Optional exemption entitlement allows duty payment and Modvat credit on inputs despite otherwise exempt final goods.

Exemption under the notification was treated as optional, so an assessee manufacturing exempt goods could choose either to avail the exemption or to pay duty and claim Modvat credit on duty-paid inputs. The Tribunal followed earlier decisions holding that credit could not be denied merely because the final goods were otherwise exempt, and it applied the same principle to the notification in issue. A demand under Rule 57C was therefore unsustainable where duty had been paid on the intermediate goods and credit was taken in accordance with law.

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Issues: Whether an assessee manufacturing goods covered by an exemption notification has the option either to avail the exemption or to pay duty and thereby enable credit of duty paid on inputs.

Analysis: The applicable legal framework treated exemption under the notification as optional. The Tribunal followed earlier decisions holding that an assessee may choose not to claim the exemption and may instead pay duty on the goods, with the consequence that Modvat credit on duty-paid inputs cannot be denied merely because the final goods were otherwise exempt. The same principle was applied to the notification involved in these appeals, and the demand based on Rule 57C was found unsustainable once duty had been paid on the intermediate goods and credit was taken in accordance with law.

Conclusion: The assessee had the option to pay duty in place of availing the exemption, and the Modvat credit taken on the inputs was permissible.

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