Duty on exempt intermediate goods permitted, but Modvat credit remained capped under the applicable notification-based restriction.

A manufacturer may pay duty on an exempted intermediate PVC film or sheet; the exemption under Notification No. 217/86-C.E. did not bar such payment, and the cited authorities did not establish any rule limiting this to partially exempt goods. However, Modvat credit on PVC granules used through that intermediate product in the manufacture of coated fabric remained subject to the notification-based restriction under Notification No. 177/86 as amended by Notification No. 39/91. The manufacturing split could not defeat that limit, and the credit was confined to the prescribed ceiling.

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Issues: (i) Whether duty could be paid on PVC film or sheet which was exempted under Notification No. 217/86-C.E., and whether such payment was contrary to law; (ii) whether the Modvat credit attributable to PVC granules used in the manufacture of the intermediate sheet or film and then in the coated fabric was restricted by Notification No. 177/86 as amended by Notification No. 39/91.

Issue (i): Whether duty could be paid on PVC film or sheet which was exempted under Notification No. 217/86-C.E., and whether such payment was contrary to law.

Analysis: The exemption granted to the PVC film or sheet did not bar the manufacturer from paying duty on that product. The Tribunal rejected the view that the earlier decisions applied only to cases of partial exemption, and held that the authorities cited did not establish any such distinction. The reliance placed on the Andhra Pradesh High Court decision and on the Supreme Court decision in Kailashnath did not alter the position, since those authorities did not decide the same question in the present context.

Conclusion: The appellant was entitled to pay duty on the exempted PVC film or sheet, and such payment was not contrary to law.

Issue (ii): Whether the Modvat credit attributable to PVC granules used in the manufacture of the intermediate sheet or film and then in the coated fabric was restricted by Notification No. 177/86 as amended by Notification No. 39/91.

Analysis: The PVC sheet or film was only an intermediate product used in the manufacture of the final coated textile fabric. Since the granules were used in the manufacture of the coated fabric through the intermediate sheet or film, the restriction imposed by the notification continued to apply. The manufacturing split adopted by the appellant could not be used to defeat the limitation on credit.

Conclusion: The Modvat credit was restricted and could not exceed Rs. 5.50 per square metre.

Final Conclusion: The appeal succeeded only to the extent that payment of duty on the exempted intermediate product was held permissible, but the credit limitation under the notification was upheld.

Ratio Decidendi: A manufacturer may pay duty on an exempted intermediate product, but where that product is used in the manufacture of a final product, the Modvat credit available on the input duty remains subject to the specific notification-based restriction applicable to that manufacture.

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