Exemption for intermediate yarn products protected once yarn entered the manufacturing stream; later notification could not retrospectively revive duty.

Cotton yarn and cellulosic spun yarn moved from the manufacturing department into other mill departments for consumption in making cotton fabrics were held to have been "used" within the exemption notification, because use begins when the yarn enters the manufacturing stream and is not confined to the final product stage. Under Rule 9, read with the retrospective explanation, such goods are deemed removed immediately before consumption or utilisation, so duty is determined by the law then in force. A later notification could not retrospectively impose excise duty on yarn that had already attracted exemption, and a demand notice based on prior duty forgone was unsustainable.

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Issues: (i) Whether cotton yarn and cellulosic spun yarn lying in the composite mill's departments had been "used" so as to satisfy the exemption condition under the relevant notification; (ii) Whether the later notification could validly impose excise duty on such yarn by reference to duty forgone before 15 July 1977, in the light of Rule 9 and the legal fiction of deemed removal.

Issue (i): Whether cotton yarn and cellulosic spun yarn lying in the composite mill's departments had been "used" so as to satisfy the exemption condition under the relevant notification.

Analysis: The expression "use" in the exemption notification was construed broadly. Once yarn was taken out of the department where it was manufactured and moved into other departments for consumption in the process of producing cotton fabrics, the process of use had begun. The condition of use was not confined to the final stage when fabric emerged, and the facts stated in the demand notice themselves showed that the yarn had been removed from storage and placed in the manufacturing stream.

Conclusion: The yarn had been used within the meaning of the exemption notification, and the contention to the contrary failed.

Issue (ii): Whether the later notification could validly impose excise duty on such yarn by reference to duty forgone before 15 July 1977, in the light of Rule 9 and the legal fiction of deemed removal.

Analysis: Excise is attracted to manufacture, but collection may be linked to removal for administrative convenience. Under Rule 9, as explained by the retrospective explanation, goods produced and consumed or utilised in the manufacturing process are deemed to have been removed immediately before such consumption or utilisation. On that basis, the relevant date for duty was the point when the yarn entered consumption in the composite mill. Since the operative notifications during the earlier period exempted the yarn, the later attempt to recover duty by the subsequent notification amounted to retrospective imposition. The later Supreme Court decision did not displace this result once the explanation to Rule 9 was taken into account.

Conclusion: The later notification could not validly fasten duty retrospectively on the exempt yarn, and the challenge to the demand notice failed.

Final Conclusion: The demand notice was unsustainable and the appeal did not merit interference with the order quashing it.

Ratio Decidendi: Where intermediate excisable goods are taken from the place of manufacture into the manufacturing stream for consumption in producing another commodity, they are deemed removed immediately before such consumption, and the duty applicable is that in force at that time; a later notification cannot retrospectively withdraw an exemption already earned.

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