Modvat credit remains available when exempt goods are cleared on duty payment and the arrangement is revenue neutral.

Modvat credit was held available where the final product was exempt from duty, but the assessee voluntarily cleared the goods on payment of duty instead of claiming the exemption. Prior decisions recognised that an assessee is not compelled to take the exemption notification and may opt to pay tariff duty. The credit denial was further unsustainable because the duty paid and the Modvat credit availed were exactly equivalent, making the arrangement revenue neutral. On that basis, the denial of credit was held unjustified and the assessee succeeded on the issue.

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Issues: Whether the assessee was entitled to avail Modvat credit when its final product was exempt from duty but the assessee chose to clear the goods on payment of duty instead of claiming the exemption.

Analysis: The exemption notification granted nil rate of duty, but the assessee was not compelled to avail it and could choose to clear the goods on payment of duty. The dispute had already been settled by prior decisions holding that an assessee may pay tariff duty rather than claim exemption. The Tribunal also applied the principle that where Modvat credit availed is exactly equivalent to the duty paid by not taking exemption, the situation is revenue neutral.

Conclusion: The denial of Modvat credit was unsustainable and the assessee succeeded on the issue.

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