Exemption for processed cotton yarn fails where excise duty was only deferred and not actually paid at the required stage.

Cotton yarn subjected to beaming, warping and allied processes did not qualify for exemption under Notification 46/87 as amended by Notification 71/94 where duty had only been deferred under Rule 49A. The notification applied only to yarn that had already borne the appropriate excise duty, and deferred payment did not satisfy that condition because the yarn had not been duty-paid at the required stage before the relevant processes. The exemption was therefore unavailable, and the demand stood.

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Issues: Whether cotton yarn subjected to beaming, warping and allied processes could claim exemption under Notification 46/87 as amended by Notification 71/94 when duty on the yarn had been deferred under Rule 49A of the Central Excise Rules.

Analysis: The notification granted exemption only where the cotton yarn or cellulosic spun yarn had already borne the appropriate duty of excise. Under Rule 49A, the manufacturer could defer payment of duty on yarn used captively in the manufacture of fabrics and discharge the duty along with duty on the fabrics. The governing principle, drawn from the Supreme Court decision on exemption notifications, is that such an exemption is available only when the raw material has in fact suffered duty at the correct rate. Since the yarn had not been duty-paid at the stage required by the notification before being subjected to the relevant processes, the condition of the exemption was not satisfied.

Conclusion: The exemption was not available and the demand could not be interfered with.

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