Modvat credit on capital goods allowed where value-based exemption was only partial, not a full nil-duty exemption.

Modvat credit on capital goods remained admissible even where the manufacturer operated under Notification No. 1/93 and cleared goods within the value-based exemption scheme. The notification was treated as granting only a partial exemption, with duty continuing to apply beyond the prescribed limit, so the final products could not be regarded as wholly exempt or as attracting a nil rate of duty. On that basis, Rule 57R(1) did not bar credit, and Rule 57R(2) would in any event protect the assessee if the notification were viewed as exempting the goods. The denial of credit was therefore unsustainable.

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Issues: Whether Modvat credit on capital goods was admissible when the manufacturer was operating under Notification No. 1/93 and clearing goods within the value-based exemption scheme.

Analysis: The relevant notification did not grant complete exemption where credit under the Modvat scheme was availed. It provided only a partial exemption, with duty remaining payable beyond the specified limit. In that setting, the final products could not be treated as wholly exempt from duty or as subject to nil rate of duty. Consequently, Rule 57R(1) did not justify denial of credit, and the exception in Rule 57R(2) protected the appellant even if the notification were otherwise treated as conferring exemption.

Conclusion: The denial of credit was unsustainable and the appellant was entitled to Modvat credit on the capital goods.

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