removal were the invoices issued by Hindustan 
Cotton Company; and that the appellant SPL is a I 00% EOU and when 
case goods were cleared without permission of the Development 
Commissioner according to the department duty was payable under 
Section 3( l) of the Act and exemption was available under notification 
no. 125/84 CE. To sustain the stand, reliance was placed on SIV 
Industries Ltd. v. CCE & Customs=. Be it stated that the reliance was 
placed on Larger bench decision of the tribunal in Shriclwkra Tyres 
Ltd. v. CCE Madras; and on that base it was contended that the 
amount utilized by the assessee was to be treated as duty price and no 
penalty could have been imposed on individuals since no evidence had 
been brought on record to show that they were aware of the transactions. 
9. The stand of the assessee was resisted by the revenue 
contending, inter alia, that the benefit of exemption notification could 
not be extended since the notification incorporated several conditions to 
be fulfilled and unless these conditions were fulfilled, exemption could
not be allowed; that the benefit of cum-duty price could not be extended 
and invocation of a wrong section or rule in the show cause notice wou Id 
not be a bar for imposition of penalty under the correct rule or section, 
and that appellant was not eligible for treatment of clearances under 
Section 3( I) of the Act. On behalf of the revenue reliance was placed 
on Sterlite Optic"/ Tech110/ogies Ltd. v. CC&CE A11ra11g"bad •. 
l 0. At this juncture, it is relevant to state that Member, Technical 
came to hold that all the sales to DTA were clandestinely done in 
contravention of the provisions of the EXIM policy and the appellant-
company did not raise any contention that the price charged included the 
component of excise duty. On the contrary the appellants claimed 
exemption under notification no. 125/84 and, therefore, the question of 
SPL having recovered any cum-duty price from the customers in DTA 
did not arise. Further it was evident that the transactions had been made 
' (2000) 3 sec 367 
' 1999 (108) ELT 61 (Tribunal) 
4 2005 (188) ELT 201 (Trib.-Mumbai) 
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SUPREME COURT REPORTS 
[2016] 7 S.C.R. 
by SPL in the name of Hindustan Cotton Company and M.M. Sanghavi 
and the demands had been raised on the invoices raised. The transaction 
itself was artificial and no justification had been shown to treat the same 
as cum-duty price and, therefore, the decision of the Commissioner not 
to treat the price as cum-duty price deserved .to be upheld. As regards 
penalty on the company, the learned member held that it had been rightly 
imposed under Section I !AC of the Act read with Rule 1730 of the 
Central Excise Rules. As far as the individuals were concerned, the 
learned Member opined that the imposition on some was justified and 
imposition on certain individuals was not warranted. He, however, 
dismissed the appeal preferred by the department. 
.11. The Member, Judicial concurred with the view of the Member, 
Technical as regards the clandestine removal and consequent 
confirmation of demand of duty and imposition of penalty on various 
appellants but, however, as far as the present appellant was concerned, 
the learned Member opined that the entire realization made by M/s. 
Sarla Polyester Ltd. were required to be treated as cum-duty and as 
such, the benefit had to be extended to the appellant on the above count. 
She further observed that:-
" Admittedly no duty has been recovered by them from their buyers. 
When the duty is being subsequently demanded from them on the 
same realization, it is, in my
view," required to be treated as cum 
duty and the assessable value has to be arrived at by deduction of 
the duty now being confirmed against the assessee. This has 
been the declaration oflaw in all the judgments relied upon by the 
learned Advocate. The fact as to whether the duty is being 
demanded on clandestine removal or on any other issue. should 
not make a difference". 
12. The learned Member placed reliance on CCE Delhi v. Mis. 
Maruti Udyog Ltd.5, reproduced a passage from the same and opined 
that the entire realization was required to be considered as cum-duty-
price and the benefit of the same had to be extended to the assessee and 
for the said purpose, the matter needed to be remanded for recalculation 
of the quantum of duty. As far as penalty is concerned, she concurred 
with the Member, Technical, but also opined that it required to be remanded 
for imposing penalty equivalent to the duty calculated on the determination 
of the quantum. 
'2002 (141) ELT 3 (SC)
SARLA PERFORMANCE FIBERS LTD. v. COMMISSIONER OF 
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CENTRAL EXCISE, SURAT -II [DIPAK MISRA, J.] 
13. The two Members noted three points as difference of opinion. 
A 
For the sake of completeness, we think it appropriate to reproduce the 
same:-
"a. Whether the entire sales value of the goods removed 
clandestinely is required to be considered as cum-duty and benefit 
·of the same is to be extended to M/s. Sarla Polyester Ltd. 
