Conditional exemption is optional; Cenvat credit on duty-paid inputs cannot be denied because the supplier could have claimed exemption.

A conditional exemption notification is optional, not mandatory, and a domestic supplier who clears inputs on payment of duty is not required to avail the exemption merely because it was available. Where the duty paid on the inputs was neither reversed nor refunded, the recipient cannot be denied Cenvat credit on the ground that the supplier should have cleared the goods duty free. The settled principle applied is that the recipient's credit claim cannot be defeated by questioning the supplier's assessment when the inputs were actually duty paid. The note concludes that Cenvat credit remained admissible and the related penalty was not sustainable.

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Issues: Whether Cenvat credit was admissible to the recipient when the domestic supplier cleared inputs on payment of duty instead of availing a conditional exemption notification applicable to supplies against invalidated advance authorization.

Analysis: The dispute turned on the character of Notification No. 44/2001-CE (NT) and the effect of Section 5A of the Central Excise Act, 1944. A conditional exemption is optional, unlike an absolute exemption, and the supplier was not compelled to clear goods duty free merely because the notification was available. Once the supplier chose to pay duty and such duty was not shown to have been reversed or refunded, the recipient could not be denied credit merely on the theory that the supplier ought to have availed the exemption. The settled principle applied was that, for credit purposes, the assessment and duty payment at the supplier's end cannot be questioned at the recipient's end when the inputs are duty paid.

Conclusion: Cenvat credit was correctly available to the assessee and the penalty on the co-appellant was not sustainable.

Final Conclusion: The impugned orders were set aside and the appeals were allowed on the footing that duty paid on inputs could not be denied as credit merely because a conditional exemption could have been availed.

Ratio Decidendi: A conditional exemption notification is optional, and where inputs are actually cleared on payment of duty and the duty remains unquestioned at the supplier's end, Cenvat credit cannot be denied to the recipient on the ground that the supplier should have availed the exemption.

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