Captive-consumption exemption applies to intermediate goods used in successive manufacturing stages, even with exempt downstream products.

Intermediate goods captively consumed within an integrated manufacturing process continued to qualify for exemption under the captive-consumption notifications, even when some were used for repair and maintenance or in the production of other exempt goods. The exemption was not lost merely because the intermediates fed successive stages of manufacture, and the fact that the final products were dutiable supported the continuing availability of the benefit. On that basis, the duty demands were held unsustainable and the assessee remained entitled to exemption.

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Issues: (i) Whether the assessee was correctly entitled to exemption under Notification No. 67/95-C.E. and its predecessor Notification No. 217/86-C.E., despite the intermediate goods being used in relation to goods exempted under Notification No. 65/95-C.E. and its predecessor Notification No. 281/86-C.E.; (ii) Whether the assessee was correctly entitled to exemption under Notification No. 67/95-C.E. and its predecessor Notification No. 217/86-C.E. where pig iron was captively consumed in the manufacture of fluted moulds, bottom plates and similar goods exempted under Notification No. 202/88-C.E. and Notification No. 46/94-C.E.

Issue (i): Whether the assessee was correctly entitled to exemption under Notification No. 67/95-C.E. and its predecessor Notification No. 217/86-C.E., despite the intermediate goods being used in relation to goods exempted under Notification No. 65/95-C.E. and its predecessor Notification No. 281/86-C.E.

Analysis: The exemption for captively consumed goods applied to intermediate products used within the factory for further manufacture. The fact that some intermediate goods were later used for repair and maintenance of machinery did not take them outside the chain of intermediate manufacture. The settled view was that, where the final products were cleared on payment of duty, captive use of intermediate products did not by itself disentitle the manufacturer from the benefit of the notification.

Conclusion: The demand of duty was not sustainable and the assessee was entitled to the exemption.

Issue (ii): Whether the assessee was correctly entitled to exemption under Notification No. 67/95-C.E. and its predecessor Notification No. 217/86-C.E. where pig iron was captively consumed in the manufacture of fluted moulds, bottom plates and similar goods exempted under Notification No. 202/88-C.E. and Notification No. 46/94-C.E.

Analysis: The goods manufactured from the pig iron remained intermediate products in an integrated steel plant and were used captively at successive stages of manufacture. The exemption could not be denied merely because the intermediate goods were used in the manufacture of other exempt goods. The situation was also revenue neutral because any duty, if payable, would be available as credit.

Conclusion: The duty demand was not sustainable and the assessee was entitled to the exemption.

Final Conclusion: The Revenue failed to establish any error in the dropping of the duty demands, and both appeals were liable to be rejected.

Ratio Decidendi: Intermediate goods captively consumed within an integrated manufacturing process continue to qualify for exemption under the captive-consumption notification, and such benefit is not lost merely because those intermediates are used in the manufacture of other exempt goods or further intermediate products, especially where the eventual final products are dutiable and the situation is revenue neutral.

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