B 
(Appellant no. I herein) or not? 
b. Whether the ratio of law declared by this Hon'ble Court in the 
case of CCE Delhi vs. M/s. Maruti Udyog Ltd. repo11ed in 
2002(141) ELT 3 applies to the facts of the present case or not 
and as to whether the benefit of the same is to be extended to the 
c 
said assessee or not? 
c. Whether the matter is required to be remanded for quantification 
of the duty by treating entire realization as cum-duty price, as 
held by the Member (Judicial) or the appellant's plea on the above 
issue is required to be rejected by upholding the decision of the 
Commissioner not to treat the price as cum-duty price, as observed 
by learned Member (Technical)? 
d. Consequent to the re-quantification of duty on the above ground, 
the penalty imposed upon M/s. Sarla Polyester Ltd. would get 
reduced to the quantum of duty reconfirmed against the said 
appellant? 
14. lt is necessary to state here that before the pronouncement of 
Orderon 13.10.2010, counsel on behalfofthe present assesee mentioned 
that the controversy was no more
res integra in view of the aecision 
rendered in CCE v. NCC Blue Water Products Ltd. 6 Thereafter the 
matter was heard on another day and on behalf of the Bench, the learned 
Member, Technical passed the order. He took note of the stand of the 
revenue that ratio cifthe said decision was not applicable as it was based 
on the principle stated in earlier decision i.e. SIV Industries Ltd. (supra). 
The learned Member also took note of the fact that the Larger Bench of 
the tribunal had distinguished the decision in SIV Industries Ltd. (supra) 
which was relied upon in NCC Blue Water products Ltd. (supra). At 
this juncture, we think it appropriate to reproduce a passage from the 
order passed by the Member, Technical on behalf of the Bench:-
' (20IOJ 12 sec 761: 2010 (258)_ ELT 161 
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SUPREME COURT REPORTS 
[2016] 7 S.C.R. 
"It is quite clear that as submitted by learned SDR, the Hon 'hie 
Supreme Court followed the decision in case of SN Industries 
and also took note of the Board's circular issued in 2002 and it is 
quite apparent that circular issued in 2004 was not brought to the 
notice of learned SDR in Supreme Court. Further, we also note 
as submitted by the decision of the present case, the Larger Bench 
had considered the Hon'ble Supreme Court in case of SIV 
Industries Ltd. and had distinguished the same and reached the 
conclusion that in case of goods sold by I 00% EOU in DTA, the 
assessment shall be made under proviso to Section 3( I) of the 
Act." 
15. After so stating, the learned Member quoted copiously from 
the Larger Bench. We think it appropriate to reproduce the relevant 
part:-
"14. We have considered the submissions. We find that the 
wordings of proviso to Section 3(1) of the Central Excise Act and 
Notification 125/84 which we have been called upon to interpret 
are similar and the basic dispute is as to how the words "allowed 
to be sold in India" are to be interpreted. After going through the 
various submissions made by both sides, we find that I 00% EOUs 
were allowed to be established with the sole purchase of exporting 
100% of their production as is evident from the words I 00% EOUs. 
However, on account of certain hardship faced in getting export 
order, sales in DTA up to 25% were permitted
from the year 1984 
but there was a clear intention to distinguish between such sales 
by the 100% EOU from the sales by domestic units other than 
100% EOU and it was for this purpose that proviso to Section 
3( I) and Notification 125/84 was introduced. Since there were 
only two modes of clearance in which the I 00% EOUs could 
have cleared the goods i.e. one by export and the other by domestic ' 
sale after obtaining the permission of the Development 
Commissioner, in respect of domestic sales the words "allowed to 
be sold in India" were incorporated in both the provisos." 
16. Thereafter, the learned Member proceeded to state certain 
aspects which are not necessary and then reproduced the following 
passage:-
"We also agree with the observation of the Larger Bench that the 
decision of the Supreme court in SIV Industries case is
SARLA PERFORMANCE FIBERS LTD. v. COMMISSIONER OF 209 
CENTRAL EXCISE, SURAT-II [DIPAK MISRA, J.) 
distinguishable for the reason stated therein, as in that case the 
main thrust was that whether on the date of removal the I 00% 
EOU ceased to be I 00% EOU and therefore the provisions relating 
to I 00% EOU could not have been applied to them. For the same 
purpose we hold that exemption under Notification 125/84 shall 
not be applicable in respect of goods manufactured by I 00% EOU 
but sold in India." 
, 
17. After reproducing number of passages from the Larger Bench, 
the learned Member observed thus:-
"7. It may be seen that Larger Bench had considered the decision 
of Hon 'ble Supreme Court in case of SIV Industries Ltd., and 
has agreed with another decision of the Larger Bench in the case 
of Himalaya International, wherein also the decision ofHon'ble 
Supreme Court in case ofSIV Industries Ltd had been considered; 
and distinguished. 
