Duty-free export yarn benefit depends on correlation with exported fabrics, not on direct export by the same manufacturer.

Duty-free removal of cotton yarn under Rule 19(2) of the Central Excise Rules, 2002 for manufacture of export goods is not defeated merely because the finished fabrics are exported through a merchant exporter. The provision does not require the same person who procured the duty-free raw material to personally export the final goods. The decisive issue is proper correlation between the duty-free cotton yarn and the exported fabrics, and the record showed that this correlation had not been examined adequately by the authorities. The demand was therefore not sustainable without fresh examination, and the matter was remanded for reconsideration after hearing the assessee.

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Issues: Whether cotton yarn procured without payment of duty under Rule 19(2) of the Central Excise Rules, 2002 and used in manufacture of fabrics could be denied the benefit merely because the finished fabrics were exported through a merchant exporter, and whether the demand could stand without proper correlation of the duty-free yarn with the exported fabrics.

Analysis: Rule 19(2) permits removal of material without payment of duty for use in the manufacture or processing of goods which are exported, subject to approval by the Commissioner. The provision does not require that the same person who obtained the duty-free raw material must personally export the finished goods, nor does it prohibit export through a merchant exporter. The decisive question was whether the duty-free cotton yarn and the fabrics made therefrom could be properly correlated with the exported fabrics, and the record indicated that such correlation had not been examined adequately by the authorities below despite the request of the appellants.

Conclusion: The demand could not be sustained without examining the correlation issue afresh. The impugned order was set aside and the matter was remanded to the original authority for reconsideration after giving the appellants a reasonable opportunity of hearing.

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