Modvat credit on duty-paid exempt goods upheld where the supplier validly chose to pay duty despite available exemption.

Modvat credit could not be denied on duty-paid steam received through pipeline merely because the steam was exempt under Notification No. 4/97-C.E. The Tribunal held that an exemption notification does not compel the manufacturer to avail exemption, and the supplier may lawfully choose to pay duty instead. Since duty was actually paid on the steam, that payment was treated as valid, and the departmental circular did not justify refusal of credit. The denial of Modvat credit was therefore unsustainable, and credit on the duty-paid steam was upheld with consequential relief.

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Issues: Whether Modvat credit could be denied on steam received through pipeline merely because the goods were exempt under Notification No. 4/97-C.E. dated 1-3-1997, when duty had in fact been paid by the supplier.

Analysis: The credit was denied on the premise that an exempted product could not be subjected to duty only to generate credit for the buyer. The Tribunal, following its earlier decision on identical facts, held that where an exemption notification is available, the manufacturer is not compelled to avail it and may choose to pay duty. Since the supplier had paid duty on the steam, the payment was treated as valid, and the departmental reliance on the circular did not justify denial of credit.

Conclusion: The denial of Modvat credit was held to be unsustainable, and the assessee succeeded on the issue.

Final Conclusion: The appeal was allowed with consequential relief, and the credit taken on the duty-paid steam was upheld.

Ratio Decidendi: Where duty is validly paid on goods though exempt under a notification, the recipient cannot be denied credit merely on the ground that the supplier could have availed the exemption.

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