G. Sankaran, Member (T)

1. This is an appeal filed by the Assistant Collector of Central Excise, Patiala under direction issued in terms of Section 35B(2) of the Central Excises and Salt Act by the Collector of Central Excise, Chandigarh. It is directed against the order in appeal passed on 15 12 1983 by the Collector (Appeals), New Delhi allowing the appeal filed by M/s. Hindustan Wire Products (P) Ltd., against the order dated 20 4 1981 passed by the Assistant Collector of Central Excise, Patiala.

2. The facts of the case, in brief, are that M/s. Hindustan Wire Products (the respondents) are licensed for the manufacture of insulating varnish falling under Item 14 of the Central Excise Tariff which is used captively by them in the same factory for the manufacture of insulated electric wires. Notification No. 217/79 C.E., dated 30 6 1979 exempts varnishes falling under Item 14 II(i) Central Excise Tariff, manufactured from ingredients on which the appropriate duty of excise, or the additional duty of customs, as the case may be, has already been paid and used for insulating electric wires and cables, from excise duty in excess of 10% ad valorem. The benefit of the notification was claimed by the respondent in classification list No. 36/79 effective from 30 6 1979. The claim was allowed by the Central Excise. On 24 12 1980, the respondent by a letter requested for grant of setoff of excise duty paid on the inputs such as phenol, cresol, etc. falling under Item 68 CET which they use in the manufacture of insulating varnish. This claim was in terms of Notification No. 201/79 dated 4 6 1979. The contention was that the respondent had fulfilled the conditions laid down in both the notifications which were independent of each other and that the respondent was entitled to avail themselves of the benefit of both. The Assistant Collector after holding adjudication proceedings held that once the setoff on the duty paid on the Item 68 inputs is availed of under Notification No. 201/79, the inputs cease to be duty paid. The insulating varnish manufactured out of such inputs cannot be said to have been manufactured out of duty paid material and so as the benefit of notification 217/79 would not be available. Consequently, duty on the varnish would have to be paid at the tariff rate of 15% and not the reduced rates of 10% ad valorem He, however, permitted the respondent the option of paying duty on insulating varnish at 10% ad valorem, but without the benefit of the setoff. He held that the benefit of both the notifications would not be simultaneously available. Aggrieved with this order, Hindustan Wire Products pursued the matter in appeal. The Collector (Appeals) held that Hindustan Wire Products was entitled to the benefit of both the notifications. He held that Notification 201/79 was an exemption notification and that merely because a procedure was prescribed for its availment by way of proforma credit, the duty paid inputs would not become non-duty paid. In this view, he set aside the Assistant Collector's order. It is against this decision that the Collector of Central Excise, Chandigarh has come up in appeal before us.

3. The grounds put forth in the appeal are-

(a) The procedure set out in Notification 201/79 is on the lines of the Rule 56A procedure for proforma credit and not a setoff procedure as stated by the Collector (Appeals). The assessee had brought in duty paid inputs under Item 68 C.E.T. and had taken proforma credit of the duty. The duty paid character of the inputs was thus lost and the inputs became non duty paid. This view is supported by para 6 of the procedure set out in the appendix to the notification which provides that any inputs in respect of which credit has been taken may be removed on payment of duty for home consumption or for repairs. If the inputs continue to be duty paid even after the credit of the inputs duty was taken, there was no need for this provision.

(b) Since the inputs became non duty paid as