The Chennai Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has ruled that the benefit of captive consumption exemption under Notification No. 67/95-CE cannot be denied merely because the final products are cleared partly on payment of duty and partly under an exemption notification. The Tribunal clarified that the exemption continues to be available as long as the manufacturer complies with the conditions of the notification, including the requirements of Rule 6 of the CENVAT Credit Rules, 2004.
The Bench, comprising P. Dinesha (Judicial Member) and Vasa Seshagiri Rao (Technical Member), was considering whether relays captively consumed in the manufacture of control panels were eligible for exemption under Notification No. 67/95-CE. The control panels were cleared partly on payment of duty, partly under Notification No. 12/2012-CE, and partly for export under a Letter of Undertaking.
M/s. GE T&D India Ltd., the appellant, manufactured relays falling under Chapter 85, which were captively used in the manufacture of control panels classifiable under Chapter 8537. These control panels were cleared for domestic consumption on payment of duty, supplied under an exemption notification, and also exported without payment of duty. The appellant claimed captive exemption on the relays under Notification No. 67/95-CE.
The Department denied the exemption on the ground that the final product, control panels, was also cleared under an exemption notification. Relying on the proviso to Notification No. 67/95-CE, the Department argued that captive exemption on inputs is barred when the final product is exempt. A show cause notice was issued proposing demand of duty on the relays, along with interest and penalty. The demand was confirmed by the adjudicating authority and upheld by the Commissioner (Appeals).
Examining the scope of Notification No. 67/95-CE and proviso (vi) thereto, the Tribunal noted that the proviso specifically saves cases where a manufacturer produces both dutiable and exempted goods and fulfills the obligations under Rule 6 of the CENVAT Credit Rules. On a harmonious reading of the notification, the Bench held that the restriction in the proviso is not absolute and that captive exemption remains available where Rule 6 requirements are met.
The Tribunal observed that the relays were manufactured and consumed within the same factory and clearly fell within the main provision of Notification No. 67/95-CE. It emphasised that the purpose of captive exemption is to avoid cascading of duty on intermediate goods and that such benefit cannot be denied solely because the final product enjoys exemption under a separate notification.
On the issue of Rule 6 compliance, the Tribunal disagreed with the findings of the lower authorities. It noted that Rule 6(6) itself provides exceptions for certain exempt clearances, including supplies made under specified exemption notifications. The Bench also took note of earlier decisions in the appellant’s own case, where it had been held that GE T&D India Ltd. had complied with Rule 6 and was entitled to captive exemption. Those decisions had been accepted by the Department and had attained finality.
Applying the principle of consistency and judicial discipline, the Tribunal held that the appellant had satisfied the conditions of proviso (vi) to Notification No. 67/95-CE. Accordingly, it ruled that the relays captively consumed in the manufacture of control panels were eligible for exemption, even though the final products were partly exempt, partly dutiable, and partly exported.
Once the eligibility to captive exemption was upheld, the Tribunal held that the demand itself could not survive. The demand of ₹10,39,545, along with interest and penalty, was therefore set aside. The Bench further observed that the dispute involved interpretation of exemption notifications and Rule 6, and there was no allegation of fraud, suppression, or wilful misstatement to justify penalty. The appeal was allowed with consequential relief in accordance with law.
