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Issues: (i) Whether nozzle holders were manufactured in the course of construction of injectors; (ii) whether the nozzle captively consumed for injector manufacture was marketable; (iii) whether nozzle and nozzle holders used in the manufacture of injectors were entitled to exemption under the relevant notifications.
Issue (i): Whether nozzle holders were manufactured in the course of construction of injectors.
Analysis: The evidence showed that injectors were manufactured through a continuous process of assembly, testing and packing, and that nozzle holders emerged only after the injector had been manufactured and the bare nozzle removed. The departmental case that a nozzle holder first emerged and was then used in injector manufacture was not established. On the facts found, nozzle holder did not arise as an independently manufactured intermediate product before injector manufacture.
Conclusion: The issue is decided in favour of the assessee and it was held that there was no manufacture of nozzle holder in the construction of injectors.
Issue (ii): Whether the nozzle captively consumed for injector manufacture was marketable.
Analysis: The record distinguished between nozzles cleared for the spare market and nozzles used captively. The latter were not subjected to korex dipping or equivalent encapsulation, which was necessary to impart shelf-life and make them suitable for sale. The department did not discharge the burden of proving marketability in the condition in which the captive nozzles were used.
Conclusion: The issue is decided in favour of the assessee and the captively consumed nozzle was held to be not marketable.
Issue (iii): Whether nozzle and nozzle holders used in the manufacture of injectors were entitled to exemption under the relevant notifications.
Analysis: Notification No. 217/85-C.E. and Notification No. 75/86-C.E. were construed along with the Board's clarification in Circular No. 14/88 and the Hyderabad Collectorate trade notice. The exclusion of nozzles and nozzle holders was read as applying to their independent clearance, while parts going into exempt component parts were treated as covered by the exemption. The trade notice clarifying that the benefit continued even when nozzles and nozzle holders were coupled to form injectors was treated as applicable across jurisdictions.
Conclusion: The issue is decided in favour of the assessee and nozzle as well as nozzle holders were held entitled to exemption under Notification Nos. 217/85-C.E. and 75/86-C.E.
Final Conclusion: The demand was unsustainable, the exemption benefit was available, and the appeals succeeded with consequential relief.
Ratio Decidendi: When the department fails to establish manufacture of an intermediate product and marketability of the captively consumed article, and the relevant exemption notifications are applicable on a proper construction, duty demand cannot be sustained.
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