Duty-paid captive input regularisation supports exemption for cabled yarn, while unproved suppression defeats penalty

Exemption for cabled yarn under Heading 56.07 was held available where the yarn was made from duty-paid monofilament lycra yarn and captively used cotton material, once the duty position on the cotton input was regularised. The record did not clearly establish that the intermediate material was cotton roving rather than cotton yarn, and the declarations and classification lists disclosed the manufacturing process. In the absence of proved suppression or misstatement, the penalty was unsustainable, and the demand was required to be recomputed in light of duty, if any, on the captively consumed cotton yarn.

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Issues: Whether the exemption notifications for goods of Heading 56.07 were available when the cabled yarn was manufactured using duty-paid monofilament lycra yarn together with captively used cotton yarn or cotton roving, and whether the demand, penalty and invocation of suppression were sustainable.

Analysis: The declarations and classification lists filed by the assessee disclosed the manufacture of cabled yarn and the use of lycra yarn and cotton-based material. The dispute centred on whether the intermediate cotton material was cotton roving or cotton yarn. The material had not been clearly characterised, and the assessee had consistently claimed that, if duty were payable on the captively used cotton material, the exemption should still follow after duty was discharged on that input. The imported lycra yarn was already duty paid, Modvat credit was otherwise available, and the record did not substantiate suppression or mis-statement. In the circumstances, the exemption could be extended after charging appropriate duty on the cotton yarn manufactured and captively consumed, following the principle that exemption is available when the duty position on inputs is regularised.

Conclusion: The exemption benefit was allowed after duty was charged on the captively used cotton yarn, the penalty was unsustainable and was set aside, and the demand was to be worked out accordingly in favour of the assessee.

Ratio Decidendi: Where captively used input material is later subjected to appropriate duty, exemption linked to duty-paid inputs cannot be denied merely on account of the initial duty status, and penalty cannot stand in the absence of proved suppression.

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