Deeming fiction for duty-paid inputs supports textile exemption where actual duty payment is not independently shown.

Notification No. 14/2002-C.E. was interpreted as allowing concessional or nil duty on textile yarn and fabrics where the statutory scheme created a deeming fiction that treated specified goods as duty-paid. The controlling point was that the condition requiring appropriate duty on inputs could not be denied merely because the intermediate or input goods were not independently shown to have suffered duty, since the legal fiction under Explanation II had to be given full effect. The exemption therefore remained available, and the associated demand for duty, interest, and penalty could not be sustained on that basis.

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Issues: Whether the assessees were entitled to concessional and nil rate of duty under Notification No. 14/2002-C.E. when the intermediate or input goods were not independently shown to have suffered duty, and whether duty, interest, and penalty could be sustained on that basis.

Analysis: The notification had to be read in the light of the Central Board's circulars and the later clarification introduced through Notification No. 37/2002-C.E. The controlling principle was that the condition of payment of appropriate duty on inputs could not be denied where the statutory scheme created a deeming fiction treating specified textile yarn and fabrics as duty-paid. The issue had already been settled by the Supreme Court, which recognised that Explanation II created a legal fiction and that such fiction must be given full effect. On that basis, the question whether duty had actually been paid on the intermediate products was no longer determinative.

Conclusion: The assessees were entitled to the exemption. The demand of duty, interest, and penalty could not be sustained against the assessee, and the Revenue's challenge to the grant of relief failed.

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