Proforma credit remains available when exempt intermediates are consumed in-factory to produce dutiable final goods.

Proforma credit remained available where duty-paid inputs were used in a manufacturing chain that produced a fully exempt intermediate product, provided that intermediate was consumed within the factory in the manufacture of the notified dutiable final goods. The operative principle was that inputs do not lose their credit eligibility merely because manufacture passes through a non-dutiable stage, so long as the intermediate product is not removed as such and is used in producing the finished goods. A departmental trade notice and the Bombay High Court view were relied on to support this interpretation, and the objection to credit on the basis of the exempt intermediate stage was rejected.

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Issues: Whether proforma credit was admissible where duty-paid inputs were used to manufacture a fully exempt intermediate product which was consumed within the factory in the manufacture of dutiable final goods.

Analysis: The availability of credit depended on whether the inputs could be treated as having been used in the manufacture of the notified finished goods, even though an exempt intermediate product emerged in the course of manufacture. A departmental trade notice, treated as an authoritative interpretation, clarified that proforma credit under the relevant procedure would remain available if the exempt intermediate product was consumed within the factory in the manufacture of the notified finished product and was not removed as such. The reasoning adopted also accorded with the Bombay High Court view that use of raw materials in a manufacturing chain leading to notified finished goods does not lose its character merely because a non-dutiable intermediate product arises en route.

Conclusion: Proforma credit was admissible, and the objection to credit on the ground that the inputs first went into an exempt intermediate product failed.

Ratio Decidendi: Inputs used in the manufacture of a notified finished product do not cease to qualify for proforma credit merely because they pass through a fully exempt intermediate stage, so long as that intermediate product is consumed within the factory in the manufacture of the final dutiable goods.

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