The Bangalore Bench of the Customs, Excise & Service Tax Appellate Tribunal (CESTAT) has held that the use of duty-free imported and indigenous capital goods for quarrying granite blocks by a 100% Export Oriented Unit (EOU) formed an integral part of the manufacturing process and did not violate the conditions of customs and excise exemption notifications.
The bench of P.A. Augustian (Judicial Member) and R. Bhagya Devi (Technical Member) set aside customs and excise duty demands exceeding ₹8 crore along with related penalties and confiscation proposals.
The appellant/assessee operated as a 100% Export Oriented Unit engaged in the manufacture and export of granite slabs, memorials, monuments, kerbstones, and other granite products. While its principal manufacturing facility was located in Injambakkam, Tamil Nadu, it also obtained quarrying rights in Balakundi Village, Karnataka, to secure raw granite blocks required for export production.
The Balakundi facility was subsequently included as an additional manufacturing location under the company’s Letter of Permission (LOP), and the Central Board of Excise and Customs declared the location a warehousing station for the purpose of operating a 100% EOU. The unit also obtained private bonded warehouse and in-bond manufacturing licences under the Customs Act.
The department alleged that duty-free imported machinery and indigenously procured capital goods were being used for quarrying activities rather than manufacturing operations, thereby violating the conditions prescribed under Notification No. 13/81-Cus. and Notification No. 123/81-C.E. On this basis, the Commissioner confirmed customs duty of ₹6.86 crore and excise duty of ₹1.22 crore, aggregating to more than ₹8.08 crore.
The central question before the Tribunal was whether quarrying and extraction of granite blocks constituted part of the manufacturing activity undertaken by a 100% EOU and whether duty-free capital goods used in quarrying operations could be regarded as being used “for the purpose of manufacture” of export products.
The Department maintained that the exemption notifications permitted duty-free procurement only for machinery directly engaged in manufacturing operations and not for quarrying activities. It further argued that EOUs were expressly permitted to use duty-free goods for granite quarrying only after amendments introduced in 2000.
Gem Granites argued that quarrying of granite was itself covered within the scope of “manufacture” under the Export-Import Policy governing EOUs. The company pointed out that mining activities, including quarrying, were specifically recognized as manufacturing activities for the purposes of the EOU scheme.
The appellant also highlighted that Balakundi had been approved as an additional manufacturing location under the LOP. The quarry site had been declared a mine under the Mines Act. All transfers of machinery and materials were carried out with departmental permission and under bond. Granite blocks extracted from the quarry were processed into slabs and other export products. Detailed statutory returns and records were regularly filed with the authorities.
The company relied upon several judicial precedents, including decisions of the Supreme Court and Tribunal, which recognized that goods and machinery used in activities integrally connected with manufacturing qualify for exemption benefits.
The Tribunal found that the quarrying operations at Balakundi were undertaken pursuant to approvals granted by the competent authorities and formed part of the approved EOU operations. It noted that the quarry site had been included in the Letter of Permission as early as 1985 and had also been granted warehousing and manufacturing permissions under the Customs Act.
The Bench observed that the granite blocks excavated from the quarry constituted the primary raw material required for manufacturing the export products. Therefore, machinery used in quarrying could not be viewed in isolation from the manufacturing process.
Rejecting the Department’s narrow interpretation of the exemption notifications, the Tribunal held that the phrase “for the purpose of manufacture” must be interpreted broadly and would include activities necessary for producing the final export product. The extraction of granite blocks was an indispensable stage in the production chain and therefore qualified as part of the manufacturing process.
The Tribunal relied extensively on the Supreme Court’s ruling in Oblum Electrical Industries Pvt. Ltd., where it was held that exemption benefits are available not only for materials directly consumed in manufacture but also for materials required to facilitate the manufacturing process.
The Bench also referred to the Larger Bench decision in Kudremukh Iron Ore Ltd., which recognized that machinery playing an integral role in the production chain qualifies as machinery used in manufacture even if it is not directly involved in the final processing stage.
The Tribunal further noted that the appellant had consistently obtained departmental approvals, submitted statutory returns, and informed authorities regarding transfers and usage of machinery. In such circumstances, there was no basis to invoke the extended period of limitation. The Bench observed that all movements of goods had taken place under approved documentation and departmental supervision.
Allowing the appeal, the CESTAT held that the capital goods and consumables used in quarrying granite blocks were utilized for obtaining the raw material required to manufacture export products and therefore satisfied the conditions of the exemption notifications. The Tribunal concluded that denial of exemption benefits was unsustainable and that the duty demands and associated proceedings could not survive.
Accordingly, the impugned order was set aside in its entirety and the appeal was allowed with consequential reliefs in accordance with law.
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