Exemption and Modvat credit: a small scale unit cannot claim input credit for duty-free clearances under the exemption scheme.

A small scale unit availing full exemption under Notification No. 75/87 could not claim Modvat credit on inputs used for clearances within the exempted limit. Once the assessee opted for the exemption, its conditions applied in full, and no duty liability arose at that stage. The cited Modvat principle was distinguishable because it applied where exemption was not chosen, not where the assessee had elected to operate under the exemption. Credit could arise only for clearances beyond the exempted threshold where duty was otherwise payable.

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Issues: Whether a small scale unit availing exemption under Notification No. 75/87 could still claim Modvat credit on inputs when duty was paid within the exempted clearance limit.

Analysis: The applicable notification granted full exemption up to the specified clearance limit. Once the assessee chose to avail that exemption, the benefit had to be accepted along with its conditions. In that exempted stage, no duty liability arose and Modvat credit could not be claimed. The authority also noted that the permissive principle in the cited Modvat decision applied where the assessee did not opt for the exemption, and not where the exemption itself was being availed. Credit could be considered only in the later stage where duty was otherwise payable on clearances beyond the exempted limit.

Conclusion: The assessee was not entitled to Modvat credit in respect of clearances covered by the exemption, and the challenge to the disallowance failed.

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