Captive excise duty on intermediate yarn, assessable value inclusion, and repeal of demand rule do not defeat accrued liability.

Cotton yarn manufactured in a composite mill and used captively for further manufacture of fabrics was treated as dutiable, because the exemption and deferment procedure only postponed collection of duty and did not remove the underlying liability. The duty on the intermediate yarn was held to form part of the cost of manufacture and was includible in the assessable value of the fabrics; the notification relied on by the assessee was inapplicable, and a later exemption could not operate retrospectively. The demand for differential duty was also upheld as time-barred objections based on the repeal of Rule 10 were rejected, since the recovery right had accrued under the then-existing rule.

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Issues: (i) Whether cotton yarn manufactured in a composite mill and used within the factory for further manufacture of fabrics was liable to excise duty; (ii) whether the duty payable on such yarn formed part of the assessable value of the fabrics; and (iii) whether the demand for differential duty was barred because it was made under the repealed Rule 10 of the Central Excise Rules, 1944.

Issue (i): Whether cotton yarn manufactured in a composite mill and used within the factory for further manufacture of fabrics was liable to excise duty.

Analysis: The exemption and deferment procedure under Rules 96V, 96W and 96X merely postponed collection of duty and did not eliminate the duty liability. The authorities distinguished the cases relied upon by the assessee on the ground that those decisions applied where manufacture was a continuous process and no removal of excisable goods as such had taken place. In the present case, the yarn came into existence in identifiable form and was used in the further manufacture of fabrics, which attracted duty.

Conclusion: The yarn was held to be dutiable, and this issue was decided against the assessee.

Issue (ii): Whether the duty payable on such yarn formed part of the assessable value of the fabrics.

Analysis: Since yarn was manufactured at an earlier stage than the fabrics, its value was part of the cost of manufacture of the final product. The compounded levy procedure only postponed the stage of collection of duty, and the fact that yarn duty was paid along with the fabrics did not change the character of that duty as part of the production cost. The notification relied on by the assessee was held inapplicable, and the later exemption notification could not operate retrospectively.

Conclusion: The duty element on yarn was held includible in the assessable value of the fabrics, against the assessee.

Issue (iii): Whether the demand for differential duty was barred because it was made under the repealed Rule 10 of the Central Excise Rules, 1944.

Analysis: The authorities held that the right of the State to recover short-levied duty and the corresponding liability had accrued under the old rule, and that the time limit for issuing demand notices remained governed by the rule in force when the duty short levy arose. On that basis, the repeal of Rule 10 without a saving clause was not treated as defeating the demand.

Conclusion: The demand was held to be within time and maintainable, against the assessee.

Final Conclusion: The revision applications were rejected and the orders confirming the duty demands were sustained.

Ratio Decidendi: Captively used excisable goods remain dutiable unless the manufacture is shown to be a continuous process with no removal as such, and where duty on an intermediate product is part of production cost, it is includible in the assessable value of the final product; repeal of a demand provision does not necessarily extinguish an accrued duty liability.

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