Captive consumption exemption for cotton yarn applied before and after the withdrawal gap, with duty confined to the interregnum.

Single cotton yarn captively consumed for manufacture of cabled, doubled and multi-folded yarn was exempt before 20-05-1994, became dutiable from 20-05-1994 to 10-08-1994 when the exemption was withdrawn, and regained exemption from 11-08-1994 under Notification No. 121/94. Duty therefore applied only for the intervening period, with re-quantification required after crediting duty already paid on the downstream yarn products. The penalty did not survive in view of the mixed duty outcome and the direction for fresh computation, and was set aside.

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Issues: (i) Whether duty was payable on single cotton yarn captively consumed for manufacture of cabled, doubled and multi-folded yarn during the relevant periods, and (ii) whether the penalty imposed on the assessee was sustainable.

Issue (i): Whether duty was payable on single cotton yarn captively consumed for manufacture of cabled, doubled and multi-folded yarn during the relevant periods.

Analysis: The dispute turned on the effect of the relevant Central Excise Rules and the notifications governing captive consumption of single yarn. Prior to 20-05-1994, clearance of single yarn for captive consumption without payment of duty was permissible under Rules 9 and 49 read with Rule 56A of the Central Excise Rules, 1944. From 20-05-1994 to 10-08-1994, the exemption was withdrawn and duty became payable on single ply yarn before its captive consumption. From 11-08-1994 onwards, Notification No. 121/94 restored the exemption for single ply yarn consumed in the manufacture of doubled or multi-folded yarn. The duty already paid on the final products was also relevant for re-computation.

Conclusion: Duty was not payable before 20-05-1994 and was again not payable from 11-08-1994, but it was payable for the period 20-05-1994 to 10-08-1994, subject to re-quantification after giving credit for duty already paid on doubled, cabled and multi-folded yarn.

Issue (ii): Whether the penalty imposed on the assessee was sustainable.

Analysis: In view of the mixed outcome on duty liability, the period of dispute, and the direction for fresh quantification, the penal consequence did not survive on the facts of the case.

Conclusion: The penalty was set aside.

Final Conclusion: The appeals succeeded in part, the duty demand was confined to the interregnum period only, the matter was remitted for fresh computation, and the penalty was annulled.

Ratio Decidendi: Where captive consumption of goods is exempt before a specified date, taxable only during the intervening period when the exemption stands withdrawn, duty can be levied only for that interregnum and the liability must be recomputed after accounting for duty already borne at the downstream stage.

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