Exemption notification and Modvat credit: later normal-duty clearances did not cancel earlier nil-duty entitlement.

An exemption notification granting nil duty up to aggregate clearances of Rs. 85 lakhs in a financial year, subject to non-availment of Modvat credit, was satisfied where credit was not taken during the exempt period. Availing Modvat credit only after crossing the threshold, while paying duty at the normal rate for later clearances, did not defeat the earlier exemption because there was no prohibition on opting out of the exemption mid-year. The demand was therefore not sustainable.

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Issues: Whether the assessee remained entitled to exemption under Notification No. 5/98-C.E. dated 21-6-1998 for clearances up to Rs. 85 lakhs notwithstanding availing Modvat credit after crossing that limit and paying duty at the normal rate.

Analysis: The notification granted nil duty up to aggregate clearances of Rs. 85 lakhs in a financial year and prescribed 5% duty thereafter, subject to the condition that Modvat credit not be availed while taking the exemption. The assessee did not take the concessional rate after crossing the threshold, but instead paid duty at the normal rate and availed credit only for that later period. The condition in the notification was satisfied for the clearances up to Rs. 85 lakhs, and there was no prohibition against opting out of the exemption in the middle of the financial year.

Conclusion: The assessee was entitled to the exemption for clearances up to Rs. 85 lakhs, and the demand was not sustainable.

Ratio Decidendi: Where an exemption notification conditions availment of nil duty on non-availment of Modvat credit, the condition is satisfied for the exempt clearances if credit is not taken during that period, and later payment of normal duty with credit after crossing the threshold does not defeat the earlier exemption.

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