Modvat credit burden of proof rules require Revenue to prove inputs were clearly non-duty paid before denying credit

In claims for Modvat credit on inputs purchased from the open market and used in manufacture, the existence of a conditional exemption notification did not by itself justify treating the goods as non-duty paid or chargeable to nil duty. Where the assessee specifically denied that position, the Revenue had to produce cogent evidence that the inputs were clearly recognizable as non-duty paid before credit could be denied. On the facts noted, no such proof was brought on record, so the denial of Modvat credit could not be sustained and the assessee remained entitled to the credit.

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Issues: Whether, in the case of inputs purchased from the open market and used in manufacture, the burden lay on the Revenue to prove that the goods were clearly recognizable as non-duty paid so as to deny Modvat credit.

Analysis: The dispute turned on the effect of the deemed credit scheme and a conditional exemption notification. The mere existence of an exemption notification was held insufficient to presume that the inputs were non-duty paid or chargeable to nil rate of duty, particularly where the assessee specifically denied that position. In such circumstances, the Department was required to produce cogent material showing that the inputs were clearly recognizable as non-duty paid. Since no such proof was brought on record, the claimed denial of Modvat credit could not be sustained.

Conclusion: The burden of proof was on the Revenue, and it failed to establish that the inputs were non-duty paid or chargeable to nil rate of duty. The assessee was entitled to Modvat credit.

Ratio Decidendi: In cases involving conditional exemption and deemed credit, non-duty-paid character cannot be presumed merely from the existence of an exemption; the Revenue must prove with evidence that the inputs were clearly recognizable as non-duty paid before denying credit.

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