Exemption on scrap-based final products turns on proof of non-duty-paid character and notice-bound findings.

Exemption under Notification No. 275/88 was denied for final products made from scrap cleared from the assessee's own factory at nil duty, because such scrap was clearly recognisable as non-duty paid and the notification condition was not met. Exemption was allowed for final products made from scrap bought from the open market, as the only allegation in the notice was non-duty-paid character, the finding could not go beyond the notice, and the Revenue failed to prove that the scrap was non-duty paid. The assessee thus succeeded only in part, with relief limited to the open-market scrap.

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Issues: (i) whether final products manufactured out of scrap cleared from the assessee's own factory at nil rate of duty were entitled to exemption under Notification No. 275/88 dated 04-11-1988; and (ii) whether final products manufactured out of scrap purchased from the open market were entitled to the said exemption.

Issue (i): whether final products manufactured out of scrap cleared from the assessee's own factory at nil rate of duty were entitled to exemption under Notification No. 275/88 dated 04-11-1988.

Analysis: The scrap generated and cleared from the assessee's own factory had been removed at nil rate of duty. The exemption was denied on the footing that such scrap was clearly recognisable as non-duty paid or chargeable to nil rate of duty. On those facts, the condition in the notification excluding inputs clearly recognisable as non-duty paid was not satisfied in favour of the assessee.

Conclusion: The denial of exemption in respect of final products manufactured out of 68.82 MTs of scrap purchased from the assessee's own factory was upheld, against the assessee.

Issue (ii): whether final products manufactured out of scrap purchased from the open market were entitled to exemption under Notification No. 275/88 dated 04-11-1988.

Analysis: The only allegation in the show cause notice was that the open market scrap was recognisable as non-duty paid. The finding that the assessee had purchased bazaar or kabari scrap went beyond the notice. Open market scrap was to be treated as duty paid unless the Revenue proved otherwise, and the burden of establishing that it was non-duty paid lay on the Revenue. That burden was not discharged, and invoices showed purchase from the open market.

Conclusion: The assessee was held entitled to the exemption in respect of final products manufactured out of 141.370 MTs of open market scrap, in favour of the assessee.

Final Conclusion: The exemption was sustained for the open market scrap and denied for the scrap cleared from the assessee's own factory, resulting in a partial success for the assessee.

Ratio Decidendi: Where exemption is denied on the allegation that scrap is non-duty paid, the Revenue must prove that fact, and a finding cannot rest on grounds not set out in the show cause notice.

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