Deemed credit for processed fabrics allowed where declared inputs were embedded in grey fabrics, without strict input-output matching.

Deemed credit under Notification No. 6/2002-C.E. (N.T.) was available for processed fabrics where the declared inputs were tariff-heading goods such as yarn and fibres, and the scheme did not require a strict one-to-one correlation between listed inputs and final products. The notification was treated as a Rule 11 deemed credit mechanism that dispensed with documentary proof of duty on declared inputs, while Explanation 3 to clause (6) showed that processing of fabrics, including use of grey fabrics as an intermediate stage, remained within the scheme. On that basis, the demand, interest and penalty were unsustainable.

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Issues: Whether an independent processor clearing processed fabrics was entitled to deemed credit under Notification No. 6/2002-C.E. (N.T.) even though grey fabrics were not specifically listed as declared inputs.

Analysis: The notification operated under Rule 11 of the Cenvat Credit Rules, 2002 and was designed to grant deemed credit without insisting on documentary proof of duty on declared inputs. The table in the notification did not require a direct one-to-one correlation between the inputs listed in column 2 and the final products in column 3. The notified inputs were tariff headings covering yarn and fibres, and the processed fabrics were found to contain such duty-paid material through the grey fabrics. Explanation 3 to clause (6) also indicated that the scheme contemplated processing of fabrics and did not exclude grey fabrics merely because they were used as an intermediate stage. The prior Board clarification and tribunal decisions supported the view that deemed credit was available where the declared inputs were contained in the final product.

Conclusion: The appellant was entitled to deemed credit on the processed fabrics, and the demand, interest, and penalty could not be sustained.

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