Modvat credit reversal for shared inputs in dutiable and exempt goods upheld, keeping exemption valid; denial set aside.

Where inputs are commonly procured and stored for use in both dutiable and exempted final products, an exemption conditioned on non-availment of Modvat credit on inputs used in exempted goods is satisfied if the manufacturer reverses the credit attributable to such inputs. Applying SC precedent, reversal of credit (including by payment at the prescribed percentage under the rules) is treated as equivalent to not having taken credit. Consequently, denial of exemption on the ground that credit was initially taken was legally unsustainable; the impugned order was set aside and the appeal was allowed.

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Issues involved: The eligibility for small scale exemption under Notification No.16/97 for goods manufactured under different brand names and the condition of not availing Modvat Credit under Rule 57A.

Summary:
1. The appellants manufactured Oven Toaster Grillers under brand names "Bajaj" and "Lifelong." They claimed small scale exemption under Notification No.16/97 for goods sold under the brand name "Lifelong" but were denied due to alleged Modvat Credit availed on inputs. The dispute revolved around whether the payment of 8% duty on goods under the brand name "Lifelong" was equivalent to not availing Modvat Credit, as per the conditions of the exemption notification.

2. The appellants argued that they procured common inputs for both brand names and paid 8% duty on goods under the brand name "Lifelong" to compensate for Modvat Credit taken on inputs. They contended that this payment fulfilled the condition of not availing Modvat Credit, citing the Supreme Court decision in Chandrapur Magnet Wires Ltd. v. CCE. On the other hand, the Department argued that Modvat Credit was taken on all inputs, disqualifying the appellants from the exemption.

3. The Tribunal examined the commercial practice of procuring inputs for both exempted and dutiable goods together. Referring to the Supreme Court's ruling in the Chandrapur Magnet Wires case, it emphasized the requirement to reverse Modvat Credit on inputs used in exempted goods. The Tribunal found that the appellants' payment of 8% duty under Rule 57CC met the condition of not availing Modvat Credit, as per the specific rule and the Supreme Court decision. Consequently, the impugned order denying the exemption was deemed erroneous, and the appeal was allowed.

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