Captive use of intermediate resin does not defeat exemption when input oils are used to make dutiable paints and varnishes.

Processed vegetable non-essential oils used within the factory in the manufacture of paints and varnishes remained eligible for exemption under Notification No. 69/84-C.E. even though resin emerged at an intermediate stage. The intermediate resin did not change the character of the oils as inputs for the final dutiable products, and an intermediate product is a relative concept where it is not cleared as such but consumed further in the same factory. Rule 57D(2) supported the position that exemption or credit cannot be denied merely because an intermediate product is exempt or nil-rated, provided it is captively consumed in making the final product. The nil rate on resin therefore did not bar the exemption.

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Issues: (i) Whether processed vegetable non-essential oils used in the manufacture of paints and varnishes through an intermediate stage of resin qualified for exemption under Notification No. 69/84-C.E. dated 01.03.1984. (ii) Whether the emergence of resin at an intermediate stage, when resin was captively consumed and not cleared from the factory, defeated the exemption because resin was subject to nil rate of duty.

Issue (i): Whether processed vegetable non-essential oils used in the manufacture of paints and varnishes through an intermediate stage of resin qualified for exemption under Notification No. 69/84-C.E. dated 01.03.1984.

Analysis: The exemption was available where the processed oils were used within the factory of production in the manufacture of paints and varnishes. The fact that resin emerged during the manufacturing process did not alter the character of the oils as inputs used for the final excisable products. The term intermediate product was treated as a relative concept depending on whether the product was cleared as such or consumed further in the same factory for the final products.

Conclusion: The exemption was admissible to the assessee.

Issue (ii): Whether the emergence of resin at an intermediate stage, when resin was captively consumed and not cleared from the factory, defeated the exemption because resin was subject to nil rate of duty.

Analysis: Rule 57D(2) of the Central Excise Rules, 1944 supported the proposition that credit or benefit could not be denied merely because an intermediate product came into existence and was exempt or carried nil duty, so long as it was used within the factory in the manufacture of a dutiable final product. Since the resin was not removed as a separate marketable product and was used in producing paints and varnishes, the nil rate on resin did not disqualify the claim.

Conclusion: The nil rate on the intermediate resin did not bar the exemption and the assessee succeeded.

Final Conclusion: The processed oils were held to have been used in the manufacture of dutiable paints and varnishes through a captively consumed intermediate resin, so the exemption claim was upheld and the appeals succeeded.

Ratio Decidendi: Where an input is used within the factory in the manufacture of a dutiable final product, the fact that an intermediate product emerges and is exempt or nil-rated does not deny the exemption if that intermediate product is not cleared as a separate finished product.

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