Deemed credit for grey fabrics under processed-fabric notification upheld for independent processors.

Grey fabrics procured by an independent processor qualified for deemed credit under Notification No. 7/2001-C.E., because the scheme under Rule 57AK of the Central Excise Rules, 1944 was intended to approximate duty incidence on declared inputs rather than require direct use of every declared input in the final product. The notification applied to processed fabrics manufactured by both composite mills and non-composite processors, and its structure supported treating yarn used for grey fabrics as part of the input chain for processed fabrics. A narrower reading would have made the deemed credit scheme redundant and unworkable, so the departmental challenge failed.

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Issues: Whether grey fabrics procured by an independent processor qualified for deemed credit under Notification No. 7/2001-C.E. when the notification declared specified inputs for processed fabrics.

Analysis: The notification was issued under Rule 57AK of the Central Excise Rules, 1944 and operated on a different footing from ordinary Cenvat credit. Deemed credit was intended to approximate duty incidence on declared inputs and was not confined to cases where every declared input was directly used in the manufacture of the final product. The notification covered processed fabrics manufactured by both composite mills and non-composite processors, and its structure showed that the yarn used for grey fabrics could be treated as an input in the chain leading to processed fabrics. A contrary reading would make the scheme redundant and unworkable.

Conclusion: Grey fabrics procured by the processor were eligible for deemed credit under Notification No. 7/2001-C.E., and the Department's challenge failed.

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