Modvat credit under exemption conditions cannot be forcibly reversed; breach affects exemption benefit, not accrued credit.

Where an exemption notification required that Modvat credit not be availed on inputs imported under the advance licence scheme, violation of that condition was treated as affecting only the availability of the exemption benefit. The Tribunal followed its earlier view that the Revenue could not compel reversal of credit that had otherwise accrued merely because the notification condition was breached. As the demand was founded on such compelled reversal, the demand was held unsustainable and the connected penalty was set aside.

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Issues: Whether the Modvat credit already availed by the assessee could be compelled to be reversed by the Revenue for alleged non-fulfilment of the condition attached to the exemption notification, and whether the demand and penalty could therefore be sustained.

Analysis: The dispute arose from the condition in the exemption notification that Modvat credit should not be availed on inputs imported under the relevant advance licence scheme. The assessee's case was that, even if the condition was not fulfilled, the consequence could only be denial of the benefit of the notification and not a coercive direction to reverse credit that had otherwise accrued. The Tribunal followed its earlier view that when a notification condition is violated, the proper consequence is denial of the exemption benefit; the credit itself cannot be denied or forcibly reversed on that basis. Since the confirmation of demand rested on compelled reversal of credit, the demand and the connected penalty could not survive.

Conclusion: The demand was not sustainable and the penalty was set aside in favour of the assessee.

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