Modvat credit and small scale exemption can coexist for different goods, and also for the same goods if related credit is reversed.

Modvat credit and small scale exemption were treated as capable of simultaneous availment in respect of different specified goods, because the earlier Tribunal view on that point had been affirmed through dismissal of the Revenue's appeal and was treated as confirmed by merger. For the same specified goods, simultaneous exemption and credit was also accepted where the credit relatable to inputs used in the exempted goods was reversed before clearance. The stated principle is that exemption should not be denied once the credit attributable to duty-free goods has been reversed, and the note concludes that the assessee's position was accepted on both issues, subject to reversal of the relevant credit.

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Issues: (i) Whether Modvat credit and full exemption under the small scale exemption notification could be availed simultaneously in respect of different specified goods; (ii) Whether, in respect of the same specified goods, full exemption and Modvat credit could be availed simultaneously where the credit attributable to exempted goods was reversed.

Issue (i): Whether Modvat credit and full exemption under the small scale exemption notification could be availed simultaneously in respect of different specified goods.

Analysis: The Tribunal treated the controversy as covered by its earlier decision on different specified goods, which had been affirmed by the Supreme Court through dismissal of the Revenue's appeal. The binding effect was taken to follow by application of the doctrine of merger, so that the earlier view permitting simultaneous availment on different goods stood confirmed.

Conclusion: Yes. Simultaneous availment of Modvat credit and full exemption was permissible for different specified goods.

Issue (ii): Whether, in respect of the same specified goods, full exemption and Modvat credit could be availed simultaneously where the credit attributable to exempted goods was reversed.

Analysis: The Tribunal applied the principle recognised by the Supreme Court that reversal of credit before clearance of exempted final products removes the basis for denying exemption on the ground that credit had been taken on inputs used in those goods. On that analogy, it held that where the Modvat credit relatable to inputs used in duty-free goods is reversed, the manufacturer can claim both the credit and the exemption in relation to the same specified goods.

Conclusion: Yes, subject to reversal of the Modvat credit taken on inputs used in the duty-free goods.

Final Conclusion: The reference was answered in favour of the assessee on both aspects, and the appeal was allowed with the condition that the credit attributable to inputs used in exempted goods be reversed.

Ratio Decidendi: Dismissal of an appeal by the Supreme Court attracts merger and confirms the underlying decision, and exemption cannot be denied where the credit attributable to exempted goods is reversed before clearance of those goods.

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