Modvat credit cannot be denied for dutiable clearances merely because other goods are cleared under exemption.

Modvat credit on inputs used for branded, dutiable clearances could not be denied merely because the manufacturer also cleared unbranded goods at nil duty under a small-scale exemption. The dispute concerned credit linked to dutiable output, not inputs used in exempted goods. Where the credit was lawfully accrued in relation to taxable clearances and there was no showing that it related to exempt clearances, the exemption scheme did not require forfeiture of that credit. The assessee was therefore entitled to the credit and the impugned orders were set aside with consequential relief.

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Issues: Whether Modvat credit earned on inputs used in the manufacture of branded goods could be denied merely because the manufacturer also cleared unbranded goods at nil rate of duty under the small-scale exemption notification.

Analysis: The dispute was not about credit taken on inputs used in exempted goods. The manufacturer was availing the exemption only for unbranded goods and was utilising Modvat credit in relation to branded goods cleared on duty payment. The mere fact that part of the final product was cleared without duty did not, by itself, disentitle the manufacturer from using the credit lawfully accrued in respect of dutiable clearances. The exemption scheme did not require forfeiture of credit in such a situation.

Conclusion: The denial of Modvat credit was not justified and the assessee was entitled to the credit.

Final Conclusion: The appeal succeeded and the impugned orders were set aside with consequential relief to the assessee.

Ratio Decidendi: Modvat credit cannot be denied merely because a manufacturer also clears other goods under an exemption, where the credit is utilised in relation to dutiable goods and is not shown to be linked to exempted clearances.

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