Modvat credit remains available for duty-paid inputs even where the final product could have been exempted.

An assessee is not required to claim exemption merely because the final product could have been cleared under an exemption notification. Where duty is actually paid on inputs used in the manufacture of captively consumed goods, Modvat credit cannot be denied solely because the finished product was capable of exemption. The Tribunal rejected the department's view that duty paid on the captive product was only a deposit, and applied its earlier reasoning that actual duty payment on inputs preserves credit entitlement. On that basis, Modvat credit was held available.

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Issues: Whether the assessee could claim Modvat credit on duty paid inputs used in captively consumed goods despite the availability of exemption under the notification.

Analysis: The dispute turned on the principle that an assessee is not compelled to claim exemption merely because the final product is eligible for it. The Tribunal followed its earlier view that where duty is actually paid on inputs used in the manufacture of final goods, credit cannot be denied merely on the ground that the final product could have been cleared under an exemption notification. The department's contention that payment of duty on the captively consumed product should be treated only as a deposit was rejected in light of that principle.

Conclusion: The assessee was entitled to Modvat credit, and the department's challenge failed.

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