Duty-paid input condition for exemption must be proved by the claimant; penalty may still be set aside on the facts.

Exemption under Notification No. 5/98-C.E. was denied because the condition requiring manufacture from yarn on which appropriate duty had already been paid was not proved. The record showed purchases from both duty-paid invoices and traders whose goods were not shown to have suffered duty, and the assessee failed to discharge the burden of proving actual duty payment on the inputs. Although the exemption claim failed, the penalty imposed in the adjudication order was held unsustainable because the facts did not justify penal consequences beyond denial of the exemption benefit. The order was therefore sustained only to the extent of denying exemption, while the penalty was set aside.

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Issues: (i) Whether the goods manufactured out of single yarn were eligible for exemption under Notification No. 5/98-C.E. dated 2-6-98 when the notification required manufacture out of yarn on which appropriate duty had already been paid; (ii) whether penalty imposed in the adjudication order was sustainable.

Issue (i): Whether the goods manufactured out of single yarn were eligible for exemption under Notification No. 5/98-C.E. dated 2-6-98 when the notification required manufacture out of yarn on which appropriate duty had already been paid.

Analysis: Condition No. 20 of the notification made the exemption available only if the multiple yarn was manufactured out of yarn falling under the relevant chapters and on which appropriate duty of excise or additional duty under the Customs Tariff Act, 1975 had already been paid. The exemption claimant was required to establish compliance with that condition. The materials on record showed purchases from both duty-paid invoices and traders or dealers whose goods were not shown to have suffered duty. The burden lay on the assessee to prove actual duty payment on the inputs, and that burden was not discharged.

Conclusion: The exemption was not available to the assessee.

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

Analysis: Although the exemption claim failed, the facts and circumstances did not justify imposition of penalty. The record did not warrant penal consequences beyond denial of the exemption benefit.

Conclusion: The penalty was not sustainable and was set aside.

Final Conclusion: The appeal succeeded on the exemption issue, but the penalty portion of the adjudication order was removed, resulting in a partial allowance of the Revenue's appeal.

Ratio Decidendi: Where an exemption notification is conditional upon use of duty-paid inputs, the assessee claiming the exemption must prove actual satisfaction of that condition, and failure to do so disentitles the benefit.

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