Election between exemption and MODVAT credit permits a small industrial unit to choose the more beneficial tax treatment.

A small scale industrial unit eligible for an exemption notification was also entitled to choose MODVAT credit on inputs under Rule 57A instead of availing the exemption. Rule 57C denied input credit only where the final product was wholly exempt or chargeable to nil duty, but the exemption notification and the MODVAT scheme were both beneficial and operated as alternatives. A manufacturer covered by both could elect the more beneficial course, and the exemption could not be imposed so as to deny MODVAT credit when the assessee chose not to avail the exemption.

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Issues: Whether a small scale industrial unit eligible for exemption under the notification could instead forgo the exemption and avail MODVAT credit on inputs under Rule 57A of the Central Excise Rules, 1944.

Analysis: Rule 57A permitted credit of duty paid on inputs for use towards payment of duty on final products, while Rule 57C denied such credit where the final product was wholly exempt or chargeable to nil duty. The exemption notification was a beneficial concession for SSI units, intended to encourage small industries, and the MODVAT scheme was also a beneficial mechanism intended to reduce the cost of the final product by neutralising the duty burden on inputs. The two benefits were alternative in nature. A manufacturer covered by both was entitled to elect the more beneficial course, and the exemption could not be thrust upon the assessee so as to deprive it of MODVAT credit where it chose not to avail the exemption.

Conclusion: The assessee had the option either to avail the exemption notification or to pay duty on the final product by taking MODVAT credit on inputs under Rule 57A, and the reference was answered in favour of the assessee.

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