Modvat credit cannot be denied on exempt inputs where duty was actually paid, preventing double taxation on raw materials.

Modvat credit under Rule 57A of the Central Excise Rules, 1944 could not be denied merely because the inputs were covered by an exemption notification, where duty had actually been paid by the supplier and accepted by the department. The distinction between "paid" and "payable" was treated as material, and the entitlement to credit was examined on the basis of actual duty payment. The Modvat scheme was applied as a relief mechanism to prevent double taxation on inputs that had already suffered excise duty. Credit was therefore allowed, and the reference was answered in favour of the assessee.

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Issues: Whether Modvat credit could be denied on inputs merely because the inputs were covered by an exemption notification, when duty had in fact been paid on the inputs by the supplier.

Analysis: The expression used in Rule 57A(1) of the Central Excise Rules, 1944 is "paid" and not "payable", and the distinction was treated as material. Since the factual position was that duty had actually been paid on the raw materials and accepted by the department, the entitlement to credit had to be examined on that basis. The Modvat scheme was applied as a mechanism to avoid double taxation by granting relief where the inputs had already suffered excise duty.

Conclusion: Credit could not be denied on the footing that the inputs were exempt, because duty had in fact been paid on them; the reference was answered against the Revenue and in favour of the assessee.

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