Conditional exemption on captive inputs permits duty payment, credit take-up, and use against final product duty.

A conditional exemption on captively consumed intermediate goods may be declined where the assessee chooses to pay duty on those goods, and that duty payment can be taken as eligible credit. The credit may then be utilised for duty on the final products, because the intermediate goods are treated as duty paid once duty is actually discharged. The treatment is consistent with an optional conditional exemption and makes the related credit claim sustainable when the duty has been validly paid on the intermediate product.

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Issues: Whether the assessee could elect not to avail the conditional exemption on captively consumed intermediate goods, pay duty on such goods, take credit of the duty so paid, and utilise that credit for payment of duty on the final products.

Analysis: The exemption in question applied only to goods captively consumed and was therefore conditional in nature. On the facts, the intermediate product was in fact subjected to duty, and the credit of that duty was taken and used towards duty liability on the final products. The case was treated as materially similar to an earlier decision of the Tribunal dealing with an optional conditional exemption. In such circumstances, the intermediate product had to be regarded as duty paid, and the credit could not be treated as irregular merely because the goods were otherwise capable of exemption.

Conclusion: The assessee was entitled to pay duty on the intermediate product, avail credit of that duty, and use the credit for payment of duty on the final products; the demand was unsustainable.

Ratio Decidendi: Where an exemption is conditional and optional in effect, an assessee may choose to pay duty on the captively consumed intermediate product, and such payment renders the input duty paid for purposes of credit and utilisation against duty on the final product.

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