Notification benefit preserved when Modvat credit was taken under protest after departmental denial of small scale exemption.

Benefit under Notification No. 16/97-C.E. remained available where Modvat credit was taken only after the assessee had begun paying duty at tariff rate under protest pursuant to an earlier departmental adjudication denying small scale exemption. The assessee had not voluntarily opted out of the notification; its conduct was compelled by the departmental order, so the later credit availing could not be treated as a deliberate breach of condition No. 2(iii). A demand based solely on that alleged contravention was therefore not sustainable, and the duty demand and penalty failed.

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Issues: Whether the benefit of Notification No. 16/97-C.E. was available to the assessee when Modvat credit was availed after the assessee had started paying duty at tariff rate pursuant to an earlier departmental adjudication order.

Analysis: The assessee had been denied small scale exemption in an earlier adjudication and, on that basis, was required to pay duty at the tariff rate. The record showed that the assessee did not voluntarily opt out of the notification, but paid duty under protest because the departmental order had treated the goods as ineligible for exemption. In these circumstances, the subsequent availing of Modvat credit could not be treated as a voluntary breach of the notification condition. A demand founded only on alleged contravention of condition No. 2(iii) of the notification could not be sustained where the assessee's conduct was compelled by the departmental order itself.

Conclusion: The assessee was entitled to the benefit of Notification No. 16/97-C.E., and the demand of duty and penalty were unsustainable.

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