Excess wastage alone cannot justify duty demand on duty-free inputs without proof of diversion or misuse

Excess wastage beyond prescribed industrial norms, by itself, does not establish misuse of duty-free inputs where there is no evidence of diversion or non-use for the intended manufacture. Inputs obtained under Notification No. 1/95-C.E. and the Chapter X procedure remain protected unless the record shows breach of the procurement conditions. In the absence of proof that the duty-free yarn was diverted or otherwise improperly accounted for, a demand under Rule 196 of the Central Excise Rules, 1944 is not sustainable, and the connected penalty under Rule 209 also falls with the duty demand.

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Issues: Whether excess wastage beyond the prescribed industrial norms, without proof of diversion of duty-free inputs, justified confirmation of duty under Rule 196 of the Central Excise Rules, 1944 and penalty under Rule 209 of the Central Excise Rules, 1944.

Analysis: The duty-free inputs were procured under Notification No. 1/95-C.E. subject to Chapter X procedure. The excess wastage norms were only industry averages and could not, by themselves, establish that the inputs were not used for the intended manufacture. The record did not show diversion of the duty-free yarn, and the claimed position that the inputs were fully accounted for in the manufacture of terry towels and resultant waste was not effectively disputed. In the absence of diversion or other violation of the procurement condition, the mere fact of higher wastage could not sustain a demand under Rule 196. Once the duty demand failed, the connected penalty also could not survive.

Conclusion: The demand of duty and the penalties were not sustainable, and the issue was decided in favour of the assessee.

Final Conclusion: The appeals succeeded and the consequential relief followed in law.

Ratio Decidendi: Mere excess wastage over prescribed industrial norms, without evidence of diversion or misuse of duty-free inputs, does not establish breach of the Chapter X procedure so as to justify duty demand or penalty.

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