Concessional exemption must be applied before input-duty credit is set off against finished-goods duty liability.

Notification No. 128/77, which granted a concessional exemption on specified paper, had to be applied first to determine the duty on the finished product. Notification No. 201/79 then operated as a set-off mechanism for duty already paid on inputs, and the available credit could be adjusted only after the finished-goods duty liability was calculated. There was no requirement to correlate particular inputs with particular clearances. The lower authorities erred by reversing this sequence, and the duty demand had to be reworked on the basis that the exemption was applied before input-duty credit.

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Issues: Whether, for availing the benefit of Notification No. 128/77 and Notification No. 201/79, the duty on the finished paper had first to be determined at the concessional rate under Notification No. 128/77 and only thereafter adjusted by input-duty credit under Notification No. 201/79, or whether the credit under Notification No. 201/79 had to be worked out first so as to determine the concessional rate.

Analysis: Notification No. 128/77 granted exemption from so much of the duty leviable on specified paper as corresponded to the prescribed percentage of exemption, depending on the installed capacity of the paper mill. Notification No. 201/79 granted credit of duty already paid on inputs and, on its procedure, functioned like a set-off mechanism akin to Rule 56A of the Central Excise Rules, 1944. The credit was available for utilisation against the duty liability on the finished goods after that liability had been determined. There was no requirement of exact correlation between the particular inputs and the output cleared. The proper sequence, therefore, was to first compute the duty leviable on the finished paper after applying Notification No. 128/77 and then to adjust the available input-duty credit under Notification No. 201/79.

Conclusion: The method adopted by the lower authorities was incorrect. The appellants were entitled to apply Notification No. 128/77 first and then utilise the credit available under Notification No. 201/79, and the demand had to be reworked accordingly.

Ratio Decidendi: Where one notification grants a concessional exemption on the finished product and another grants credit for duty already paid on inputs, the duty on the finished product must first be determined under the exemption notification and only thereafter can the input-duty credit be set off against the resulting liability.

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