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Issues: Whether cotton yarn manufactured in a composite mill and captively consumed in the manufacture of cotton fabrics during the currency of Notification No. 132/77-C.E. remained exempt from duty, and whether duty could be demanded on the yarn when the fabrics were cleared after the notification was withdrawn.
Analysis: The exemption under Notification No. 132/77-C.E. operated while the yarn was manufactured and used in the same composite mill. The subsequent withdrawal of the exemption and the wording of Notification No. 226/77-C.E. could not validly create a retrospective charge for the period before 15-7-1977. The reasoning was reinforced by the principle that excise duty on yarn is attracted at the spindle stage when the yarn comes into existence as a distinct commodity, and by the settled position that in cases of removal for captive consumption the relevant date for duty is the date of removal from the spinning section. Since the yarn in dispute stood exempt on the dates of such removal, duty was not leviable.
Conclusion: The demand of Central Excise Duty on the yarn was unsustainable and the assessee was entitled to refund.
Final Conclusion: The Revenue's challenge failed because the exempt status of the yarn during manufacture and captive consumption governed the levy, and the later clearance of fabrics did not revive duty on the yarn.
Ratio Decidendi: Where excisable yarn is manufactured and captively consumed during the currency of an exemption notification, duty cannot be imposed later on the basis of withdrawal of the exemption or clearance of the finished fabrics, and the relevant incidence of duty is the stage of removal when the yarn becomes a distinct commodity.
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