Captive use exemption for factory maintenance goods upheld where internal transport and production-linked repairs form part of manufacture.

Acetylene gas captively consumed inside the factory for repair and maintenance of railway tracks, wagons, locomotives and departmental machinery was treated as used in relation to manufacture and within the scope of the exemption notifications. The internal railway system was regarded as an integral and inseparable part of the manufacturing process because it supported movement of inputs and intermediate goods and connected production-related activities. Use of the gas in the connected shops and departments was also considered to satisfy the manufacturing nexus. On that basis, the exemption was held applicable and the duty demand was set aside.

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Issues: Whether acetylene gas captively consumed within the factory for repair and maintenance of railway tracks, wagons, locomotives, and departmental machinery was eligible for exemption under Notification No. 65/95-CE or Notification No. 67/95-CE.

Analysis: The relevant notifications exempt goods manufactured in a factory and used within the factory of production in or in relation to manufacture of final products, or used for maintenance of machinery installed in the factory. The disputed acetylene gas was used in connection with internal railway movement, transport of inputs and intermediate products, and repair and maintenance activities within the plant. The railway network inside the factory was treated as an integral and inseparable part of the manufacturing process, and the use of acetylene gas in the connected shops and departments was also found to be in relation to manufacture. On that basis, the demand could not be sustained by denying the exemption.

Conclusion: The exemption was held to be applicable and the demand was set aside.

Ratio Decidendi: Goods used within the factory as an integral and inseparable part of the manufacturing process, including for internal transport and maintenance connected with production, are used in relation to manufacture and qualify for exemption where the notification so provides.

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