Modvat credit requires actual duty payment on inputs; deemed credit cannot cover duty-free copper scrap.

Modvat credit under Rule 57G was available only where duty had actually been paid on the inputs. Deemed credit or relaxed documentary proof could not be used to treat non-duty-paid goods as duty paid. On the facts, the copper scrap from an ordinance factory was recognised as duty free under the respondent's own stand, so it remained non-duty paid and outside the credit scheme. The order granting credit was therefore set aside, and the issue was decided in favour of the Revenue.

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Issues: Whether the respondent was entitled to Modvat credit on copper scrap received from an ordinance factory on the footing that the scrap was deemed to be duty paid, despite the department's case that it was clearly recognisable as non-duty paid.

Analysis: Modvat credit under Rule 57G required duty to have been paid on the inputs. The Government order permitting deemed credit was only intended to relax the documentary requirement where duty had in fact been paid, and not to extend credit to goods on which no duty had been paid. The respondent's own stand before the appellate authority was that the goods were covered by an exemption notification and were therefore duty free. That position supported the conclusion that the goods were non-duty paid, and the departmental clarification could not alter the basic requirement for Modvat credit.

Conclusion: The respondent was not entitled to Modvat credit on the scrap, and the issue is decided against the assessee and in favour of the Revenue.

Final Conclusion: The appeal succeeds and the order granting credit is set aside.

Ratio Decidendi: Deemed credit under Rule 57G cannot be claimed for inputs on which no duty has been paid; it only dispenses with proof of duty payment where duty has actually been discharged.

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