MODVAT credit on exempted inputs denied where goods under exemption notification were not treated as nil-rated for credit purposes

Inputs cleared under a valid exemption notification were held not to be treated as goods charged to nil rate of duty for MODVAT purposes, because the scheme confined credit to inputs that had actually suffered duty. The Tribunal read Rule 57G(2) as requiring duty-paid inputs and rejected the argument that exempted clearances could be equated with nil-rated goods merely because no duty was paid on removal. On the merits, MODVAT credit was therefore not available on the exempted inputs, though the matter was referred to a Larger Bench because of a conflicting earlier view.

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Issues: Whether inputs cleared by the manufacturer under an exemption notification without payment of duty could be treated as duty-paid or nil-rated goods so as to qualify for MODVAT credit under Rule 57G(2).

Analysis: The question turned on the meaning of the expressions used in the MODVAT scheme, particularly the requirement that credit be available only in respect of duty-paid inputs and the proviso dealing with goods recognisable as non-duty paid or charged to nil rate of duty. The reasoning adopted the view that goods exempted under an exemption notification are not to be equated with goods charged to nil rate of duty merely because no duty was paid at clearance. The scheme was read as allowing credit only where the inputs had actually borne duty, and the Tribunal referred to earlier decisions taking the same approach to wholly exempt goods.

Conclusion: On the merits, MODVAT credit was not available on the exempted inputs.

Final Conclusion: The Bench expressed a view adverse to the appellant on eligibility for credit, but because of a conflicting earlier view, the matter was referred to a Larger Bench for decision.

Ratio Decidendi: Goods cleared under a valid exemption notification are not to be treated as charged to nil rate of duty for MODVAT purposes, and credit is confined to inputs that have in fact suffered duty.

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