Acer’s SAD Demand for Warranty Parts Stands as CESTAT Applies Rule 8’s Reasonable-Time Test, Not Section 28 Limitation

Acer imported computer components under SAD exemptions conditioned on compliance with the Customs (Import of Goods at Concessional Rate of Duty for Manufacture of Excisable Goods) Rules, 1996.

Although the components were imported for manufacturing computers, some were transferred from the factory to service centres for free warranty replacements.

After an audit query, Acer disclosed the transfers and paid SAD of ₹1,15,69,622, taking credit of the same amount.

The Department issued a notice seeking recovery of SAD and interest, denying the credit, and imposing penalties. The adjudicating authority confirmed the demands and penalties; the Commissioner (Appeals) upheld that order.

Acer appealed, including on the grounds that the transfers qualified as intended use, the demand was time-barred, and the credit was admissible.

Section 25(1) of the Customs Act permits conditional exemptions, and Rules 4, 7 and 8 of the 1996 Rules require imported goods to be used for the intended manufacturing purpose and provide for recovery of the duty foregone, with interest, if they are not so used.

Under Commissioner of Central Excise, Ahmedabad v. Gujarat Ambuja Exports Ltd., Rule 8 operates independently of Section 28 and prescribes no limitation period; recovery must instead be initiated within a reasonable time, assessed on the facts.

An exemption is construed strictly, and actual use for the specified purpose is required; the CCR definition of “input” for credit purposes does not determine compliance with a separate customs exemption.

Wilful misstatement or suppression requires deliberate conduct with intent to evade duty; mere non-payment is insufficient (Uniworth Textiles Ltd. v. CCE; Pushpam Pharmaceuticals Co. v. Collector).

Rule 9(1)(b) of the CCR permits credit on a challan evidencing payment of additional customs duty, except where the duty became recoverable by reason of specified fraudulent or intentional conduct; Rule 2(k)(ii) includes goods used for free warranty, and the second proviso to Rule 3(5) dispenses with payment on inputs removed for that purpose.

The Tribunal also applied Mahindra and Mahindra Ltd. v. Union of India on the inapplicability of Section 114A penalties to SAD for the relevant period.

The components sent to service centres were not consumed in manufacturing computers; warranty replacement was a distinct after-sales use. The CCR’s express treatment of warranty goods as inputs for credit purposes did not extend the customs exemption, and the end-use certificates—based on returns that omitted the transfers—did not bar recovery.

Under Gujarat Ambuja Exports, Section 28’s limitation periods did not apply; the Tribunal found the notice, issued within a year of the Department learning of the transfers, timely under the reasonable-period test.

However, the transfers were a small proportion of imports, were disclosed in ER-1 returns, and the SAD paid would have been creditable; the Revenue therefore failed to establish an intent to evade.

The exception in Rule 9(1)(b) did not apply, making the credit admissible, while the second proviso to Rule 3(5) answered the alternative demand for payment on removal.

Rule 8 independently supported interest from the date of import, subject to credit for the amount already paid. The penalties failed because the requisite intent was not established, the credit was admissible, and Section 114A did not apply to SAD for the relevant period.

It set aside the Section 114A penalty, the denial and recovery of the SAD credit and related interest, and the Rule 15 penalty.

The separate claim concerning reversal of countervailing-duty credit was left open for the appellant to pursue in accordance with law.

The appeal was partly allowed, and the impugned order modified accordingly.