Continuous manufacturing records and input recycling: exemption cannot be denied unless diversion or non-accountal is proved.

In a continuous manufacturing process, input accountal must be assessed from the records as a whole, including issue, recovery, rejection and re-use, rather than by isolating one stage. The Tribunal held that recycled tobacco reintroduced into production could be taken into account, and that a theoretical mismatch between issued cut tobacco, waste cigarettes and recovered tobacco was not enough to deny the exemption. The burden remained on the Department to prove diversion or non-accountal, and a Board circular could not be extended beyond inputs actually shown to have been diverted. On the record, non-accountal was not established and the duty demand was unsustainable.

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Issues: Whether the Revenue had established that the cut tobacco was not satisfactorily accounted for and was liable to duty at tariff rate, and whether the benefit of the exemption notification could be denied on the basis of the alleged mismatch between issued cut tobacco, waste cigarettes and recycled tobacco.

Analysis: The relevant accountal had to be examined from the manufacturing records as a whole, including the issue, return, rejection and recovery stages reflected in the prescribed appendices, and not by isolating one stage of the process. The Department's case rested on an assumption that waste cigarettes necessarily represented unaccounted cut tobacco to the extent of paper and filter content, but that approach ignored the continuous nature of cigarette manufacture and the recycling of recovered tobacco. The record showed that the assessee's reconciliation, read with the verified statements, accounted for the tobacco used in manufacture and the recovered tobacco reintroduced into production. The Board's circular could not be stretched to deny exemption on inputs not shown to have been diverted, and the alleged variation was not enough by itself to sustain demand. The Tribunal also found that the burden remained on the Department to prove non-use or diversion, which it failed to discharge.

Conclusion: The allegation of non-accountal was not proved and the demand of duty was unsustainable; the appeal failed.

Ratio Decidendi: Where input material is consumed in a continuous manufacturing process and the records, taken as a whole, account for issue, recovery and re-use, an exemption based on use in manufacture cannot be denied merely on a theoretical or isolated reconciliation unless the Department proves diversion or non-accountal.

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