Transitional credit on grey fabrics remains available despite dealer custody, as the input character is unchanged for processors.

Grey fabrics were treated as input goods for transitional credit under Notification No. 35/2003-CE (N.T.), and that character was not lost because the goods were held by a dealer rather than directly by a processor. The Tribunal followed its earlier ruling, affirmed by the Gujarat High Court, that man-made grey fabrics are finished goods in the hands of the manufacturer but remain inputs for the processor. The notification was read to cover stock held through traders as well as stock lying with processors, so transitional credit could not be denied on the dealer objection. The Revenue challenge failed and the assessee's credit entitlement was sustained.

---

---

Issues: Whether grey fabrics held by a dealer were to be treated as input for the purpose of transitional credit under Notification No. 35/2003-CE (N.T.) dated 10.04.2003, and whether such credit could be denied on the ground that the goods were held by a dealer rather than directly by the processor.

Analysis: The issue had already been decided by the Tribunal and affirmed by the Gujarat High Court. It was held that man-made grey fabrics are finished goods in the hands of the manufacturer, but remain inputs for the processor. The interposition of a dealer does not change the character of the goods as inputs. The notification was held to envisage credit not only for stock with traders but also for stock lying with processors, and the departmental objection was thus covered by the earlier ruling.

Conclusion: Transitional credit could not be denied merely because the grey fabrics were held by a dealer. The Revenue's challenge failed.

Final Conclusion: The appeal was rejected and the assessee's entitlement to the transitional credit under the notification was sustained.

Ratio Decidendi: The introduction of a dealer in the chain does not alter the character of grey fabrics as input goods for the processor, and transitional credit under the notification cannot be denied on that basis.

---