Exemption under Notification No. 269/86 cannot be denied for mixed inputs; demand also failed beyond the show cause notice

A demand cannot be sustained on a ground not alleged in the show cause notice; the adjudicating authority changed the basis of demand from loss of duty-paid character to use of inputs outside the specified chapters, so that part failed. Exemption under Notification No. 269/86 was not confined to products made exclusively from specified inputs, and the use of some non-specified materials did not by itself defeat eligibility, so the exemption was upheld. The extended period of limitation was unavailable because the classification list and Modvat declaration disclosed the relevant input use, so suppression was not established. Duty and penalty were therefore set aside.

---

---

Issues: (i) whether the demand could be sustained on a ground different from that stated in the show cause notice; (ii) whether goods manufactured with specified inputs along with some non-specified inputs remained eligible for exemption under Notification No. 269/86; and (iii) whether the extended period of limitation was available to the Department.

Issue (i): Whether the demand could be sustained on a ground different from that stated in the show cause notice.

Analysis: The notice proceeded only on the basis that the inputs lost their duty-paid character because credit had been taken on the duty paid thereon. The adjudicating authority, however, dropped that allegation and confirmed demand on a different footing, namely, use of inputs falling outside the specified chapters along with the specified inputs. A demand founded on a ground not put to the assessee in the notice cannot be sustained.

Conclusion: The demand was not sustainable on a ground different from the show cause notice, and this point was in favour of the assessee.

Issue (ii): Whether goods manufactured with specified inputs along with some non-specified inputs remained eligible for exemption under Notification No. 269/86.

Analysis: The notification did not require the final product to be manufactured exclusively or wholly out of inputs falling within the specified headings. The principal ingredient used by the assessee fell within the specified chapter, and the addition of some other materials did not, by itself, take the case outside the notification. The same principle applied to mixed use of specified and non-specified inputs.

Conclusion: The product remained eligible for the notification, and this issue was decided in favour of the assessee.

Issue (iii): Whether the extended period of limitation was available to the Department.

Analysis: The classification list read with the Modvat declaration showed disclosure of the relevant inputs, including the use of materials outside the specified chapter along with Nitrocellulose. On that record, suppression of material facts was not established, and the extended limitation period could not be invoked.

Conclusion: The extended period of limitation was not available to the Department, and this issue was decided in favour of the assessee.

Final Conclusion: The demand of duty and the penalty were unsustainable, and the impugned order was set aside.

Ratio Decidendi: An exemption notification not requiring exclusive use of specified inputs cannot be denied merely because some non-specified inputs were also used, and a duty demand cannot be sustained on a ground not alleged in the show cause notice; extended limitation is unavailable where the relevant facts were disclosed to the Department.

---