Modvat credit on packing material requires proof that packing cost was excluded from assessable value before denial is justified.

Modvat credit on HDPE bags used as secondary packing material is admissible unless the department proves that the packing cost was excluded from the assessable value of the finished goods. A mere inference from the fact that local and outstation buyers were charged the same price is insufficient to deny credit. In the absence of cost construction or other evidence showing that packing cost was left out, the department cannot displace the assessee's claim. Denial of Modvat credit on this basis is therefore not sustainable.

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Issues: Whether Modvat credit on duty paid on HDPE bags used as secondary packing material was admissible when the department alleged that the cost of such packing was not included in the value of the finished goods.

Analysis: Credit under Rule 57A was disputed on the footing that the price charged to local and outstation customers was the same and therefore the cost of packing material must have been excluded from the assessable value. The record disclosed no proof from the department, such as cost construction or other evidence, to establish that the packing cost was in fact left out. A mere assumption drawn from equal pricing could not displace the assessee's claim or justify denial of credit.

Conclusion: The department failed to prove that the cost of HDPE bags was excluded from the value of the final product, and denial of Modvat credit was not sustainable.

Ratio Decidendi: Denial of Modvat credit on packing material requires proof that its cost was not included in the assessable value; mere parity of sale price between different classes of buyers is insufficient.

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