Deemed modvat credit for exempted inputs allowed where conditional exemption was not the same as nil-rate duty goods.

Inputs cleared under a conditional exemption notification were not treated as goods charged to nil rate of duty for purposes of the 7-4-1986 deemed credit order. The exclusion in that order applied only to inputs clearly recognisable as non-duty paid or tariff-rated at nil, and purchases from another manufacturer were treated as purchases from the open market. The later 2-5-1988 order expressly added wholly exempted goods to the exclusion clause, confirming that the earlier order did not already cover such goods. Deemed modvat credit was therefore admissible and the denial of credit was set aside.

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Issues: Whether steel flats purchased from a manufacturer availing exemption under Notification No. 208/83-C.E. were eligible for deemed modvat credit under the Government of India's order dated 7-4-1986, when the order denied credit only to inputs clearly recognisable as non-duty paid or charged to nil rate of duty.

Analysis: The order dated 7-4-1986 permitted deemed credit for specified inputs purchased from outside without production of duty-paid documents, but excluded inputs clearly recognisable as non-duty paid or charged to nil rate of duty. The goods in question were cleared under a conditional exemption notification and not as goods leviable at nil rate in the tariff. The distinction between goods exempted under an exemption notification and goods charged to nil rate of duty was treated as material, because the latter expression was linked to the tariff rate under the charging provision, whereas exemption operated by way of a separate notification. The later Government order dated 2-5-1988 expressly added wholly exempted goods to the exclusion clause, which showed that the earlier order did not itself cover such goods. Purchases from another manufacturer were also treated as purchases from the open market.

Conclusion: The inputs were not hit by the exclusion in the 7-4-1986 order, and the deemed modvat credit was admissible.

Final Conclusion: The appeals succeeded and the denial of deemed credit was set aside, with consequential relief.

Ratio Decidendi: Under the deemed credit order dated 7-4-1986, goods merely exempted under a notification were not to be treated as goods charged to nil rate of duty, and the exclusion applied only where the inputs were clearly recognisable as non-duty paid or tariff-rated at nil.

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