(i) Foreign Trade (Development and Regulation) Act, 1992 — Section 5 — Disallowing Domestic Tariff Area Sales (DTA Sales) by 100% Export Oriented Unit (EOU) — Validity by Policy Circular dated 30-8-05 and Notification No. 24 dated 31-8-05 amending para 6.8 (a) and para 6.8 (h) of the Foreign Trade Policy 2004-2009 — Whether DTA sales by 100% EOUs form an integral part of EOU Scheme — (No) — Nothing prevents the Central Government, in public interest, to plug loophole by tinkering with the existing policy — Validity of Circular dated 30-8-05 and Notification dated 31-8-05 upheld.

       Held : We find no merit in the challenge to the impugned Circular/Notification for the following reasons. Firstly, it is important to note that under para 6.1 of the unamended FTP 2004-2009, 100% EOUs undertook to export their entire production except permissible sales in DTA. Therefore, DTA sales constituted an exception or an incidental facility. DTA sales were not an integral part of the EOU Scheme. Under para 6.1, EOUs were allowed to be set up on the condition that they would export their entire production. It is on this condition that 100% EOUs could avail of various benefits under Customs and Excise Act. The said DTA sales or sales of rejects were exceptions. DTA sales were not an integral part of the EOU Scheme in the sense that if for reasonable reasons if these exceptions are eliminated, as in this case, the Scheme would become unworkable. In fact, M/s. Hindustan Granites even today after the impugned amendment works without use of domestic raw material. Hence, DTA sales is not an integral part of the EOU Scheme. Secondly, it is important to note that 100% EOUs have been importing rough marble blocks from which they are producing marble tiles/slabs and what they are exporting is the said marble tiles/slabs. However, the Director General found, in the course of last seven years, that the entire export of marble tiles/slabs is made out of the poor quality indigenous rough marble blocks. On the other hand, it is found that the entire sale of marble tiles/slabs in DTA is from rich good quality imported rough marble blocks. Therefore, the DTA sales by 100% EOUs are now disallowed under the impugned Circular/Notification. Thirdly, on account of the above practice, the Director General has found that four to five 100% EOUs have been importing rough marble ostensibly for export but in effect after slight polishing the same are sold in DTA. Marble is a restricted item. On account of the above practice, the Director General has found circumvention of the Restricted Import Policy of marble during 100% EOU Scheme (unamended). As stated above, the concept of Net Foreign Exchange earning is very important. On account of the price differential, under the impugned practice, there is substitution of imported inputs by domestic inputs. The rational behind allowing imports of rough marble blocks by 100% EOUs was that the raw material would be used for export production and that it will not be diverted in DTA defeating the very purpose of putting marble in the restricted category. The object behind the EOU Scheme is consumption of imported raw material for manufacture of finished products which are to be exported. If that facility leads to substitution of imported inputs by domestically procured inputs then the facility has to be discontinued. This discontinuation has been done by the impugned Circular/Notification. Fourthly, as stated above, marble is an item under restricted category. It is put in the restricted category since it is not treated as only revenue-generating resource. It is put in the restricted category because the mining industry depends on that resource. It generates employment. Mining generates employment. Marble is an input required in the mining industry. As a result of impugned substitution, the Indian market gets flooded by the imported goods resulting in unemployment in the mining industry. Fifthly, by the impugned Circular/Notification, the Government has stopped procurement of domestic rough marble blocks for achieving NFE earnings. This is the major object behind the impugned Circular/Notification. It is true that the unamended Policy had no co-relation between the input imported and the finished product exported. That was the loophole. To stop the procurement of domestic rough marble blocks for achieving NFE, the DTA sales had to be prohibited. By the amended Policy 100% EOUs are now required to produce marble tiles/slabs (finished products) out of imported rough marble blocks and thereby the amended Policy stops the procurement of domestic rough marble blocks for achieving NFE by these 100% EOUs. Lastly, there are 20 to 25 SIL Units (found to be eligible) vis-a-vis 4 to 5 100% EOUs and, therefore, the volume has been increased from 68,000 MT to 1,30 Lakhs MT. (Para 20)

       Facility given to 100% EOUs to hedge the losses which may arise on account of changes in foreign exchange rates which facility is removed. In our view, nothing prevents the Central Government, in public interest, to plug the loophole by tinkering with the existing policy as is done in the present case. Disallowing DTA sales by 100% EOUs for above reasons cannot be compared with total ban on export of pulses which was the case in the matter of M/s. Asian Food Industries (supra). As held hereinabove, DTA sales did not constitute an integral part of the EOU Scheme, hence the above judgment has no application. (Para 24)

       For the above reasons, we do not see any merit in the challenge to the impugned Circular dated 30.8.05 and the Notification dated 31.8.05 by the above 100% EOUs. Accordingly, we uphold the validity of the Circular dated 30.8.05 and the Notification dated 31.8.05. (Para 25)

       (ii) Foreign Trade (Development and Regulation) Act, 1992 — Section 5 — Exim Policy Disallowing Domestic Tariff Area Sales (DTA Sales) by 100% Export Oriented Unit (EOU) — Validity — Under Exim Policy, in 1991 EOU was permitted to sell rejects upto 5% and goods in DTA — In 1997, EOU was permitted to sell rejects as well as goods upto 50% of FOB value of exports subject to payment of duty and fulfillment of minimum Net Foreign Exchange Earnings (NFE) — Over and above this limit, EOU could sell finished products which were freely importable against payment of full duty — M/s ‘A’ Exports was granted Letter of Permission (LOP) to manufacture and export marble tiles and finished marble blocks — In the said LOP it was stipulated that M/s ‘A’ could make domestic sales as per provisions of Exim Policy 1997-2002 — M/s ‘A’ started exporting finished marble made out of rough imported marble and rough indigenous marble — Rough marble so imported was duty free — Under the LOP, M/s ‘A’ had the right to make sales in DTA, subject to payment of concessional and full duty as the case may be — On 31-8-05, impugned Notification was issued amending para 6.8(a) and 6.8(h) of FTP 2004-2009 — By impugned Notification, EOUs were prevented from making DTA sales of finished marble from imported rough marble, with immediate, effect — According to M/s ‘A’, impugned Notification was against the basic feature of the EOU Scheme — Whether DTA sales by 100% EOUs form an integral part of EOU Scheme — (No) (Para 34, 35)