8. To sum up, two decisions of Larger Bench of the Tribunal 
have considered the issue and distinguished the decision in the 
case of SIV Industries Ltd. and the decision of Larger Bench in 
the present case on a reference made in the appellant's case 
itself had considered, all aspects and the history of 100% EOU, 
statutory provisions and precedent decisions to reach conclusion 
that duty is chargeable under proviso to Section 3( I) of Central 
Excise Act, 1944." 
18. Being of this view, the Bench reiterated the difference of opinion
and the questions framed thereunder. After the judgment was delivered 
by the tribunal, the appellant preferred W.P. No. 714 of201 I. The High 
Court noted the submissions of the learned counsel for the writ petitioners 
and opined that keeping in view the concept of self-restraint and the 
requirement of judicial propriety, it was desirable for the assessee to 
prefer an appeal before this Court. Being of this view, the High Court 
declined to interfere. Hence, the present appeals have been preferred 
under Section 3 5 L(b) of the Act. 
19. It is not in dispute that the unit of the assessee-appellant is a 
I 00% EOU and under the EOU scheme it was required to export the 
goods manufactured by it. The stand of the assessee is that it was 
eligible to clear goods up to a certain specified limit after obtaining due 
permission from the Development Commissioner in tenns of Export 
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[2016] 7 S.C.R. 
Import (EXIM) Policy read with Handbook of Procedure (HBP). It is 
the submission of Mr. V. Lakshmi Kumaran, learned counsel for the 
appellant that even if it is held that finished goods were removed by the 
assessee without requisite permission from the Development 
Commissioner, central excise duty is leviable in terms of Section 3( I) of 
the Act. It is contended by him thatthe tribunal has erroneously followed 
the Larger Bench decision of the tribunal in Himalaya International 
Ltd. v. Commissioner of C.Ex. Cltandigarlt 7• Learned counsel would 
submit that if the submission of the assessee is accepted, he will be 
entitled to refund as it has paid more than the amount than the duty 
liability determinable under Section 3(1) of the Act. 
20. Mr. K. Radhakrishnan, learned senior counsel appearing for 
the revenue, per contra, would contend that the appellant which is a 
continuing EOU, was bound to export finished goods and as there has 
been non-fulfilment of the obligation and the goods have been cleared 
without permission of the competent authority, the appellants are liable 
to pay the duty as determined by the tribunal. It is his further argument 
that the assessee cannot be assessed under Section 3( I) of the Act but 
under the proviso as held by the tribunal. Learned senior counsel would 
submit that the decision in SIV Industries Ltd. (supra) and NCC Blue 
Water Pnulucts Ltd. (supra) when seemly
applied, the 100% EOU 
which was cleared in OTA without permission cannot be allowed to pay 
duty under Section 3( I) of the Act. 
21. To understand the controversy, it is necessary to scrutinize the 
relevant provisions, circulars in'the field and the interpretations placed 
by this Court on the pertinent provisions. The contentious part of Section 
3 of the Act, prior to amendment w.e.f. 11.05.200 I read as follows:-
"Section 3. Duties specified in the First Schedule and the 
Second Schedule to the Central Excise Tariff Act, 1985 to 
be levied -(I) There shall be levied and collected in such manner 
as may be prescribed,-
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(a) a duty of excise on all excisable goods which are produced or 
manufactured in India as, and at the rates, set forth in the First 
Schedule to the Central Excise Tariff Act, 1985 ( 5 of 1986); 
(b)a special duty of excise, in addition to the duty of excise 
specified in clause (a) above, on excisable goods specified in the 
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'(2003) 154 ELT 580
SARLA PERFORMANCE FIBERS LTD. v. COMMISSIONER OF 211 
CENTRAL EXCISE, SURAT -II [DIPAK MISRA, J.] 
Second Schedule to the Central Excise Tariff Act, 1985 (5 of 
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1986) which are produced or manufactured in India, as, and at 
the rates, set forth in the said Second Schedule. 
Provided that the duties of excise which shall be levied and 
collected on any excisable goods which are produced or 
manufactured, -
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(i) in a tree 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, 
shall be an amount equal to the aggregate of the duties of customs c 
which would be Ieviable under Section 12 of the Customs Act, 
1962 (52of1962), on like goods produced or manufactured 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 goods shall, notwithstanding anything contained in any 
other provision of this Act, be determined in accordance with the 
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provisions of the Customs Act, 1962 (52of1962) and the Customs 
Tariff Act, 1975 (51 of 1975)." 
