Captive-use inputs and intermediate products may qualify for exemption, while pre-notice duty payment can defeat penalty and interest.

Goods consumed within the factory, including materials used through an intermediate-product chain, may qualify as used in or in relation to manufacture for purposes of Notification No. 67/95-C.E., and the exemption was available on that basis. Where duty had already been paid before issuance of the show cause notice, penalty under Section 11AC of the Central Excise Act, 1944 and Rule 173Q of the Central Excise Rules, 1944 was not sustainable, and no separate interest liability survived on the reasoning adopted. The article therefore states that captive-use inputs and intermediate products can fall within the exemption, while prior discharge of duty negates consequential penal and interest demands.

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Issues: (i) Whether the goods/captive-use inputs were entitled to the benefit of Notification No. 67/95-C.E. on the footing that the materials were used in or in relation to manufacture through intermediate products; (ii) Whether penalty and interest were leviable when the duty had already been paid before issuance of the show cause notice.

Issue (i): Whether the goods/captive-use inputs were entitled to the benefit of Notification No. 67/95-C.E. on the footing that the materials were used in or in relation to manufacture through intermediate products.

Analysis: The exemption was considered in the assessee's own earlier case. The reasoning accepted that refractory materials and products consumed within the factory can be treated as used in or in relation to manufacture, and that an item consumed in the production of an intermediate product, which in turn is consumed in manufacture of the final product, satisfies the notification requirement. The prior decision and the Board's clarification on intermediate products supported this approach.

Conclusion: The issue was decided in favour of the assessee and the benefit of Notification No. 67/95-C.E. was available.

Issue (ii): Whether penalty and interest were leviable when the duty had already been paid before issuance of the show cause notice.

Analysis: The duty amount had already been deposited before the show cause notice. In that factual setting, the basis for penal action under the excise provisions was not sustainable, and no separate interest liability survived on the footing adopted in the order.

Conclusion: Penalty under Section 11AC of the Central Excise Act, 1944 and Rule 173Q of the Central Excise Rules, 1944 was not sustainable, and interest was also held not payable.

Final Conclusion: The assessee obtained relief on the exemption question and on the consequential penal and interest demands, leaving no surviving liability under the order.

Ratio Decidendi: Goods consumed within the factory as part of an intermediate-product chain can qualify as used in or in relation to manufacture for exemption purposes, and penalty is not justified where the duty has already been discharged before the show cause notice.

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