Captive-consumption exemption under Notification 217/86 upheld, but refund denied for failure to prove no unjust enrichment.

Notification No. 217/86 extended to gauges consumed captively within the factory because the exclusion for machines, tools and similar items depends on whether the item is specifically covered by the exclusionary language and on its direct role in production or processing; the gauges were found eligible for exemption. The refund claim nevertheless failed because unjust enrichment applies even to duty paid on captive consumption and duty paid under protest, and the assessee did not produce records proving that the duty burden had not been passed on; a chartered accountant's certificate alone was insufficient, especially where it recorded the duty as expenditure. Partial relief was therefore confined to the exemption issue.

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Issues: (i) Whether gauges used within the factory for captive consumption were entitled to exemption under Notification No. 217/86; (ii) Whether the refund claim based on such exemption was barred by unjust enrichment.

Issue (i): Whether gauges used within the factory for captive consumption were entitled to exemption under Notification No. 217/86.

Analysis: The exemption applied to inputs manufactured in a factory and used within the factory in or in relation to manufacture, but excluded machines, machinery, plant, equipment, apparatus, tools or appliances used for producing or processing goods or for bringing about change in any substance. The gauges were treated as measuring tools, yet the governing Supreme Court authority on the same notification held that the exclusion depends on whether the item falls within the specific exclusionary language and that items directly used in the manufacturing process may still qualify for the exemption.

Conclusion: The benefit of Notification No. 217/86 was available to the gauges consumed captively, in favour of the assessee.

Issue (ii): Whether the refund claim based on such exemption was barred by unjust enrichment.

Analysis: The doctrine of unjust enrichment was held applicable even for duty paid on captive consumption and also where duty was paid under protest. The claim was supported only by a chartered accountant's certificate, while the records necessary to show that the duty burden had not been passed on were not produced. The certificate itself stated that the duty had been charged as expenditure in the relevant years.

Conclusion: The assessee failed to establish absence of unjust enrichment, and the refund claim was not maintainable.

Final Conclusion: The exemption dispute was decided in favour of the assessee, but the refund claim failed on the ground of unjust enrichment, resulting in partial relief only.

Ratio Decidendi: For Notification No. 217/86, the exclusion for tools and similar items turns on their direct role in production or processing, while refund of duty remains subject to proof that the duty burden was not passed on, including in captive-consumption cases.

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