Inter-factory exemption depends on a functioning receiving factory, while unproved fabrication claims may still fail on duty and penalties.

Inter-factory exemption under Notification No. 118/75-C.E. applied only when the receiving premises was already a functioning factory of the same manufacturer. Because the foundry unit was still under set-up and not yet manufacturing excisable goods, most removals from the fabrication unit did not qualify for exemption; only the deliveries covered by specified challans were accepted. Duty on the goods covered by Annexure D was set aside for lack of satisfactory proof of fabrication in the factory premises. The penalties under the Central Excise Rules, 1944 were partly reduced, with the penalty under Rule 226 removed and the penalty under Rule 173Q left unchanged.

---

---

Issues: (i) Whether removals of goods from the fabrication unit to the foundry unit were entitled to the benefit of Notification No. 118/75-C.E.; (ii) whether duty was payable on the goods covered by Annexure D; and (iii) whether the penalties imposed under the Central Excise Rules, 1944 required modification.

Issue (i): Whether removals of goods from the fabrication unit to the foundry unit were entitled to the benefit of Notification No. 118/75-C.E.

Analysis: The notification applied only where goods produced in one factory were removed to another factory of the same manufacturer for use there. The foundry unit was still under set-up during the relevant period and no excisable goods were being manufactured there. On the definition of factory in Section 2(e) of the Central Excises and Salt Act, 1944, and on the contemporaneous licensing position, the foundry unit was not yet a functioning factory for the purposes of the notification. The removal of goods, except those covered by specified delivery challans, was therefore treated as removal for consumption from the structural factory and not as inter-factory transfer qualifying for exemption.

Conclusion: The claim to exemption under Notification No. 118/75-C.E. failed, except for the goods covered by Delivery challan Nos. 583, 588, 594, 596 and 599 of Annexure G.

Issue (ii): Whether duty was payable on the goods covered by Annexure D.

Analysis: There was no satisfactory evidence of fabrication in the factory premises, and the adjudicating authority had proceeded on inference rather than positive proof. In view of the circumstances, the appellant was given the benefit of doubt on this component.

Conclusion: The duty demand relating to Annexure D was set aside.

Issue (iii): Whether the penalties imposed under the Central Excise Rules, 1944 required modification.

Analysis: The order took account of the surrounding circumstances, including the nature of the violations and the position regarding the personal ledger balance, and reduced some penalties while leaving the penalty under Rule 173Q unchanged. The penalty under Rule 226 was wholly removed.

Conclusion: The penalties were partly reduced and partly set aside.

Final Conclusion: The duty demand was substantially upheld, but relief was granted in respect of Annexure D and certain delivery challans, with the penalties correspondingly modified.

Ratio Decidendi: A removal qualifies for the benefit of an inter-factory exemption only if, at the time of removal, the receiving premises is itself a functioning factory of the manufacturer within the statutory meaning and not merely an unlicensed or incompletely established unit.

---