22. After the amendment the relevant part of the provision reads 
as under:-
"Section 3. Duties specified in the First Schedule and the 
Second Schedule to the Central Excise Tariff Act, 1985 to 
be levied -(I) There shall be levied and collected in such manner 
as may be prescribed,-
(a)a duty of excise to be called the Central Value Added Tax 
(CENVAT) on all
excisable goods excluding goods produced or 
manufactured in special economic zones which are produced or 
manufactured in India as, and at the rates, set forth in the First 
Schedule to the Central Excise Tariff Act, 1985 (5 of 1986); 
(b)a special duty of excise, in addition to the duty of excise 
specified in clause (a) above, on excisable goods excluding goods 
produced ur manufactured in special economic zones specified in 
the Serond Schedule to the Central Excise Tariff Act, 1985 (5 of 
1986) which are produced or manufactured in India, as, and at 
the rates, set forth in the said Second Schedule. 
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[2016] 7 S.C.R. 
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Provided that the duties of excise which shall be levied and 
collected on any excisable goods which are produced or 
manufactured, -
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(i) in a free trade zone or a special economic zone and brought to 
any other place in India; or 
(ii) by a hundred per cent export-oriented undertaking and brought 
to any other place in India, 
shall be an amount equal to the aggregate of the duties of customs 
which would be leviable under the Customs Act, 1962 (52 of 
1962) or any other law for the time being in force, on like goods 
produced or manufactured 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 goods shall, 
notwithstanding anything contained in any other provision of this 
Act, be determined in accordance with the provisions of the 
Customs Act, 1962 (52of1962) and the Customs Tariff Act, 1975 
(51 of 1975)." 
23. Having noted the relevant provisions, it is apposite to appreciate 
what has been held in SIV Industries Ltd. (supra). In the said case, the 
appeal was preferred challenging the order of the tribunal whereby it 
had directed that the duty of central excise was not payable under Section 
3(1) of the Act but under the proviso to Section 3(1) of the Act. The 
appellant therein was granted permission to set up a 100% Export 
Oriented Unit (EOU) for the manufacture of Yiscose staple fibre at its 
factory
at Sirumugal in Coimbatore District in the State of Tamil Nadu. 
The Jetter of intent dated 18.12.1991 was issued to the appellant for the 
purpose by the Secretariat for Industrial Approvals (SIA), Ministry of 
Industry, Government oflndia. On 08.09. I 993 the appellant therein made 
an application to the Secretary, Ministry of Commerce, Government of 
India and sought debonding of its unit from I 00% EOU, i.e., withdrawal 
from I 00% EOU Scheme. By letter dated 18. l 0.1993 of the Ministry of 
Commerce it was agreed in principle to allow the appellant to withdraw 
from the I 00% EOU Scheme subject to the conditions on which 
withdrawal was permitted. Once the debonding of the unit was permitted, 
finished goods earlier manufactured in the I 00% EOU could be cleared 
for domestic tariff area (DTA) on levy of duty of central excise. The 
dispute arose as to what rate of duty was to be levied. The contention of 
the assessee was that excise duty is payable on the finished goods under
SARLA PERFORMANCE FIBERS LTD. v. COMMISSIONER OF 
213 
CENTRAL EXCISE, SURAT -II [DIPAK MISRA, J.] 
the main Section 3(1) of the Act together with customs duty on the 
imported raw material used in the manufact9re of the said finished goods 
lying in the stock. The Revenue on the other hand contended that excise 
duty under the proviso to Section 3( 1) of the Act was payable on the 
finished goods and with no customs duty being levied on the raw materials 
gone into the manufacture of finished goods. The Court encapsulateq 
the issue by stating that the expression "allowed to be sold in India" 
appearing in the proviso to Section 3(1) of the Act was the bone of 
contention between the parties. The assessee contended that for the 
application of the proviso to Section 3(1) two conditions have to be 
cumulatively and simultaneously satisfied, viz., (I) 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. After analyzing 
various aspects and the circulars dated 17.02.1983 clarifying the 
introduction of the proviso and the circular dated 29.05.1984 explaining 
further amendment to the proviso to Section 3( I) of the Act, the Court 
held:-
"The contention of the Revenue is that permission to withdraw 
from the Scheme is itselfa permission to sell in India, i.e., when 
the unit is permitted to debond, it would be deemed to have been 
permitted to sell the goods in India. But then permission to
sell in 
India has to be in terms or in accordance with the provisions of 
the export-import policy. Permission to sel! in India by 100% EOU 
consists of all those factors like value addition, fulfilment 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 by the Board of Approvals (BoA) 
to the closing stock of finished goods. The 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 of Commerce. The Board of 
Approvals and the Development Commissioner are two different 
authorities constituted for two different 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 
a different statutory authority. If reference is made to para 102 of 
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the relevant import-export policy pennission of the Development 
Commissioner is required for selling the goods in [ndia up to a 
limit of 25% by I 00% EOU. Para 117 of the policy deals with 
de bonding 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 
corresponding amendments to Section 3 of the Act the expression 
"allowed to be sold in [ndia" in the proviso to Section 3(1,) of the 
Act is applicable only to sales made up to 25% of production by 
100% EOU in DTAand with the 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." 
