Beneficial exemption for goods used in manufacture extends to HSD oil for fork-lifts and integrated processing within an export unit.

Notification No. 126/94-C.E. was construed broadly to cover goods required for production or manufacture in an export-processing setup, including use "in connection with" such activity. HSD oil used for fork-lifts was treated as eligible because material handling equipment within the factory was connected to manufacturing operations. HSD oil used in the heat treatment line, dye preheating system and paint line was also covered because those processes formed part of the manufacturing activity. The fact that approval had been taken for captive generating sets did not defeat the exemption where the fuel was duly accounted for and used only for the permitted purposes, so the duty demand and penalty were unsustainable.

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Issues: Whether HSD oil procured duty free under Notification No. 126/94-C.E. could be treated as eligible for exemption when used in fork-lifts and in the manufacturing operations of an export-oriented unit, and whether duty and penalty were therefore demandable.

Analysis: The notification exempted specified goods required for use in an Export Processing Zone for the production or manufacture of articles for export, or for use in connection with such production, manufacture or packaging. The specified eligible goods included material handling equipment such as fork-lifts, and the expression "in connection with" was applied broadly. Fork-lifts were treated as equipment used inside the factory for movement of semi-finished and finished goods and thus connected with manufacturing operations. HSD oil used in the heat treatment line, dye preheating system and paint line was also held to be covered because those processes formed part of the manufacturing activity. The fact that approval had been taken for captive generating sets did not justify denial of the exemption where the quantity was accounted for and used only for the permitted purposes.

Conclusion: The HSD oil used for fork-lifts and manufacturing operations was covered by the notification, and the duty demand and penalty were not sustainable.

Ratio Decidendi: A beneficial exemption notification covering goods used for production or manufacture, or in connection with such production or manufacture, extends to fuel used for material handling equipment and integrated manufacturing processes within the export unit when the goods are duly accounted for and used for the notified purposes.

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