Modvat credit cannot be cut down by a 95% restriction when exemption from excise duty is upheld.

Where exemption from central excise duty is upheld, a procedural cap on Modvat credit cannot be used to reduce the substantive relief. The article states that duty paid on inputs, once not required to be retained by the Revenue, may be allowed in full as Modvat credit because it serves the same restorative function as refund. Accordingly, the 95% restriction in Notification No. 14/97 could not be applied to curtail the benefit flowing from the exemption finding, and the assessee was entitled to complete consequential relief on the credit claim.

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Issues: Whether, after the assessee succeeded in establishing exemption from central excise duty, the credit of duty paid on inputs could still be restricted to 95% under Notification No. 14/97.

Analysis: The assessee had already succeeded on the exemption issue, so the duty paid on the inputs was not required to be retained by the Revenue. Allowing the duty-paid amount as Modvat credit served the same purpose as refund and restored the amount to the assessee. In that situation, applying the 95% restriction in Notification No. 14/97 would improperly reduce the benefit that flowed from the exemption finding.

Conclusion: The restriction to 95% could not be applied, and the assessee was entitled to the full benefit of the duty-paid amount through Modvat credit.

Final Conclusion: The impugned order was unsustainable and the assessee obtained complete consequential relief on the credit claim.

Ratio Decidendi: Where duty paid is not exigible because exemption is upheld, a procedural credit restriction cannot be used to diminish the substantive relief flowing from that exemption.

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