Revenue-neutral Modvat credit cannot be denied where duty is voluntarily paid on otherwise exempt final products.

Where an assessee manufactures goods otherwise covered by an exemption but voluntarily pays duty on the clearances, Modvat credit on inputs used in manufacture cannot be denied on the ground of exemption. The controlling principle is revenue neutrality: if duty is discharged on the final products, denial of credit on inputs or capital goods is not justified. On that basis, the demand and penalty discussed in the note are unsustainable, and the article treats the issue as settled by Supreme Court authority relied upon in the order.

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Issues: Whether credit of duty paid on inputs and capital goods could be denied when the final products were exempted but duty was voluntarily paid on them, and whether the demand and penalty could therefore be sustained.

Analysis: The appellants were manufacturing goods falling under Chapters 15 and 38 of the Central Excise Tariff Act, 1985 and had availed Modvat credit on inputs used in the manufacture of the final products. The dispute arose because the final products were said to be wholly exempt under Notification No. 115/75. The controlling principle applied was that where the assessee has chosen to discharge duty on the exempted goods, denial of Modvat credit is not justified, since the exercise is revenue neutral. The issue was treated as settled by the Supreme Court decisions relied upon in the order.

Conclusion: The credit could not be denied and the demand and penalty were unsustainable.

Ratio Decidendi: When an assessee elects to pay duty on goods otherwise exempt from duty, Modvat credit on the inputs used in their manufacture cannot be denied because the transaction is revenue neutral.

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