Conditional excise exemption requires captive consumption; internally used steam later supplied elsewhere was not eligible, and duty was partly time-barred.

For conditional central excise exemption, "use" in the factory was treated as captive consumption or consumption that exhausts the goods; steam that was first used internally but later supplied to other units did not satisfy that requirement, so the exemption was unavailable. On limitation, disclosure in the classification list of medium-pressure and low-pressure steam and its supply to neighbouring industries was treated as substantial, making Rule 10A inapplicable and bringing the demand within Rule 10. The demand was therefore enforceable only for the period falling within one year before the show cause notice, with the earlier period time-barred.

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Issues: (i) Whether steam generated in the factory and used internally for motive power, but thereafter supplied to other units as medium pressure or low pressure steam, was eligible for exemption under Notification No. 118/75-C.E. dated 30-4-1975. (ii) Whether the demand for duty was barred by limitation and whether the show cause notice was governed by Rule 10A or Rule 10 read with Rule 173J.

Issue (i): Whether steam generated in the factory and used internally for motive power, but thereafter supplied to other units as medium pressure or low pressure steam, was eligible for exemption under Notification No. 118/75-C.E. dated 30-4-1975.

Analysis: The exemption was linked to goods manufactured in a factory and intended for use in that factory or in any other factory of the same manufacturer. The term "use" in such exemption notifications was treated as meaning use in the sense of consumption or using up, commonly described as captive consumption. The steam, though first used within the factory, retained utility and was later supplied to other factories, so the first internal use did not amount to the kind of use contemplated by the notification. The analogy drawn from other conditional exemption notifications showed that a qualifying use must ordinarily exhaust or substantially consume the article as such.

Conclusion: The steam supplied to other factories as medium pressure or low pressure steam was not eligible for exemption under Notification No. 118/75-C.E.

Issue (ii): Whether the demand for duty was barred by limitation and whether the show cause notice was governed by Rule 10A or Rule 10 read with Rule 173J.

Analysis: The classification list had specifically disclosed the production of medium pressure and low pressure steam and its supply to neighbouring industries. The excise authorities had approved the list without asserting dutiability, and the disclosure was treated as substantial. On that basis, Rule 10A was held inapplicable and the case was treated as falling under Rule 10. As the relevant time-limit was one year, the demand could operate only prospectively from the date falling within that period, and earlier demands were time-barred.

Conclusion: The demand was enforceable only for the period within one year prior to the show cause notice, and the earlier period was barred by limitation.

Final Conclusion: The exemption claim failed, but the duty demand was restricted on limitation grounds, resulting in only partial relief to the appellants.

Ratio Decidendi: For a conditional exemption based on use in the factory, "use" means consumption or using up of the goods, not merely an initial internal employment that leaves the goods capable of subsequent removal and use elsewhere.

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