Input credit on intermediate goods cleared under Notification 217/86-C.E. upheld where duty would only shift the credit chain.

Intermediate products cleared to another unit under Notification No. 217/86-C.E. for further manufacture of dutiable final products were held eligible for the notification's exception, subject to Chapter X procedure. The normal bar on input credit for exempted goods did not apply in this setting, because insisting on duty payment and reversal of credit would defeat the notification's purpose and merely shift the credit chain to the receiving unit. On that reasoning, the duty demand and penalty were not sustainable and were set aside.

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Issues: Whether duty demand and penalty were sustainable when intermediate products were cleared to another unit under Notification No. 217/86-C.E. for further manufacture of dutiable final products without reversing input credit.

Analysis: The normal rule is that credit on inputs used in exempted goods is not admissible, but Notification No. 217/86-C.E. creates an exception for removal of intermediate products without payment of duty for further use in the manufacturer's other unit, subject to Chapter X Procedure. Requiring duty payment and reversal of credit in such a situation would defeat the purpose of the notification. The arrangement also did not confer any extra benefit, because payment of duty at the intermediate stage would only shift the credit chain to the second unit. The conclusion was supported by the principle applied in the cited Supreme Court decision.

Conclusion: The duty demand and penalty were not sustainable and were set aside.

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