Inter-factory cotton yarn clearance under Rule 96E could not attract duty demand or penalty where removal was without duty.

Cotton yarn removed from one factory to another under Rule 96E of the Central Excise Rules was treated as removal without payment of duty. The rule operates as a procedural exemption mechanism for such inter-factory clearances, and a duty demand contrary to that statutory scheme could not be sustained. Because the penalty rested on the same unsupported demand, it also had no legal basis. The CESTAT, Chennai held that both the duty demand and penalty were illegal and set them aside in favour of the assessee.

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Issues: Whether cotton yarn removed from one factory to another under Rule 96E of the Central Excise Rules could be subjected to duty demand and penalty.

Analysis: Rule 96E is framed as a procedure for removal of cotton yarn from one factory to another without payment of duty. The rule expressly permits removal of yarn without payment of duty, and the clearance in question fell within that statutory scheme. A demand of duty inconsistent with that rule could not be sustained, and the penalty founded on the same demand also lacked legal basis.

Conclusion: The duty demand and penalty were illegal and were set aside in favour of the assessee.

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