Exemption under Notification 5/99-C.E. may survive earlier Modvat credit use if later payment fully offsets the breach.

Exemption under Notification No. 5/99-C.E. for dyed polyester yarn was considered in relation to the condition that no Modvat credit under Rules 57A, 57B or 57Q had been availed in the relevant process. The Tribunal held that denial of the exemption could not rest solely on earlier availment and utilisation of input and capital goods credit if the assessee later made payment fully compensating that credit. In that situation, the breach of the exemption condition stood neutralised, and the benefit of the notification remained available, subject to verification by the adjudicating authority that the later payment was adequate to offset the earlier credit.

---

---

Issues: Whether the assessee was entitled to the benefit of Notification No. 5/99-C.E. despite having availed Modvat credit on inputs and capital goods in earlier years, and whether the subsequent payment made by the assessee could cure the alleged breach of the exemption condition.

Analysis: The notification granted exemption to dyed polyester yarn subject to the condition that no credit under Rule 57A, Rule 57B or Rule 57Q of the Central Excise Rules, 1944 had been availed in the relevant process. The only basis for denial of exemption was that the assessee had availed and utilised input credit and capital goods credit in earlier years. The Tribunal held that if the amount later paid by the assessee represented full compensation for the earlier credit availed and utilised, the breach stood neutralised and the benefit of the notification could not be denied merely on the ground of the earlier availment. In such a situation, the exact interpretation of the expression used in the condition did not require separate examination.

Conclusion: The assessee was held entitled to the exemption under Notification No. 5/99-C.E., subject to verification by the adjudicating authority that the subsequent payment was adequate to offset the earlier credit availed and utilised.

---