Modvat credit reversal does not replace duty liability on returned goods; duty applies at the time of removal.

Under Rule 57F(1)(ii) of the Central Excise Rules, 1944, return of defective goods on which Modvat credit had been taken does not limit liability to reversal of the credit originally availed. The expression "appropriate duty of excise" was construed to mean the duty payable when the goods are cleared from the place where duty liability arises, as if they had been manufactured by the assessee. Reversal of credit alone does not discharge that liability; duty must be paid at the rate applicable on the date of removal.

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Issues: Whether, on return of defective goods on which Modvat credit had been taken, the assessee was required to reverse only the credit originally availed or to pay duty at the rate applicable on the date of removal under Rule 57F(1)(ii) of the Central Excise Rules, 1944.

Analysis: Rule 57F(1)(ii) was construed to mean that the expression "appropriate duty of excise" refers to the duty payable on the goods at the time they are cleared from the place where duty liability is attracted. Reversal of the credit earlier availed does not by itself discharge the duty liability. The rule operates by treating the clearances as if the goods had been manufactured by the assessee, so the duty has to be paid on that basis.

Conclusion: The duty payable on removal was not confined to the quantum of Modvat credit originally taken. The contention of the assessee was rejected and the issue was answered in favour of the Revenue.

Final Conclusion: The appeal succeeded and the order favourable to the assessee was set aside, restoring the order that required duty to be paid on the basis applicable at the time of removal.

Ratio Decidendi: Under Rule 57F(1)(ii) of the Central Excise Rules, 1944, reversal of Modvat credit on return of goods does not extinguish the duty liability, and the assessee must pay the appropriate duty applicable when the goods are cleared.

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