Captive intermediate product and marketability test govern excise refund, but unjust enrichment must still be examined before sanction.

A captive intermediate mixture of natural graphite and natural bentonite clay used in manufacturing pencil lead was treated as not amounting to manufacture and as failing the marketability test, so the duty paid on it was not sustainable on merits and the refund claim could not be rejected merely because the product was said to be excisable. The refund was therefore held admissible on merits. The matter was, however, remitted for fresh examination of unjust enrichment and other related refund eligibility issues, with the assessee to be given an opportunity to substantiate entitlement on those aspects.

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Issues: (i) Whether the mixture of natural graphite and natural bentonite clay used in the manufacture of pencil lead was excisable and whether the refund claim was admissible on merits; (ii) whether the issue of unjust enrichment required examination before grant of refund.

Issue (i): Whether the mixture of natural graphite and natural bentonite clay used in the manufacture of pencil lead was excisable and whether the refund claim was admissible on merits.

Analysis: The mixture was held to be covered by the earlier precedent that such an intermediate product, used captively in the manufacture of pencil lead, did not amount to manufacture and failed the test of marketability. On that basis, the duty paid on the mixture was not sustainable on merits, and the refund claim could not be rejected merely on the footing that the product was excisable.

Conclusion: The refund claim was held to be admissible on merits and the assessee succeeded on the merits issue.

Issue (ii): Whether the issue of unjust enrichment required examination before grant of refund.

Analysis: The lower authorities had not properly examined unjust enrichment, and the assessee was required to be afforded an opportunity to substantiate entitlement to refund on that aspect and on the other related eligibility issues.

Conclusion: The matter was remitted for reconsideration of unjust enrichment and connected refund eligibility issues.

Final Conclusion: The order denying refund was set aside, the assessee succeeded on merits, and the refund claim was sent back for fresh examination on unjust enrichment and other related issues.

Ratio Decidendi: An intermediate product used captively is not chargeable to excise duty unless marketability is shown, and a refund claim, though sustainable on merits, must still be examined for unjust enrichment before sanction.

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