Captive consumption exemption for chemicals used in steam generation cannot be denied on a mere presumption of alternate use.

Chemicals used in demineralising water for captive steam generation qualified for Notification No. 217/86 because they were consumed in an integral manufacturing process connected with paper production. The denial of exemption could not rest on a mere presumption that steam or electricity generated from it might be diverted elsewhere; no concrete evidence of such diversion was shown. Steam remained an intermediate product captively consumed in manufacture, and the generation of electricity from high-pressure steam was treated as part of the same energy-transfer process. On that basis, the exemption could not be refused, and the demand and penalty were unsustainable.

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Issues: Whether chemicals used in the demineralisation of water for captive generation of steam, which in turn was used in the paper-making process and partly for generation of electricity, were eligible for the benefit of Notification No. 217/86.

Analysis: The chemicals were consumed in the water treatment process which was integrally connected with the manufacture of steam used within the factory. The denial of benefit rested on a presumption that the steam or the electricity generated from it might be used elsewhere, but there was no concrete evidence of such diversion. The fact that steam was exempt from duty did not alter the position, because the relevant consideration was that the steam was an intermediate product captively consumed in the manufacture of the final dutiable product, namely paper. The generation of electricity from high-pressure steam was treated as an energy transfer within the manufacturing process and not as a basis to deny the exemption on a mere apprehension of alternate use.

Conclusion: The benefit of Notification No. 217/86 could not be denied, and the demand and penalty were unsustainable.

Final Conclusion: The appeal succeeded and the impugned orders were set aside, with the assessee obtaining relief on the exemption claim.

Ratio Decidendi: An exemption for inputs used in relation to manufacture cannot be refused on a mere presumption of possible alternative use when the inputs are consumed in an integral captive process leading to the final dutiable product.

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