24. After so stating the Court noted the stand of the revenue that 
by debonding permission had been granted by BoA for selling the closing 
stock of finished goods in India. Negativing the said contention, the 
Court held:-
"By its application dated 8-9-1993 the appellant had only asked 
the Central Government for permission to debond the unit. Pending 
formal debonding clearance, the 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 authority 
concerned and letter of debonding was
issued. This 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 ofBoA cannot be construed as permission to sell 
in India. The argument of the Revenue that debonding assumes 
allowing all closing stock of the goods on the date of debond ing to 
be sold in lndia would be stretching the matter a little too far. 
Conditions for sale of25% of the finished products by EOU and 
sale of finished stock by a de bonded I 00% EOU on the date of 
debonding are different." 
25. Eventually, the Court interpreting the provision and notification 
issued under the relevant Rules held thus:-
"Chapter V-A of the Central Excise Rules contains provisions for 
removal from a free trade zone or fr0m a 100% EOU of excisable 
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goods for home consumption. This ~hapter was made applicable
SARLA PERFORMANCE FIBERS LTD. v. COMMISSIONER OF 
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CENTRAL EXCISE, SURAT -II [DIPAK MISRA, J.] 
to units under the EOU Scheme by Notification No. 130/84-CE 
dated 26-5-1984. This chapter contains Rules 100-A to 100-H. 
Rule 100-A 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 l 00% export-oriented 
undertaking and who has been allowed by the proper officer to 
remove such excisable goods for being sold in India on payment 
of duty of excise levi~ble 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 de bonded. Under Rule I 00-H, Rule 
57-A and other Rules mentioned therein shall not apply to excisable 
goods produced or manufactured by a I 00% export-oriented 
undertaking. Rule 57-A relates to allowing credit of 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 the 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." 
26. In view of the aforesaid position, the Court was of the view 
that the tribunal was not right in holding that duty was to be leviable in 
terms of the proviso to Section 3(1) of the Act and, accordingly, it set
aside the judgment of the tribunal and restored that of the adjudicating 
authority. 
27. The aforesaid judgment of this Court was distinguished by the 
Larger Bench of the tribunal in Himalaya International Ltd. (supra). 
The Larger Bench referred to circular No. 618/9/2002-CX dated 
13.02.2002 and ruled thus:-
"A reading of the above circular would show that it was issued 
pursuant to the decision of the Supreme Court in SIV Industries 
Ltd. (supra), but without understanding the position that the 
Supreme Court did not deal with a case where clearance was 
made to DI A by 100% EOU in excess of the permission granted. 
It is contended on behalf of the assessee that the interpretation 
given in the circular referred to above is binding on the Revenue 
and therefore, this Tribunal cannot give a different interpretation 
to Section 3( 1) and the proviso at the instance of the Revenue. In 
suppo11 of the above contention reliance was placed on a decision 
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of the Supreme Court in CCE, Vadodara v. Dhiren Chemicals 
Industries, 2002 (139) ELT 3 (S.C.). We find no merit in the above 
contention of the assessee. In CCE, Vadodara v. Dhiren Chemicals 
Industries the Supreme Court observed that regardless of the 
interpretation placed by it on the expression in the notification 'on 
which appropriate duty of excise has already been paid' ifthere 
are circulars which have been issued by the Central Board of 
Excise & Customs placing a different interpretation upon the said 
phrase that interpretation will be binding upon the Revenue. In 
the present case, we are not dealing with any circular of Central 
Board of Revenue interpreting the meaning of the proviso to Section 
3(1) and which had been in force. On the other hand, the circular 
dated 13 .2.2002 is one issued giving a wrong interpretation to the 
decision of the Supreme Court. We have no hesitation to hold 
that an interpretation thus given by the Board to the decision of 
the Supreme Court will not be binding." 
28. To appreciate the whole controversy in completeness, we may 
reproduce the said circular dated 13.2.2002:-
"Subject: Removal of goods by I 00% EOUs to DTA- Non-levy 
of duty under Section 3( I) of Central Excise Act, 1944. 
I am directed to invite reference to Supreme Court's judgment in 
case of SIV Industries v. CCE [2000 (117) E.L.T. 281 (S.C.)] 
vide which the Apex Court had held that
"proviso to Section 3(1) 
regarding the duty chargeable on goods cleared by EOUs shall be 
applicable only to sales made in DTA upto 25% of production 
which are allowed to be sold into India as per provisions ofEXIM 
Policy". In other words, Hon'ble Court decided that ifthe goods 
are "not allowed" to be sold in India, the proviso to Section 3( I) of 
Central Excise Act, 1944 shall not be applicable. The expression 
'allowed to be sold' has since been replaced with 'brought to any 
other place' w.e.f. 11-5-2001 vide Section 120 of Finance Act, 
2001 (14 of2001]. 
