Strict compliance for conditional exemption under Notification No. 5/1998-CE required; duty on finished goods did not cure diverted inputs.

Conditional exemption under Notification No. 5/1998-CE required strict compliance with both the prescribed use of exempt inputs in the specified water-handling pumps and, where goods were used outside the factory, the Chapter X procedure. The text states that duty paid on finished goods or on bought-out clearances did not cure diversion of exempt inputs to other manufacture or other use, because exemption law demands full adherence to the stated conditions. It further records non-utilisation of the inputs in the prescribed manner and concludes that the exemption could be denied, with duty, interest, and penalty confirmed.

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Issues: Whether compliance with the conditions of the exemption notification and the Chapter X procedure was mandatory for duty-free procurement of inputs, and whether utilisation of such inputs for purposes other than the notified manufacture could be treated as sufficient compliance because duty was paid on the finished goods or on clearances as bought-out items.

Analysis: The exemption granted under Notification No. 5/1998-CE was conditional and applied only when the inputs were used in the manufacture of the specified water-handling pumps and, where the use was outside the factory, the Chapter X procedure was followed. The demand relating to bought-out items already reflected the permissible course for such clearances, but that did not extend to inputs diverted for other manufacture or other use. The payment of duty on the finished goods did not make good the duty foregone on the inputs taken under the exemption. The law on exemption requires strict compliance with the stipulated conditions, and the plea of substantial compliance or accounting neutrality could not override the mandatory procedure. The record also showed non-utilisation of the exempted inputs in the prescribed manner.

Conclusion: Compliance with the exemption conditions and Chapter X procedure was mandatory, and failure to comply justified denial of the exemption, confirmation of duty, interest, and penalty. The Revenue's case succeeded.

Final Conclusion: The impugned orders were set aside and the original demand and penalty were restored and confirmed against the assessee.

Ratio Decidendi: Where an exemption notification is conditional, the prescribed conditions and procedure must be strictly and fully complied with, and duty paid on the manufactured goods does not substitute for the duty foregone on inputs wrongly procured or diverted under the exemption.

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