Sun Pharma Wins Major CESTAT Relief, Rs 3.9 Cr Excise Demand Set Aside

New Delhi: In a significant ruling for Export Oriented Units (EOUs), the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Ahmedabad, has set aside a central excise duty demand of Rs 3.90 crore along with interest and penalty imposed on Sun Pharmaceuticals Industries, holding that the FOB value of deemed exports must be included while calculating Domestic Tariff Area (DTA) sale entitlement under the Foreign Trade Policy.

The Tribunal ruled that the department's denial of concessional duty benefit under Notification No. 23/2003-CE was legally unsustainable, as it ignored settled law laid down by the Supreme Court and High Courts.

The appeal arose from Order-in-Original No. OIO-VAD-EXCUS-002-COM-007-19-20 dated 26.06.2019 passed by the Commissioner of CGST and Central Excise, Vadodara-II, whereby Sun Pharmaceuticals Industries was directed to pay Rs 3,90,82,282/- towards alleged short-paid excise duty along with interest and penalty equivalent to 50% of the duty amount.

Sun Pharmaceuticals Industries, a 100% Export Oriented Unit (EOU) located at Panoli, Bharuch, Gujarat, was engaged in the manufacture of bulk drugs under Chapter 29 of the Central Excise Tariff Act, 1985 and operated under the EOU scheme until 28.02.2014.

The dispute originated during audit proceedings conducted by central excise officers, who noticed that during the period from April 2011 to February 2014, the appellant had cleared certain products into the Domestic Tariff Area at concessional rates of duty under Notification No. 23/2003-CE dated 31.03.2003. The department alleged that some of the products cleared in DTA exceeded 90% of the FOB value of exports of the respective products, some products were cleared in DTA despite being dissimilar to exported goods, and certain products were cleared exclusively in DTA without being exported at all.

Based on these findings, a show cause notice dated 10.03.2017 was issued invoking the extended period of limitation under Section 11A(4) of the Central Excise Act, 1944, proposing recovery of differential duty along with interest and penalty under Section 11AC. The adjudicating authority confirmed the demand, leading Sun Pharmaceutical Industries to file an appeal before the Tribunal.

In its appeal, Sun Pharmaceutical Industries contended that the department had fundamentally misconstrued the provisions of the Foreign Trade Policy and Notification No. 23/2003-CE.

The appellant argued that for the purpose of determining DTA sale entitlement, the FOB value of deemed exports must necessarily be added to the FOB value of physical exports, a position consistently upheld by the Gujarat High Court, the Supreme Court, and the Tribunal in several decisions. It was submitted that when deemed exports were included, the appellant’s overall DTA clearances remained well within the permissible limit of 50% of FOB value of exports, as prescribed under Para 6.8(a) of the Foreign Trade Policy.

The appellant further argued that the restriction of 90% of FOB value applied product-wise only subject to the overall DTA entitlement not exceeding 50%, and therefore no violation could be alleged unless this overall cap was breached.

Sun Pharma also maintained that the goods cleared in DTA were “similar goods” to those exported, as defined under the Customs Valuation (Import of Goods) Rules, 2007, which definition is adopted under the Foreign Trade Policy, and that the adjudicating authority erred in distinguishing products merely on the basis of trade names rather than composition, use, and therapeutic application.

It was also contended that the extended period of limitation was not invocable since the appellant had regularly filed ER-2 returns, quarterly and annual performance reports, and had duly intimated the Development Commissioner prior to effecting DTA clearances. The appellant asserted that there was no suppression of facts or intent to evade duty and therefore interest and penalty were not sustainable.

The Commissioner of CGST & Central Excise, Vadodara-II, on the other hand, defended the impugned order and argued that the goods cleared in DTA by the appellant were not similar to the goods exported, thereby violating the conditions of the Foreign Trade Policy and the concessional notification.

The department contended that certain products were cleared exclusively in the domestic market without ever being exported, which amounted to a clear breach of the EOU scheme. It was further argued that products having different therapeutic uses could not be considered commercially interchangeable and therefore could not qualify as “similar goods.”

The department also justified the exclusion of deemed exports from FOB value calculations and supported the invocation of the extended period of limitation on the ground that the violations came to light only upon detailed audit scrutiny.

After hearing both sides, the Tribunal noted that the principal issue was whether the FOB value of deemed exports was required to be included for determining DTA sales entitlement. Accepting the appellant’s contention, the Tribunal observed, “We find that the contention of the appellant is correct,” and held that “FOB value of deemed exports should be included in FOB value of physical exports for determining the DTA sales entitlement.”

Relying on binding precedents affirmed by the Supreme Court, the Tribunal further recorded that “the value of deemed export is also to be taken into account for determining 50% of the FOB value which will be permitted to be sold to domestic market.”

The Bench noted that this aspect required reconsideration by the adjudicating authority, observing that “this issue needs relook by the learned Adjudicating Authority.”

On the issue of product-wise restriction, the Tribunal examined Para 6.8(a) of the Foreign Trade Policy and observed that “there is a limit on DTA sale of any specific product not more than 90% of the FOB value of export of that particular product subject to not exceeding overall DTA sales entitlement of 50% of FOB value of exports.”

The Tribunal found that the adjudicating authority had not properly examined whether this condition was breached after considering deemed exports and therefore remitted the matter for fresh verification.

With respect to the allegation of dissimilarity of goods, the Tribunal observed that pharmaceutical products involve technical considerations and held that

“Composition and use of pharmaceutical drugs is a highly technical subject, and therefore, it will be proper if the similarity or otherwise is adjudged by the learned Commissioner based on parameters of composition, use for specific ailments, trade or proprietary name, etc.”

The Tribunal allowed the appellant to place reliance on established pharmacopoeias such as the Indian Pharmacopoeia or British Pharmacopoeia while re-examining the issue.

On limitation, the Tribunal upheld the invocation of the extended period, observing that the issues involved in the present case arose only after deeper scrutiny of records and that such details “would have remained unnoticed” without audit. The Tribunal agreed with the findings of the adjudicating authority on this aspect and held that “extended period of limitation has correctly been invoked.”

In view of the above observations, the Tribunal, vide Final Order No. 11445/2025 pronounced on 26.12.2025, held that the impugned order could not be sustained in its present form and directed that the matter be reconsidered afresh.

The Tribunal concluded,

“With above observation, we remit the matter to the Adjudicating Authority for deciding various issues raised by the appellant afresh in the light of above observations and then re-determine the central excise duty liability of the appellant, if any.”

Accordingly, the appeal filed by Sun Pharmaceutical Industries was allowed by way of remand.

To view the official order, click the link below: