Duty adjustment against captively consumed inputs preserves exemption and defeats penalty where the demand is unsustainable.

Where duty already paid on the finished dipped fabrics exceeded or covered the duty attributable to the captively consumed raw material, the Tribunal held that the excess duty could be adjusted against the demand on the raw material. On that basis, the additional excise duty demand was unsustainable and the exemption under the relevant notification could not be denied. Because the penalty was proposed only as a consequence of the duty demand, and the demand itself failed after adjustment, the penalty also could not survive and was set aside. The appeal therefore succeeded in full.

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Issues: Whether duty paid on the finished goods could be adjusted against the demand raised on captively consumed raw material so as to deny the assessee the benefit of exemption, and whether penalty could survive when the duty demand itself was unsustainable.

Analysis: The duty in question was payable on a per kilogram basis, and it was accepted that the finished dipped fabrics were cleared on payment of additional duty on their actual weight. It was also accepted that once the unprocessed fabrics had borne additional excise duty, the dipped fabrics were exempt under the relevant exemption notification. The Tribunal found that the assessee had paid duty in excess of what was otherwise required on the unprocessed fabrics and that the excess duty paid on the cleared product could be adjusted against the demand being raised on the raw material. Reliance was placed on the principle permitting such adjustment of duty paid, including the ratio of the Supreme Court decision in Divya Enterprises.

Conclusion: The demand for additional excise duty was unsustainable after adjustment of duty already paid, and the exemption benefit could not be denied to the assessee.

Issue (ii): Whether penalty was leviable when the duty demand itself was not maintainable.

Analysis: The penalty was proposed only as a consequence of the duty demand. Once the Tribunal held that no duty demand could be sustained after adjustment, the foundation for penalty disappeared.

Conclusion: The penalty was not leviable and was set aside.

Final Conclusion: The duty demand and the penalty were both set aside, and the appeal succeeded in full.

Ratio Decidendi: Where duty already paid on the finished product exceeds or covers the duty payable on the captively consumed input, the assessee is entitled to adjustment and the exemption cannot be denied; a penalty based solely on the unsustainable demand cannot survive.

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