Input exemption under Notification 67/95-C.E. cannot be denied for capital goods used captively within the factory.

The proviso to Notification No. 67/95-C.E. denies input exemption only where the inputs are used in exempt final products or goods chargeable to nil duty. It does not extend to inputs used to manufacture capital goods that are themselves exempt and captively consumed within the factory. Reading the proviso otherwise would undermine the notification's object by withholding exemption from the inputs while continuing to exempt the capital goods made from them. The stated position is that the proviso cannot be applied to deny exemption in such a manufacturing chain, and the Revenue's view is rejected.

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Issues: Whether the proviso to Notification No. 67/95-C.E. dated 16-3-95 denies exemption to inputs used in the manufacture of capital goods that are captively consumed within the factory.

Analysis: The notification exempts capital goods manufactured in a factory and used within the factory of production, and also exempts inputs used in or in relation to the manufacture of final products, subject to the proviso that denies exemption to inputs used for exempt final products or goods chargeable to nil duty. The proviso was held to apply to inputs used for exempt final products, not to inputs used for manufacture of capital goods which are themselves exempt and used within the factory. Accepting the Revenue's interpretation would negate the object of the notification by denying exemption to the inputs while granting it to the capital goods made from them.

Conclusion: The proviso does not apply to inputs used in the manufacture of captively consumed capital goods, and the Revenue's appeal fails.

Ratio Decidendi: An exemption proviso directed at inputs used for exempt final products cannot be extended to deny exemption for inputs used to manufacture capital goods that are themselves exempt and used within the factory.

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