Deemed modvat credit applied to exempt steel flats, as notification-based exemption was not treated as nil-rated duty.

Deemed modvat credit under the 7-4-1986 Government of India order was available for steel flats purchased from a manufacturer operating under Notification No. 208/83-C.E. The order denied credit only for inputs clearly recognisable as non-duty paid or charged to nil rate of duty, and exempted goods were treated as different from goods subjected to nil duty under the tariff. Section 3 of the Central Excises and Salt Act, 1944 was used to confirm that goods exempted by notification remain tariff goods, not necessarily nil-rated goods. The 2-5-1988 order, which later added "wholly exempt from duty," showed the earlier order did not exclude wholly exempt inputs.

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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 order dated 7-4-1986.

Analysis: The order dated 7-4-1986 allowed deemed credit for specified inputs purchased from outside, but denied it only where the inputs were clearly recognisable as non-duty paid or charged to nil rate of duty. The exemption under Notification No. 208/83-C.E. was held to be materially different from goods charged to nil rate of duty under the tariff. Reference was made to Section 3 of the Central Excises and Salt Act, 1944 to explain that goods exempted by notification remain goods subject to the tariff rate, though exempted, and are not necessarily goods charged to nil rate of duty. The later Government of India order dated 2-5-1988, which expressly added the words 'wholly exempt from duty', was treated as showing that the earlier order did not cover wholly exempt goods. The purchases from another manufacturer were also treated as purchases from the open market.

Conclusion: Deemed credit was admissible under the 7-4-1986 order even though the flats were received from a manufacturer availing exemption under Notification No. 208/83-C.E.; the disallowance of credit was unsustainable.

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