Conditional exemption and Modvat credit: Revenue must prove exemption was actually availed before denying credit.

Deemed Modvat credit cannot be denied merely because an exemption notification exists for the input goods; the Revenue must establish that the exemption was actually availed and that the conditions of the notification were satisfied. A conditional exemption does not by itself prove that duty was not paid on the goods, and an allegation that the purchaser knew of the exemption is insufficient without proof that the manufacturer cleared the goods under that exemption. In the absence of any finding that the supplier was the manufacturer or that clearance was made under the notification, denial of credit was not sustainable and the assessee succeeded.

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Issues: Whether deemed Modvat credit could be denied on the basis that the input goods were exempt from duty, and whether it was for the Revenue to establish that the exemption had in fact been availed.

Analysis: Mere existence of an exemption notification was held insufficient to show that the inputs were wholly exempted from duty or were clearly goods on which duty had not been paid. Where the exemption is conditional, the Revenue must make the necessary enquiry and establish that the conditions of the notification were satisfied and that the exemption was actually availed. The allegation that the purchaser knew the goods were exempt, without proof that the goods were cleared by the manufacturer under the exemption, was held inadequate. The record contained no allegation or finding that the supplier was the manufacturer or that the clearance had been made under the exemption.

Conclusion: The denial of deemed Modvat credit was not sustainable, and the issue was decided in favour of the assessee.

Ratio Decidendi: In cases of conditional exemption, the burden lies on the Revenue to prove that the goods were cleared under the exemption and that the conditions of the notification were satisfied before denying credit.

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