Revenue neutrality in captive consumption of pan masala defeats duty demand where credit offsets any tax on the intermediate product.

Unbranded pan masala captively used in manufacturing branded pan masala was treated as revenue neutral because any duty on the intermediate product would have been available as Modvat credit against duty on the final dutiable product. The assessee also asserted exemption under Notification No. 67/95-CE, and the text records that duty paid on the branded product exceeded the duty that would have been payable on the unbranded product. On that basis, the duty demand on the captively consumed unbranded pan masala was stated to be unsustainable and was set aside in favour of the assessee.

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Issues: Whether duty demand on unbranded pan masala captively consumed in the manufacture of branded pan masala was sustainable when the assessee claimed revenue neutrality and exemption under Notification No. 67/95-CE.

Analysis: The unbranded pan masala was admittedly used captively in the manufacture of branded pan masala, on which duty was being paid. The duty, if payable on the unbranded product, would have been available as Modvat credit for utilisation against the duty on the branded product. The assessee had in fact paid more duty on the branded product than what would have been payable on the unbranded product, making the entire exercise revenue neutral.

Conclusion: The duty demand was not sustainable and was set aside in favour of the assessee.

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