Modvat exemption survives mixed clearances where separate input accounts are maintained and credit is not taken on exempt goods.

Notification No. 4/97 granted full exemption to specified final products where Modvat credit on inputs used for exempted goods was not availed. Mixed clearances, by themselves, did not defeat the exemption for the remaining clearances. The record showed that credit had not been taken on inputs used for the exempted final product, and the Modvat rules did not require separate physical storage of inputs for exempted and dutiable goods. What was required was separate inventory and accounts of receipt and use, and that requirement was satisfied. The exemption was therefore not denied, and the demand was dropped.

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Issues: Whether the assessee was entitled to the exemption under Notification No. 4/97 for clearances of part of the final products, and whether the absence of separate storage of inputs used for exempted and dutiable goods amounted to violation of the Modvat procedure under Rules 57C and 57CC.

Analysis: The exemption notification granted full exemption to the specified final products subject to the condition that Modvat credit on inputs used in the manufacture of exempted goods was not availed. The fact that part of the production was cleared on payment of duty did not by itself bar exemption for the remaining clearances. The record showed that credit was not taken on inputs used for the exempted final product. The rules did not prescribe any mandatory requirement of separate physical storage of the two categories of inputs. What was required under Rule 57CC(9) was maintenance of separate inventory and accounts of receipt and use of inputs for exempted goods, and that requirement was found to have been met.

Conclusion: The exemption could not be denied on the ground of mixed clearances or absence of separate storage, and the order dropping the demand was upheld. The revenue appeal failed.

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