Modvat/Cenvat credit on duty-paid capital goods cannot be denied when they are also used for dutiable production.

Modvat/Cenvat credit on duty-paid capital goods cannot be denied merely because the goods were first used for exempted manufacture, where they were also used in producing excisable goods. The absence of an undertaking for exclusive use in exempted production was material, and the right to credit remained intact once the same capital goods were later deployed for dutiable clearances. The Court also noted that no limitation period was prescribed for availing such credit in these circumstances. The assessee was therefore entitled to the credit and the departmental demand was unsustainable.

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Issues: Whether Modvat/Cenvat credit on capital goods could be denied merely because the capital goods were initially used in the manufacture of exempted goods, when they were also used for the manufacture of excisable goods.

Analysis: The capital goods had been purchased on payment of excise duty and were used in the assessee's factory for manufacturing both exempted and excisable goods. There was no material to show that the goods were purchased under any undertaking that they would be used exclusively for exempted production. The Court held that the absence of duty liability on exempted goods did not affect the right to credit when the same capital goods were later used for clearances on which duty was payable. It also noted that no limitation period was prescribed for availing such credit once duty had been paid on the capital goods.

Conclusion: The assessee was entitled to avail credit on the capital goods, and the departmental demand was unsustainable.

Ratio Decidendi: Where capital goods are duty paid and are used for both exempted and dutiable production, credit cannot be denied merely because the goods were first used for exempted manufacture, unless exclusive use for exempted goods is established.

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