Captively consumed capital goods remained exempt under Notification No. 67/95; proviso could not override the main exemption.

Notification No. 67/95 continued to exempt capital goods manufactured in a factory and consumed captively within the same factory, along with inputs used in that manufacture. The proviso excluding inputs used in wholly exempt or nil-duty final products did not apply to such captively consumed capital goods, because treating them as exempt final products would nullify the specific capital goods exemption in the main clause. The notification was construed to avoid multiple duty stages and unnecessary duty-payment and credit cycles. The exemption therefore remained available, and the duty demand was unsustainable.

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Issues: Whether captively consumed capital goods manufactured within the factory were entitled to exemption under Notification No. 67/95, and whether the proviso to the notification denied exemption to the inputs used in their manufacture merely because the final captively consumed capital goods were exempt.

Analysis: The notification granted exemption both to capital goods manufactured in a factory and used within the factory of production, and to inputs so used, subject to the proviso excluding inputs used in the manufacture of final products that were wholly exempt or chargeable to nil duty. The crucial question was whether captively consumed capital goods falling under the capital goods clause could also be treated as exempt final products for the purpose of the proviso. A construction that brought such capital goods within the proviso would nullify the specific exemption granted to captively consumed capital goods under the main clause. The scheme of the notification was to prevent multiple stages of duty and to avoid forcing the assessee into a circuitous cycle of duty payment and credit availment.

Conclusion: Captively consumed capital goods did not fall within the excluded category in the proviso, and the exemption under Notification No. 67/95 remained available. The demand was unsustainable.

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