Deemed Modvat credit for captively generated exempt scrap was unavailable because duty payment remained a basic requirement.

Deemed Modvat credit under the proviso to Rule 57G was confined to cases where duty had in fact been paid, even if documentary proof was relaxed. Captively generated scrap used as input for further manufacture did not qualify merely because it was described as exempt or subject to nil duty, since it was not an open-market purchase and could not be treated as duty-paid by inference. A later amendment expressly covering goods wholly exempt from duty was treated as clarificatory and consistent with that position, confirming that such goods remained outside the deemed credit facility as non-duty-paid inputs.

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Issues: Whether scrap generated captively in the appellants' factory and used as input for further manufacture was eligible for deemed Modvat credit under the relevant order, and whether goods wholly exempt from duty or chargeable to nil rate of duty could be treated as non-duty-paid for that purpose.

Analysis: The credit scheme under the proviso to sub-rule (2) of Rule 57G was intended to dispense with documentary proof of duty payment in limited cases, but not to dispense with the requirement that duty must in fact have been paid. The scrap in question was not purchased from the open market; it was generated within the same factory and therefore stood on a different footing from inputs whose duty-paid character had to be inferred from market purchases. Goods lying in a factory and captively produced could not claim automatic deemed credit merely because they were described as exempt or as carrying nil duty. The later amendment expressly referring to goods wholly exempt from duty was treated as clarificatory and consistent with the earlier position, reinforcing that such goods were outside the deemed credit facility as non-duty-paid inputs.

Conclusion: Captively generated scrap that was wholly exempt from duty did not qualify for deemed Modvat credit, and the disallowance of credit was upheld.

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