Proforma credit on duty-paid intermediate goods was available where the scheme allowed election between exemption and set-off.

Duty-paid stators and rotors used captively in electric fan manufacture were treated as eligible for proforma credit where the intermediate goods had already borne duty and the scheme of notifications allowed an assessee to choose between exemption and set-off. Credit could not be denied merely because another notification also exempted the intermediate goods when consumed within the factory. On that footing, the extended-period demand and penalties lacked support because the alleged contravention depended entirely on the disputed credit claim, and the record showed departmental awareness of the availment.

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Issues: (i) Whether duty-paid stators and rotors used captively in the manufacture of electric fans were eligible for proforma credit under the Central Excise Rules, notwithstanding the availability of a notification granting exemption to the intermediate products and another notification providing set-off of duty paid thereon; (ii) Whether the demand for the extended period and the penalties imposed were sustainable.

Issue (i): Whether duty-paid stators and rotors used captively in the manufacture of electric fans were eligible for proforma credit under the Central Excise Rules, notwithstanding the availability of a notification granting exemption to the intermediate products and another notification providing set-off of duty paid thereon.

Analysis: The materials showed that the intermediate goods had suffered duty before being fitted into the final product. The scheme of the relevant notifications permitted an assessee to choose between the exemption stream and the set-off stream. Once duty had been paid on the intermediate products, credit could not be denied merely because another notification also treated such goods as exempt when captively consumed. The settled position accepted that duty on inputs used through an intermediate stage could be taken as credit when the final product was dutiable and the intermediate goods were not cleared from the factory.

Conclusion: The issue was answered in favour of the assessee. Proforma credit on the duty paid on stators and rotors was admissible.

Issue (ii): Whether the demand for the extended period and the penalties imposed were sustainable.

Analysis: The extended period rested only on the premise that credit was not admissible. Once the credit was held admissible on merits, the basis for alleging deliberate contravention and evasion disappeared. The record also showed continuing contest by the assessee and departmental knowledge of the availment in the returns, which negatived the foundation for penal action on the facts accepted by the order.

Conclusion: The issue was answered in favour of the assessee. The extended demand and the penalties were not sustainable.

Final Conclusion: The appeal succeeded, the duty demand and penalties were set aside, and the assessee was held entitled to the proforma credit claimed on the intermediate goods.

Ratio Decidendi: Where an assessee has paid duty on intermediate goods and the statutory scheme provides both exemption and set-off routes, the assessee may elect the set-off route, and credit cannot be denied merely because an alternative exemption notification also covers the intermediate goods.

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