2. It has come to the notice of the Board that field formations are 
interpreting the judgment of Apex Court to the effect that ifthe 
goods cleared by EOUs are not allowed to be sold into India, the 
Section 3(1) of Central Excise Act, 1944 is not applicable and 
duty can be demanded under the provisions of Customs Act, 1962 
only. Board has taken a serious view of this mis-interpretation.
SARLA PERFORMANCE FIBERS LTD. v. COMMISSIONER OF 
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CENTRAL EXCISE, SURAT-II [DIPAK MISRA, J.] 
The provisions of Central Excise Act, 1944 shall apply to all goods 
manufactured or produced in India for which Section 3 is the 
charging section. EOUs are also situated in India and the 
chargeability under Central Excise Act is never in doubt. 
Therefore, it is clarified that prior to 11-05-2001, the clearances 
from EOUs ifnot allowed to be sold in India, shall continue to be 
chargeable to duty under main Section 3(1) of Central Excise 
Act, 1944. Appropriate action may be taken immediately to 
safeguard revenue and all pending decisions may be settled 
accordingly." 
29. The said circular, as is perceptible, is in accord with the decision 
rendered in SIV Industries Ltd. (supra). The said circular while so 
indicating also clearly lays down the expression "allowed to be sold" has 
been replaced with "brought to any other place" with effect from 
11.05.2001 vide Section 120 of Finance Act, 2001 (14 of2001). The 
circular being in consonance with the decision in SIV Industries Ltd. 
(supra) and rightly so, it was absolute unnecessary on the part of the 
Larger Bench of the tribunal to say that this Court in SIV Industries 
Ltd. (supra) did not deal with the case where clearance was made to 
OTA by 100% EOU in excess of the permission granted. The attempt 
to distinguish the circular, in our considered opinion, was not only 
unnecessary but also absolutely erroneous. 
30.
After the judgment of the Larger Bench, the Central Board of 
Excise and Customs, New Delhi brought out a circular dated 05.01.2004. 
The relevant part of the said circular reads as follows:-
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"Subject: Withdrawal of Board's Circular No.618/9/2002-CX., 
dated 13-2-2002 - Removal of goods by I 00% EOU to OTA -
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Clarification regarding levy of duty on removal of goods by I 00% 
EOU to OTA. 
I am directed to draw your attention to Board's Circular No. 618/ 
9/2002-CX., dated 13-02-2002 [2002 (140) E.L.T. T27] on the 
above subject wherein it was clarified that prior to 11-5-2001, the 
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clearances from EOUs if not allowed to be sold in India, shall 
continue to be chargeable to duty under main Section 3(1) of 
Central Excise Act, 1944.This was based on an interpretation of 
Apex Court's decision in the case of SIV Industries Ltd. [2000 
(117) E.L.T. 281(S.C.)]. 
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2. However, attention is now invited to the decision of Larger 
Bench of CESTAT in the case of M/s. Himalaya International 
Ltd. v. Commissioner of Central Excise, Chandigarh [2003 (154) 
E.L.T. 580 (Tri. - LB)], wherein it has been held that "Rate of 
duty as per the proviso to Section 3(1) of the Central Excise Act, 
1944 would be applicable for assessing all the excisable goods, 
which were cleared by 100% EOU to DTA whether in terms of 
permission granted or in excess of permission granted". In view 
of the said judgment of the CESTAT, it is now clear that all the 
goods manufactured by EOU and cleared into DTA before final 
debonding of the EOU shall be chargeable to duty under proviso 
to Section 3( 1) of the Central Excise Act, 1944 and under no 
condition, goods produced in I 00% EOU can be charged under 
main Section 3(1) of Central Excise Act, 1944. 
3. In view of the above judgment of the CESTAT, the matter has 
been re-considered by the Board and it has been decided to 
withdraw the Board's Circular No. 618/9/2002-CX., dated 13-2-
2002. The above-mentioned judgment ofCESTAT, which has been 
accepted by Board, may kindly be taken into consideration in 
deciding similar pending cases." 
31. Having noted the circular, we may refer to the authority in 
NCC Blue Water Products Ltd. (supra). In the said case, the tribunal 
has held that the duty of Central excise on shrimps and shrimp seeds 
produced
and removed by the assessee-respondent, a 100% export-
oriented unit (EOU), in the Domestic Tariff Area (DTA) without the 
approval of the Development Commissioner, would be payable under 
Section 3( 1) of the Act and not under the proviso appended thereto. 
