Input exemption for cut-tobacco upheld where oily cigarettes were destroyed as unfit and duty was remitted

Cut-tobacco used to manufacture oily cigarettes remained eligible for exemption under Notification No. 121/94 because the inputs were applied to the intended manufacturing process, even though the finished cigarettes were found unfit for human consumption, destroyed, and the duty on them was remitted. The exemption could not be denied merely because the final goods were not marketable and no duty was collected on them. The duty demand on the cut-tobacco was therefore unsustainable.

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Issues: Whether cut-tobacco used in the manufacture of oily cigarettes was entitled to exemption under Notification No. 121/94, where the oily cigarettes were destroyed as unfit for human consumption and duty on them was remitted.

Analysis: The input cut-tobacco was accepted to have gone into the manufacture of oily cigarettes. Those cigarettes were found to be unfit for human consumption, were not marketable, and were permitted to be destroyed, with remission of duty granted on that ground. In such circumstances, the input could not be treated as having been used in a product that was exempt from duty or chargeable at nil rate merely because the final goods were destroyed and no duty was collected on them. The purpose and intended use requirement under Notification No. 121/94 was satisfied, and the denial of exemption on cut-tobacco was inconsistent with the principle that inputs used in goods destroyed for reasons beyond the assessee's control remain eligible for the benefit.

Conclusion: The exemption under Notification No. 121/94 was available to the cut-tobacco, and the demand of duty on that input was unsustainable.

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