Deemed Modvat credit on market-purchased scrap cannot be denied without proof that the inputs were actually exempted or non-duty paid.

Deemed Modvat credit on market-purchased aluminium scrap under invoices could not be denied merely on the assumption that the inputs were exempted or non-duty paid. The applicable restriction operated only where the goods were clearly identifiable as nil-rated, exempted, or otherwise non-duty paid, and the Department had to prove that fact with evidence. Because the exemption relied upon was conditional and no material showed that the scrap had actually emerged from exempted clearances, denial of credit was not justified. The note also records that no sufficient finding supported denial in respect of pulgaon scrap.

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Issues: Whether deemed Modvat credit could be denied on aluminium scrap purchased from the market under invoices on the footing that the inputs were clearly identifiable as exempted or non-duty paid.

Analysis: The claim for deemed credit arose under the scheme for market-purchased inputs, while the restriction under the relevant rule was that credit would not be available for inputs clearly identifiable as non-duty paid, charged to nil rate of duty, or exempted. The inputs were purchased under invoices and were treated by the assessee as duty paid. In such a situation, if the Department sought to deny credit on the basis that the goods were exempted or non-duty paid, it had to establish that fact with evidence. The exemption notification relied upon was treated as a conditional notification, and it could not be presumed that all aluminium scrap in the market had been cleared under exemption. No material was produced to show that the inputs had in fact emanated from exempted clearances. As regards pulgaon scrap, no finding had been recorded by the adjudicating authority sufficient to sustain denial of credit.

Conclusion: Deemed Modvat credit could not be denied on the material available; the assessee was entitled to succeed on this issue.

Final Conclusion: The Revenue failed to dislodge the Collector (Appeals)' view, and the denial of deemed credit was not sustained.

Ratio Decidendi: Where inputs are purchased from the market under invoices and the exemption is conditional, deemed credit cannot be denied unless the Department proves that the inputs were actually exempted, nil-rated, or otherwise non-duty paid.

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