Substantial expansion for exemption can be met by replacement of machinery if installed capacity rises by more than 25%.

For the Notification dated 10 June 2003, substantial expansion was clarified to mean an increase in the installed capacity of an existing unit by not less than 25%, and additional plant and machinery was not indispensable in every case. The decisive test is whether the expansion effort actually increases installed capacity; replacement of existing plant and machinery can satisfy the requirement if it produces an increase of more than 25%. That clarification was treated as supporting the exemption claim, and the CESTAT's view was left undisturbed.

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Issues: Whether, for the purpose of the Notification dated 10 June 2003, substantial expansion entitled the unit to the exemption benefit when installed capacity was increased by not less than 25% through replacement of existing plant and machinery, and whether the clarification dated 21 January 2004 altered that position.

Analysis: The clarification explained that substantial expansion means an increase in the installed capacity of an existing unit by not less than 25%. It also clarified that additional plant and machinery is not indispensable in every case, and that the decisive question is whether the installed capacity has in fact increased because of the expansion effort. The reasoning was found to accord with the earlier Division Bench view that replacement of existing plant and machinery, if it results in an increase of more than 25% in installed capacity, satisfies the requirement of substantial expansion under the notification.

Conclusion: The clarification was held to support the exemption claim, and the decision of the CESTAT was treated as not liable to interference.

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