Exemption for parts of parts upheld where captive goods were used to make engine components, not directly fitted to the engine.

Cages, rings and balls captively used to make ball bearings, which were themselves component parts of internal combustion engines, were treated as eligible for exemption under Notification No. 217/85-C.E. The operative principle applied was that parts used in the manufacture of component parts can qualify as "parts of parts" of the final engine where the intermediate component is ultimately used in internal combustion engines. The Board circular and trade notice supported this interpretation, and exemption could not be refused merely because the goods were not fitted directly into the final engine.

---

---

Issues: Whether cages, rings and balls manufactured captively and used in the manufacture of ball bearings, which in turn are parts of internal combustion engines, were entitled to exemption under Notification No. 217/85-C.E. as parts of parts of internal combustion engines.

Analysis: The items in dispute were admittedly used in the manufacture of ball bearings, and the ball bearings were in turn used as component parts of internal combustion engines. The Board's Circular No. 14/88 dated 26-5-1988 and the corresponding trade notice clarified that parts used in the manufacture of component parts, which are ultimately used in diesel oil operated internal combustion engines, would qualify for the exemption. The Tribunal also applied the same principle in the cited precedent relied upon by the parties. On these facts, the goods were treated as parts of parts of internal combustion engines and the exemption could not be denied merely because they were not directly fitted into the final engine.

Conclusion: The exemption under Notification No. 217/85-C.E. was available to the disputed goods, and the demand and penalty were set aside.

---