Job-work exemption for dyed yarn upheld where input supplier also acted as manufacturer, leaving duty demand and penalty unsustainable.

Dyed yarn cleared under a job-work arrangement was treated as eligible for exemption under Notification No. 214/86-C.E. because the substantive conditions were satisfied, and Rules 57J/57AC did not prevent the appellant from acting both as supplier of inputs and as job-worker. The arrangement involved grey textured yarn being cleared on duty payment, received back under delivery challans from the principal manufacturer, and used in the appellant's factory to manufacture dyed yarn for clearance to that principal manufacturer. The earlier Larger Bench ruling in Maruti Udyog was relied on as supportive. The duty demand and penalty were therefore set aside, and the transaction was also found to be revenue neutral.

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Issues: Whether the dyed yarn cleared by the appellant to its customer without payment of duty was eligible for exemption under Notification No. 214/86-C.E., and whether the demand of duty and penalty were sustainable.

Analysis: The arrangement involved the appellant manufacturing grey textured yarn, clearing it on duty payment, receiving delivery challans from the principal manufacturer under Rule 57J/57AC, and thereafter using the same material in its factory to manufacture dyed yarn for clearance to the principal manufacturer. The substantive conditions of Notification No. 214/86-C.E. were held to be satisfied because the transaction answered the nature of a job-work arrangement for manufacture of an intermediate product, and nothing in the Notification or in Rules 57J/57AC prevented the appellant from functioning both as supplier of inputs and as job-worker. The earlier Larger Bench ruling in Maruti Udyog was treated as supportive of this arrangement. The consequent duty demand and penalty could not survive, and the overall transaction was also found to be revenue neutral.

Conclusion: The clearance of dyed yarn without payment of duty was held to be in order, the exemption under Notification No. 214/86-C.E. was allowed, and the duty demand and penalty were set aside in favour of the appellant.

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