The two-Judge Bench taking note of the fact that during the period 
1994-1995 to 1997-1998, the assessee produced and sold 11, 15,29,540 
number of shrimp seeds and 48,365 kg of shrimps in DTA without 
obtaining the permission of the Development Commissioner; without 
issuing proper invoices as mandated under Rule 100-E of the Central 
Excise Rules, 1944 (for short "the Rules") and without payment of excise 
duty. Besides, the assessee also undertook certain job-work whereby it 
processed 864.238 MT of shrimps and 905.580 MT offish and cleare~ 
the said goods in OTA. According to the assessee, these goods were 
ultimately exported by OTA units. The said action of the assessee 
compelled the authority to issue a show cause notice requiring the
SARLA PERFORMANCE FIBERS LTD. v. COMMISSIONER OF 
219 
CENTRAL EXCISE, SURAT -II [DIPAK MISRA, J.] 
assessee to show cause as to why duty of excise equal to aggregate of 
the duties of customs should not be levied under Section 3 of the Act 
read with Rule 9(2) read with proviso to sub-section (1) of Section 11-A 
of the Act and interest and penalty thereon. The matter was contested 
by the assessee and eventually the tribunal ruled in favour of the assessee. 
Before this Court, it was contended that since as per Note I of Section 
I of the First Schedule to the Customs Tariff Act, 1975, any reference in 
that section "to a particular genus or species of an animal, except where 
the context otherwise requires, includes a reference to the young of that 
genus or species" and, therefore, both live shrimps and shrimp seeds are 
classifiable under Sub-Heading 0306.23 of Chapter 3 of the First Schedule 
to the Customs Tariff Act, 1975. It was also urged that the tribunal 
committed an error in relying on the decision of this Coui1 in SIV 
Industries Ltd. (supra) because unlike in that case the assessee had 
sought permission of the Development Commissioner, who in turn had 
advised them to approach the SIA for permission to clear shrimps and. 
shrimp seeds which, in fact, was granted and, therefore, they were 
required to pay duty under proviso to Section 3( I) of the Act. It was also 
urged that under the Exim Policy, an EOU is obliged to make export> of 
the entire production
itself and not through any other entity. The Court 
posed the following question:-
"The core question for our consideration, therefore, is whether 
the sales of shrimps and shrimp seeds by the assessee in DTA, 
without requisite permission from the Development Commissioner, 
are to be assessed to excise duty under Section 3( I) of the Act or 
under the proviso to the said section?" 
32. To deal with the said question, the Court referred to Section 3 
and it expressed understanding of the provision in the following terms:-
"It is manifest that all excisable goods produced or manufactured 
in India are.exigible to duty of excise under Section 3 of the Act, 
the charging section, at the rates set forth in the Schedule to the 
Tariff Act. However, the proviso to the said section provides that 
the duties of excise on any excisable goods, which are produced 
or manufactured by a I 00% EOU and allowed to be sold in India 
shall be an amount equal to the aggregate of the duties of customs 
which would be leviable under Section 12 of the Customs Act, 
1962. As aforestated, the controversy at hand is whether in the 
absence of an order by the competent authority, allowing the 
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assessee to sell the shrimp seeds and shrimps in India, excise 
duty on such sales could be levied and collected in terms of the 
proviso. To put it differently, the issue relates to the significance 
of the expression "allowed to be sold in India" as appearing in 
clause (ii) to the proviso to sub-section (I) of Section 3 of the 
Act." 
33. After so stating the two-Judge Bench referred to the decision 
in SIV Industries Ltd. (supra) and opined that:-
" A similar issue fell for consideration of this Court in SIV 
Industries Ltd. (supra) In that case, the assessee was a 100% 
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EOU. Later on, they sought permission to withdraw from 100% 
EOU Scheme, for which the Ministry accorded the necessary 
permission. However, some of the goods lying in the unit were 
removed prior to the debonding. A dispute arose regarding the 
rate of duty payable on such sales. The plea taken by the assessee 
was that they were liable to pay duty under Section 3( 1) of the 
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Act together with customs duty on the imported raw material 
used in the manufacture of said finished goods, lying in the stock 
whereas the stand of the Revenue was that excise duty under the 
proviso to Section 3(1) of the Act was payable on the finished 
goods with no customs duty being leviable on the raw materials 
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used in the manufacture of finished goods. Thus, the bone of 
contention in that case was also with regard to the interpretation 
of the expression
"allowed to be sold in India" appearing in the 
said proviso. Interpreting the said expression. this Court held that 
the expression "allowed to be sold in India" used in the proviso to 
Section 3(1) of the Act is applicable only to sales made in DTA up 
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to 25% of the production by 100% EOUs, which are allowed to 
be sold into India as per the provisions of the E1dm Policy. No 
permission was required to sell the goods manufactured by I 00% 
EOU lying with it at the time the approval is accorded to debond. 
