Deemed Modvat credit on exempt inputs requires verification of duty-paid status; failure justified extended limitation.

Deemed Modvat credit was unavailable on zinc ingots supplied by small scale units whose clearances were exempt from duty, because the inputs were identifiable as non-duty-paid and the assessee was expected to verify their duty-paid character before claiming credit. Failure to make that verification justified a finding of suppression for the extended limitation period, and the reversal of credit was sustained.

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Issues: Whether reversal of Modvat credit under Rule 57I of the Central Excise Rules was justified by invoking the longer period on the ground of suppression of facts when the assessee took deemed Modvat credit on zinc ingots cleared by small scale units under exemption.

Analysis: Deemed Modvat credit is an exception to the ordinary requirement of producing duty-paying documents, but the facility is not available where the inputs are clearly recognisable as having not suffered duty at all. The suppliers in this case were small scale units whose clearances were exempt under Notification No. 175/86-CE, and the departmental enquiry showed that the zinc ingots supplied to the assessee were cleared without duty. The invoices disclosed that the suppliers were manufacturers with SSI particulars, so it was reasonable to expect the assessee to verify the duty-paid character of the inputs before availing deemed credit. In the context of the extended period, suppression does not require every omission, but deliberate non-disclosure of material facts; here, the assessee failed to make the necessary verification before taking credit on inputs that were identifiable as non-duty-paid.

Conclusion: The invocation of the longer period was justified and the order reversing the Modvat credit was sustained.

Final Conclusion: The assessee was not entitled to retain the deemed Modvat credit taken on exempt inputs, and the demand with penalty stood upheld.

Ratio Decidendi: Where an assessee claims deemed Modvat credit on goods received from identifiable manufacturers, it must verify that the inputs have suffered duty, and failure to do so can amount to suppression of facts for the purpose of the extended limitation period.

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