Captive consumption of cotton yarn attracts excise duty based on deemed removal date, not later fabric clearance.

Cotton yarn manufactured in a composite mill and captively consumed in the spinning department was treated as removed at the time of such consumption under Rule 9(1) and its Explanation. Because the exemption notification then in force applied when the yarn was manufactured and deemed removed, no excise duty was payable on that yarn. A later withdrawal of the exemption could not retrospectively fasten duty on goods already captively consumed; liability depended on the date of deemed removal, not on the later clearance of the finished fabric. The revenue appeals failed, while the assessee succeeded on the substantive duty issue, with the refund claim remitted for fresh adjudication.

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Issues: (i) Whether cotton yarn manufactured in a composite mill and captively consumed in the spinning department prior to 15-7-1977 was exempt from excise duty under the then operating notification. (ii) Whether, for such captively consumed yarn, excise duty liability depended on the date of manufacture and captive removal or on the later date on which the finished fabric was cleared after the exemption was withdrawn.

Issue (i): Whether cotton yarn manufactured in a composite mill and captively consumed in the spinning department prior to 15-7-1977 was exempt from excise duty under the then operating notification.

Analysis: The charge of excise attaches on manufacture, but liability is worked out on removal. Under Rule 9(1) of the Central Excise Rules, 1944, read with its Explanation, goods consumed or utilised within the factory are deemed to have been removed immediately before such consumption or utilisation. The notification in force from 18-6-1977 granted full exemption to cotton yarn when used for weaving of cotton fabrics in a composite mill. Since the yarn in question was manufactured and consumed within that period, the exemption applied when the liability crystallised.

Conclusion: Yes. The yarn was exempt from excise duty and no duty was payable on it under the notification then in force.

Issue (ii): Whether, for such captively consumed yarn, excise duty liability depended on the date of manufacture and captive removal or on the later date on which the finished fabric was cleared after the exemption was withdrawn.

Analysis: The later notification of 15-7-1977 could not fasten duty on yarn already manufactured and removed for captive consumption before that date. The decisive event was the deemed removal of the yarn when it was consumed in the factory, not the subsequent clearance of the fabric. The principle applied in the cited case concerning goods cleared after manufacture did not govern captive consumption, because the Explanation to Rule 9(1) squarely covered this situation.

Conclusion: Duty liability depended on the date of deemed removal for captive consumption, not on the later date of fabric clearance; the later notification did not apply retrospectively to the exempt yarn.

Final Conclusion: The revenue appeals failed, while the assessee's appeal succeeded on the substantive duty issue and the refund claim was sent back for fresh adjudication in accordance with law.

Ratio Decidendi: Where excisable goods are captively consumed within the factory, Rule 9(1) and its Explanation deem them to be removed at the time of such consumption, and the duty liability is governed by the exemption or tariff in force on that date, not by a subsequent change affecting the finished product.

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