Deemed manufacture under excise credit rules requires appropriate duty on removal of inputs, with penalty relief set aside.

Rule 57F(1) deems inputs cleared as such, with permission, to be treated as if manufactured in the receiving factory, so the duty payable on removal is the appropriate excise duty applicable at that time, not merely reversal of the credit originally taken under Rule 57A, subject only to the minimum floor of that credit. The narrower view was rejected. The penalty was also set aside for want of an independent basis to sustain it.

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Issues: (i) Whether, under Rule 57F(1) of the Central Excise Rules, 1944, inputs cleared as such from the factory are chargeable to the duty payable at the time of removal as if manufactured in that factory, or only to the amount of credit originally taken under Rule 57A; (ii) Whether the penalty imposed was sustainable.

Issue (i): Whether, under Rule 57F(1) of the Central Excise Rules, 1944, inputs cleared as such from the factory are chargeable to the duty payable at the time of removal as if manufactured in that factory, or only to the amount of credit originally taken under Rule 57A.

Analysis: Rule 57F(1) creates a legal fiction that inputs removed as such, with prior permission, are to be treated as if they had been manufactured in the receiving factory. On that footing, the expression "payment of appropriate duty of excise" refers to the duty applicable on the date and in the circumstances of removal, and not merely to reversal of the credit originally availed. The proviso only fixes a floor by requiring that the duty shall not be less than the amount of credit allowed under Rule 57A. The later amendment by Notification No. 28/95-C.E. (N.T.) also showed that the pre-amendment rule contemplated a duty computation distinct from mere credit reversal.

Conclusion: The duty on removal of inputs as such was correctly required to be paid as appropriate duty under Rule 57F(1), subject to the minimum limit of the credit taken, and the assessee's narrower construction was rejected.

Issue (ii): Whether the penalty imposed was sustainable.

Analysis: The order records no independent basis for sustaining the penalty once the principal dispute was decided, and the circumstances were treated as warranting relief on that limited aspect.

Conclusion: The penalty was set aside.

Final Conclusion: The appeals failed on the principal duty issue but succeeded only to the limited extent of relief from penalty.

Ratio Decidendi: Where a rule deems cleared inputs to have been manufactured in the receiving factory, the duty payable on removal as such is the appropriate duty applicable on that deemed manufacture and removal, subject only to the statutory minimum of the credit originally allowed.

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