Modvat credit on inputs for exported exempt goods upheld; domestic exemption alone could not defeat credit eligibility.

Modvat credit was allowed on inputs used to manufacture exempt final products that were exported without payment of duty, because export removal did not justify denial of credit merely on the ground that the goods were exempt in the domestic market. The Tribunal distinguished cases involving exempt goods retained or cleared within India and accepted that the export character of the clearances preserved credit eligibility. On that basis, the reversal of credit was unwarranted, and the associated demand, interest, and penalty could not survive.

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Issues: Whether Modvat credit was admissible on inputs used in the manufacture of exempted final products that were exported without payment of duty, and whether the demand, interest, and penalty sustained on that basis were valid.

Analysis: The exported goods, though otherwise exempt, were taken out of India, and the governing principle applied was that credit on inputs used for exported final products cannot be denied merely because the finished goods are exempt in the domestic market. The reasoning also distinguished cases where exempted goods were not exported. On these facts, the Tribunal accepted that the credit was available and that the reversal or demand based on denial of such credit was not sustainable.

Conclusion: The assessee was entitled to Modvat credit on the inputs used for the exported exempted final products, and the demand with consequential interest and penalty failed.

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