Rule 56B captive use breach: diversion of processed components without duty sustains duty demand and penalty.

Components cleared under Rule 56B for specified processing and return to the original factory cannot be diverted for captive use without duty. Where the admitted facts showed that most of the semi-finished goods were consumed in the appellant's own factory for manufacture of carburettors, the breach of the permission justified duty demand and penalty. A later reliance on Notification No. 217/86 did not cure the misuse because it was raised after the diversion had already occurred. The plea of revenue neutrality was also rejected, as captive consumption without duty was contrary to the prescribed procedure and the permission conditions.

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Issues: Whether the demand of duty and penalty were sustainable where semi-finished components received under Rule 56B were further processed and consumed in the appellant's own factory instead of being returned, and whether exemption under Notification No. 217/86 or revenue neutrality could defeat the demand.

Analysis: The permission under Rule 56B was granted for sending components outside for specified processing and bringing them back to the factory of origin. The admitted facts showed that most of the components received under that permission were used in the appellant's own factory for manufacture of carburettors without payment of duty, which was a clear breach of the condition of the permission. The subsequent classification list and reliance on Notification No. 217/86 did not assist the appellant, since the misuse had already occurred and the notification was invoked belatedly. The plea of revenue neutrality was also rejected because the goods had been captively used without duty in violation of the prescribed procedure.

Conclusion: The demand of duty and the penalty were upheld and were against the assessee.

Final Conclusion: Captive use of the processed components in breach of the Rule 56B permission justified confirmation of duty and imposition of penalty.

Ratio Decidendi: Goods removed under a limited processing permission cannot be diverted for captive use without payment of duty, and a later reliance on exemption or revenue neutrality does not cure the breach.

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