Captive consumption exemption under Notification 67/1995-CE applies to intermediate fabrics despite SSI exemption on final garments.

Captively consumed processed fabrics used to manufacture knitted garments were treated as eligible for exemption under Notification No. 67/1995-CE, even though the final garments were cleared under SSI exemption. The operative question was whether the proviso to the notification, read with clause (vi) and the Rule 6 obligation under the Cenvat Credit Rules, barred exemption for intermediate goods merely because the final products were exempt. On the facts found comparable to the Supreme Court's captive-consumption ruling on clinker and exempt cement, the proviso did not defeat the benefit where the prescribed obligation was satisfied, and the earlier Tribunal ruling relied on by the Revenue was distinguished. The duty demand was therefore unsustainable.

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Issues: Whether processed fabrics manufactured as intermediate goods and captively consumed in the manufacture of knitted garments were entitled to exemption under Notification No. 67/1995-CE when the final products were cleared under SSI exemption under Notification No. 8/2003-CE.

Analysis: The intermediate goods were used captively in the manufacture of the final products. The exemption under Notification No. 67/1995-CE was denied by the department on the basis of the proviso, since the final products were exempted goods. The relevant question was whether the legal effect of the proviso and clause (vi) of the notification, read with the obligation under Rule 6 of the Cenvat Credit Rules, 2002, permitted denial of exemption in such a situation. The facts were found to be pari materia with the situation considered by the Supreme Court in relation to captive consumption of clinker for manufacture of exempt cement, where it was held that the proviso would not defeat the exemption when the prescribed obligation stood discharged. The earlier Tribunal decision relied on by the Revenue was distinguished as it had not examined the proviso or its legal effect.

Conclusion: The exemption under Notification No. 67/1995-CE was available to the intermediate processed fabrics, and the demand of Central Excise duty was not sustainable.

Final Conclusion: The impugned orders were set aside and all the appeals were allowed on the basis that captive intermediate goods could not be denied exemption merely because the final products were cleared under SSI exemption, where the governing proviso and related legal position supported the assessee.

Ratio Decidendi: Where captively consumed intermediate goods otherwise fall within the scope of Notification No. 67/1995-CE, exemption cannot be denied merely because the final products are exempted under a separate notification if the governing proviso does not bar the benefit on the facts found to be comparable and the applicable obligation is satisfied.

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