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Issues: (i) Whether exemption under Notification No. 108/1995-CE could be denied merely because the goods were supplied to contractors executing the project instead of directly to the Project Authorities; (ii) Whether Explanation 2 inserted w.e.f. 01.03.2008 denied exemption where capital goods were withdrawn only after completion of the project.
Issue (i): Whether exemption under Notification No. 108/1995-CE could be denied merely because the goods were supplied to contractors executing the project instead of directly to the Project Authorities.
Analysis: The exemption notification covered supplies made to projects financed by international organizations and approved by the Government of India. The decisive condition was supply for the project, and prior precedent had held that clearance to the contractor executing the project satisfied that requirement. The Court also noted that the higher courts had affirmed that such supply could not be denied exemption merely because the consignee was the contractor.
Conclusion: The denial of exemption on the ground that the goods were supplied to contractors was unsustainable and was held against the Revenue.
Issue (ii): Whether Explanation 2 inserted w.e.f. 01.03.2008 denied exemption where capital goods were withdrawn only after completion of the project.
Analysis: Explanation 2 was construed as restricting withdrawal of goods during the currency of the project, not after the project had ended. The Court rejected the view that only goods permanently incorporated in the project were eligible, holding that the explanation could not enlarge the main notification beyond its scope. The earlier contrary observation in Bird Machines was treated as obiter and not controlling, while the practical impossibility of retaining project equipment permanently was also recognised.
Conclusion: Exemption could not be denied on the basis of post-completion withdrawal of the goods, and the issue was decided in favour of the assessee.
Final Conclusion: The impugned denial of exemption was held unjustified, the demand and penalties did not survive, and the appeals succeeded with consequential relief.
Ratio Decidendi: For Notification No. 108/1995-CE, supply to a contractor executing a qualifying project is treated as supply to the project, and Explanation 2 does not deny exemption where goods are withdrawn only after completion of the project; a notification explanation cannot be construed to enlarge the main exemption beyond its intended scope.
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