Conditional exemption notifications cannot alone justify denial of deemed Modvat credit without proof that the exemption actually operated.

A conditional exemption notification does not by itself make market-purchased inputs clearly recognisable as non-duty paid or chargeable to nil duty. The Revenue must show that the conditions of the notification were actually satisfied and that the exemption had in fact operated on those inputs before deemed Modvat credit can be denied. A purchaser from the market is not required to disprove fulfilment of the exemption conditions. On the record, no such evidence was produced, so the denial of deemed credit could not be sustained and the assessee's position prevailed.

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Issues: Whether inputs purchased from the market could be treated as clearly recognisable as non-duty paid merely because they were covered by Notification No. 208/83, and whether Modvat deemed credit could be denied without evidence that the conditions of the exemption notification had actually taken effect.

Analysis: The governing principle applied was that the mere existence of an exemption notification does not by itself establish that the inputs are wholly exempt, clearly recognisable as non-duty paid, or chargeable to nil rate of duty. That consequence follows automatically only where the exemption is unconditional and the applicability of the notification to the goods is shown. Where the exemption is conditional, the Revenue must establish by enquiry that the conditions were satisfied and that the exemption had fully operated in respect of the inputs. A manufacturer purchasing from the market cannot be required to disprove fulfilment of the conditions, and the appellate forum must be satisfied by the Revenue that the exemption in fact took effect. On the record before the Tribunal, no such evidence had been produced in either appeal.

Conclusion: The mere availability of Notification No. 208/83 did not justify denial of deemed Modvat credit. The Revenue failed to prove that the inputs were actually exempt or clearly recognisable as non-duty paid, so the Revenue's appeal was rejected and the assessee's appeal was allowed.

Final Conclusion: The decision affirms that conditional exemption cannot be presumed to have been availed of unless the Revenue establishes satisfaction of the statutory conditions and actual operation of the exemption in respect of the inputs.

Ratio Decidendi: For conditional exemption notifications, non-duty-paid character cannot be presumed from the notification alone; the Revenue must prove that the conditions were fulfilled and the exemption actually operated before Modvat credit is denied.

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