The Court opined that the goods having been sold without 
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permission of the Central Government to debond the unit, the duty 
on the goods sold by the assessee was leviable under main Section 
3(1) of the Act." 
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f Emphasis addedl 
34. lt is necessary to state here that after so stating the Court also 
noted that after pronouncement of the decision in SIV Industries Ltd.
SARLA PERFORMANCE FIBERS LTD. v. COMMISSIONER OF 
221 
<;:ENTRAL EXCISE, SURAT -II [DIPAK MISRA, J.] 
(supra), the circular was issued on 13.02.2002 clarifying the position. 
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Interpreting the said circular, the Court held:-
"19. As aforesaid, according to the Exim Policy 1992-1997 read 
with Appendix XXXIII of the Handbook of Procedures, an EOU 
may sell 50% of its production in value terms into a DTA only on 
issuance of a removal authorisation by the Development 
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Commissioner. 
20. In the instant case, admittedly at the time of sales of shrimps 
and shrimp seeds by the assessee in DTA, the Development 
Commissioner had not issued the requisite removal authorisation. 
Therefore, in view of the dictum of this Court in SIV Industries 
Ltd. (supra). with which we are in respectful agreement, and the 
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afore-extracted circular issued by the Board following the said 
decision, excise duty on such sales is chargeable under main Section 
3(1) of the Act." 
rEmphasis addedl 
35. The impugned order, as is manifest, relies on the Larger Bench 
decision. It is to be noted that after the judgment in NCC Blue Water 
Products Ltd. (supra) the said decision was brought to the notice of the 
tribunal but it has opined that parent judgment in SIV Industries Ltd. 
(supra) was distinguished by the Larger Bench and further the circular 
dated 05.01.2004 was not taken note of by this Court in the subsequent 
judgment. On a careful scrutiny of the authority in NCC Blue Water 
Products
Ltd. (supra), we are of the considered opinion that it concurs 
with the view expressed in SIV Industries Ltd. (supra). The circular 
dated 05.01.2004 came into existence after the Larger Bench decision 
in Himalaya International Ltd. (supra). We have already stated that 
there was no justification for distinguishing the decision in SIV Industries 
Ltd. (supra). The Technical Member who authored the judgment after 
the decision in NCC Blue Water Products Ltd. (supra) was brought to 
the notice of the tribunal has absolutely improperly noted that the circular 
dated 05.01.2004 was not brought to the notice of this Court. The Court 
in NCC Blue Water Products Ltd. case had not based its conclusion on 
the basis of the circular dated 13.02.2002. It is clear as day that it has 
concurred with the ratio laid down in SIV Industries Ltd. (supra). It 
has been clearly opined that the expression "allowed to be sold in India" 
used in proviso to Section 3(1) of the Act would be applicable only to 
sales made in DTA of the production by 100% EOUs, which are allowed 
to be sold into India as per the provisions of the Exim Policy. 
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36. The said authority has also made it clear that the circular issued 
in 2002 is in consonance with the authority in SIV Industries Ltd. (sL1pra). 
Thus, the view expressed by NCC Blue Water Products Ltd. (supra) 
has given the stamp ofapproval to the circular. It is a binding precedent 
on all the courts and the tribunals under Article I 4 I of the Constitution of 
India. The Larger Bench of the Tribunal, as stated earlier, could not 
have distinguished the judgment in SIV Industries Ltd. (supra). The 
later circular issued on 05.01.2004 on which reliance was placed by the 
revenue before the tribunal which has been taken note of in the impugned 
judgment is clearly indicative ofan erroneous approach. The decision in 
NCC Blue Water Products Ltd. (supra) was bound to be followed and 
the tribunal could not have stated that 2004 circular was not taken note 
of. The tribunal should have appropriately appreciated that this Court 
was interpreting the statutory provision and it is also worthy to note that 
after the judgment delivered in SIV!tulustries Ltd. (supra) an amendment 
was brought into the provision. Therefore, the transaction prior to the 
date of amendment would be governed by SIV Industries Ltd. (supra) 
which has been followed in NCC Blue Water Products Ltd. (supra). 
Be it clarified that we are not concerned with the amended provision in 
this case. 
37. In view of the aforesaid analysis, the
appeals are allowed. 
The judgment and order passed by the tribunal and that of the adjudicating 
authority are set aside. The assessee shall be liable to pay the excise 
duty as per Section 3(1) of the Act. The competent authority is directed 
to compute the duty accordingly and proceed thereafter as per law. In 
the facts and circumstances of the case, there shall be no order as to 
costs. 
Devika Gujral 
Appeals allowed.