Modvat declaration alone does not defeat small-scale exemption where no input credit was actually taken.

A small scale unit is not treated as having availed Modvat merely because it filed a declaration under Rule 57G if it did not actually take credit on inputs. On that footing, filing the declaration alone did not justify denial of the exemption under Notification No. 175/86. The demand for duty at tariff rate was therefore unsustainable, and the unit remained entitled to the exemption under paragraph a(ii) of the notification.

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Issues: Whether a small scale unit that had only filed a Modvat declaration under Rule 57G but had not actually taken Modvat credit on inputs could be denied exemption under Notification No. 175/86 and subjected to duty at tariff rate.

Analysis: The appellant had not taken credit of the duty paid on inputs and had therefore not availed Modvat benefit in substance. Mere filing of a Modvat declaration did not make the unit a Modvat unit for the purpose of denying the exemption available under paragraph a(ii) of Notification No. 175/86. On that footing, the demand of duty at tariff rate was not sustainable.

Conclusion: The appellant was entitled to the exemption under paragraph a(ii) of Notification No. 175/86, and the demand of duty at tariff rate was unjustified.

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