Captive input exemption denied where intermediate product was exemptly cleared, making the proviso under Notification No. 217/86-C.E. apply.

Notification No. 217/86-C.E. allowed exemption for specified inputs used within the factory in manufacturing final products, but the proviso withdrew the benefit where the input was used in relation to exempt or nil-rated final products. Caustic soda was used captively to produce anhydrous sodium sulphate, and that intermediate product was itself cleared under exemption. Because the proviso was attracted on these admitted facts, the later use of the intermediate product in manufacturing rayon yarn did not restore eligibility. The exemption was therefore unavailable for the caustic soda, and the demand was sustainable.

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Issues: Whether caustic soda used captively in the manufacture of anhydrous sodium sulphate was eligible for exemption under Notification No. 217/86-C.E. when the anhydrous sodium sulphate was further used in the manufacture of rayon yarn but was itself cleared under exemption.

Analysis: Notification No. 217/86-C.E. granted exemption to specified inputs used within the factory in the manufacture of final products, but its proviso denied the benefit where the input was used in or in relation to the manufacture of final products exempt from the whole of duty or chargeable to nil rate of duty. On the admitted facts, caustic soda was used to manufacture anhydrous sodium sulphate, and that intermediate product was cleared under exemption. The condition in the proviso was therefore attracted, and the input did not qualify for exemption merely because the intermediate product was later used in the manufacture of rayon yarn.

Conclusion: The exemption under Notification No. 217/86-C.E. was not available to the caustic soda used for manufacture of exempt anhydrous sodium sulphate, and the demand was sustainable.

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