Interest on yarn duty could not be levied where cotton fabrics were exported under bond and no duty arose.

Rule 49A postpones duty on yarn and the related interest until duty on fabrics is paid under Rule 52, which applies to removal for home consumption and assessment of duty. Where cotton fabrics are exported under bond under Rule 13, the export bond is discharged on fulfilment of the export obligation and no duty is payable on the fabrics. In that situation, by virtue of Explanation 2(ii) to Rule 13, no duty is payable on the yarn used in the exported fabrics either, so interest cannot be levied on a non-existent duty liability. The demand for interest was therefore unsustainable.

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Issues: Whether interest on duty payable on yarn used in the manufacture of cotton fabrics is recoverable under Rule 49A of the Central Excise Rules, 1944 when the fabrics are exported under bond and no duty is payable on the exported fabrics.

Analysis: Rule 49A postpones payment of yarn duty and interest until the duty on fabrics is paid in the manner prescribed under Rule 52, which contemplates removal for home consumption and assessment of duty. Where fabrics are exported under bond under Rule 13, the bond is discharged on fulfilment of the export obligation and no duty is payable on the fabrics. In that situation, by virtue of Explanation 2(ii) to Rule 13, no duty is payable on the yarn used in the exported fabrics either. If no duty is payable on the yarn, interest cannot be charged on a non-existent duty liability, and the mechanism of Rule 52 does not operate.

Conclusion: Interest under Rule 49A was not recoverable on yarn used in fabrics exported under bond. The demand for interest was unsustainable and the appeal succeeded.

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