Exemption for captive-use equipment under the manufacturing notification was denied by majority under the exclusion clause.

Notification No. 217/86-C.E. exempted inputs used within the factory in or in relation to manufacture, but its Explanation excluded machines, machinery, plant, equipment, apparatus, tools and appliances used for producing or processing goods or for bringing about change in a substance. The majority applied a broad reading of "in relation to" and "manufacture" and treated gauges, templates and material handling equipment as integrally connected with production, bringing them within the exclusion. The concurring third member required direct use in producing, processing or changing a substance and considered that not established for the items in question. By majority, the goods were found ineligible for exemption.

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Issues: Whether gauges/templates and material handling equipments manufactured for captive consumption were exempt under Notification No. 217/86-C.E., or were excluded by the Explanation as machines, machinery, plant, equipment, apparatus, tools or appliances used for producing or processing of goods or for bringing about any change in any substance in or in relation to the manufacture of the final products.

Analysis: The Notification granted exemption to inputs used within the factory in or in relation to the manufacture of final products, but the Explanation excluded machines, machinery, plant, equipment, apparatus, tools or appliances used for producing or processing of any goods or for bringing about any change in any substance. The majority view applied the broad meaning of the expressions "in relation to" and "manufacture" and held that the impugned items, being integrally connected with the manufacturing process and used in relation to manufacture, fell within the exclusion. The concurring third member took the opposite view, holding that the exclusion required direct use in producing or processing of goods or in bringing about a change in substance, which was not shown for measuring instruments and material handling equipment.

Conclusion: By majority, the impugned goods were held not eligible for exemption under Notification No. 217/86-C.E., and the appeal was accepted on the basis of the majority opinion.

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