Modvat credit reversal preserves exemption where attributable input credit for exempt clearances is reversed and no express bar exists.

Exemption under Notification No. 263/87-C.E. could not be denied merely because Modvat credit had been taken on inputs used in goods cleared without duty under Chapter X procedure, where the credit attributable to the exempt clearances had already been reversed. The governing principle was that, for final products cleared both on payment of duty and without payment of duty, only the credit relatable to the exempted goods must be reversed. In the absence of an express bar in the notification against availing Modvat credit, the mere taking of credit did not justify denial of exemption. The assessee was therefore entitled to the notification benefit.

---

---

Issues: Whether exemption under Notification No. 263/87-C.E. could be denied merely because Modvat credit had been taken on inputs used in goods cleared without payment of duty under Chapter X procedure, when the credit attributable to the exempt clearances had already been reversed.

Analysis: The appeal turned on the interaction between Modvat credit and exempt clearances. The governing principle applied was that where final products are cleared both on payment of duty and without payment of duty, the credit relatable to inputs used in the exempted final products must be reversed. The record showed that such reversal had already been effected. In the absence of any express condition in the notification barring exemption where Modvat credit is availed, the mere taking of credit did not furnish a ground to deny the exemption.

Conclusion: The denial of exemption was not sustainable, and the assessee was entitled to the benefit of Notification No. 263/87-C.E.

Ratio Decidendi: Exemption cannot be denied solely because Modvat credit was availed if the attributable credit on inputs used for exempt clearances has been reversed and the exemption notification does not contain an express bar.

---