Modvat credit on packing containers remains available where exemption applies only to the finished packed product, not the packaging materials.

An exemption that reduces duty on paints and varnishes cleared in small packings on a proportionate basis does not amount to exemption from duty on the value of the packaging materials themselves. Explanation (b)(ii) to Rule 57A applies only where exemption is availed in respect of the packaging materials used for the final products. On that basis, metal containers used for packing paints and varnishes were not covered by the disqualifying exception, and Modvat credit remained admissible on those containers.

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Issues: Whether metal containers used for packing paints and varnishes were hit by Explanation (b)(ii) to Rule 57A of the Central Excise Rules, 1944 so as to deny Modvat credit when the final products were cleared under Notification No. 219/77-C.E. dated 15.07.1977.

Analysis: Notification No. 219/77-C.E. grants exemption to specified paints and varnishes cleared in small packings by reducing the duty otherwise leviable on the value of the packed products on a proportionate basis. It does not exempt the duty payable on the value of the packaging materials themselves. Explanation (b)(ii) to Rule 57A applies only where an exemption is availed in respect of the duty of excise payable on the value of the packaging materials used for packing the final products. Since the notification operates on the finished goods and not on the packing materials, the exclusion under the explanation is not attracted.

Conclusion: The containers were not covered by the disqualifying exception in Explanation (b)(ii) to Rule 57A, and Modvat credit was admissible. The departmental appeal failed.

Final Conclusion: The order allowing Modvat benefit on metal containers was upheld and the departmental challenge was rejected.

Ratio Decidendi: An exemption notification that merely reduces duty on the final packed product on a proportionate basis does not amount to an exemption availed on the value of packaging materials for the purpose of excluding Modvat credit under Explanation (b)(ii) to Rule 57A.

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