Exemption for inputs used in exempt final products is barred; relief extended only to segregated dutiable by-product input.

Notification No. 217/86 applies only to inputs used in or in relation to manufacture of final products that are not wholly exempt from excise duty and are not chargeable to nil rate. Benzyl Cyanide used for manufacture of wholly exempt Phenyl Acetic Acid did not qualify for exemption, because the notification's embargo attached to the exempt final product. The exemption was confined to the segregable quantity of Benzyl Cyanide attributable to the aqueous layer by-product cleared on payment of duty; it did not extend to the balance used for the exempt commodity. The sales tax set-off ratio was inapplicable because the notification expressly linked eligibility to the tax status of the final product.

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Issues: Whether Notification No. 217/86 was available to the entire quantity of Benzyl Cyanide used in the manufacture of Phenyl Acetic Acid, and whether the exemption could be claimed only for the quantity of Benzyl Cyanide attributable to the aqueous layer by-product cleared on payment of duty.

Analysis: The exemption under Notification No. 217/86 applies only to inputs used in or in relation to the manufacture of final products which are not wholly exempt from excise duty or are not chargeable to nil rate of duty. Phenyl Acetic Acid was wholly exempt, so Benzyl Cyanide used for its manufacture could not qualify for exemption under the notification. The fact that a separable portion of the input went into the aqueous layer, which was cleared on payment of duty, did not extend the exemption to the balance used for the exempt final product. The ratio of the sales tax set-off decision was held inapplicable because the notification itself contained an express embargo tied to exempt final products, and the assessee had been able to segregate the quantity used for the dutiable by-product from the quantity used for the exempt commodity.

Conclusion: The exemption was not available on the entire quantity of Benzyl Cyanide, but it was only to the quantity used in the manufacture of aqueous layer cleared on payment of duty.

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