Duty-paid yarn exemption survives intermediate processing where statutory records show open disclosure and no suppression.

Exemption under Notification No. 6/2002-CE was upheld for dyed yarn made from duty-paid texturised yarn, even though an intermediate twisted yarn stage had not suffered duty, because the principal input had already borne duty and no CENVAT credit was taken in the relevant process. The demand was also held time-barred, since the exemption claim was openly disclosed in declarations and statutory records and did not amount to suppression or deliberate misstatement with intent to evade duty. The impugned demand and penalty were therefore set aside.

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Issues: (i) whether dyed yarn manufactured from duty-paid texturised yarn, through an intermediate twisted yarn stage on which no duty was paid, satisfied the condition in Notification No. 6/2002-CE; (ii) whether the demand was barred by limitation for want of suppression or misstatement.

Issue (i): whether dyed yarn manufactured from duty-paid texturised yarn, through an intermediate twisted yarn stage on which no duty was paid, satisfied the condition in Notification No. 6/2002-CE.

Analysis: The exemption condition required the final goods to be manufactured out of duty-paid textured or draw-twisted yarn and that no CENVAT credit had been taken in the relevant process. The presence of twisted yarn as an intermediate stage did not alter the duty-paid character of the original input where the starting material was duty-paid texturised yarn and no credit had been availed. The same condition in the notification had already been construed to permit exemption where the principal yarn had suffered duty, even if an intermediate stage did not.

Conclusion: The condition of Notification No. 6/2002-CE was satisfied and the demand could not be sustained on merits.

Issue (ii): whether the demand was barred by limitation for want of suppression or misstatement.

Analysis: The concessional exemption had been claimed openly in declarations and statutory records. A claim for exemption does not, by itself, amount to misrepresentation. In the absence of suppression or deliberate misstatement with intent to evade duty, the longer period of limitation could not be invoked.

Conclusion: The demand was time-barred.

Final Conclusion: The impugned demand and penalty were set aside and the assessee succeeded on both merits and limitation.

Ratio Decidendi: Where a notification grants exemption to goods manufactured out of duty-paid specified yarn, the exemption is not denied merely because an intermediate processing stage emerges without duty payment, so long as the principal input had suffered duty and the prescribed credit condition is met; open claim of exemption in statutory records does not amount to suppression for extending limitation.

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