Modvat credit remains available when an exempt intermediate product is used to make dutiable final products.

Rule 57C did not require reversal of Modvat credit where resin, an intermediate product cleared under Notification No. 217/86-C.E. and Chapter X procedure, was ultimately used in the manufacture of dutiable final products. The exempt clearance of the intermediate product did not alter the position because the final product remained duty-paid paints. Since Rule 57C applies only when the final products are exempt, it had no application on these facts. Reversal of Modvat credit could not therefore be demanded, and the assessee's entitlement to credit was upheld.

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Issues: Whether Modvat credit was required to be reversed under Rule 57C where resin, an intermediate product cleared under Notification No. 217/86-C.E. and Chapter X procedure, was used in the manufacture of dutiable final products at another factory.

Analysis: The intermediate resin was not the final product in the scheme of manufacture, since the final product was paints on which duty was paid. The clearance of the intermediate product under the exemption notification and Chapter X procedure did not change the legal position where the inputs were ultimately used in the manufacture of dutiable final products. In such a situation, Rule 57C, which disallows credit where the final products are exempt, had no application.

Conclusion: Rule 57C was not attracted and reversal of Modvat credit could not be demanded.

Final Conclusion: The impugned order was set aside and the assessee's claim to Modvat credit was upheld.

Ratio Decidendi: Modvat credit cannot be denied or reversed merely because an intermediate product is cleared under exemption or Chapter X procedure, if that product is used in the manufacture of dutiable final products.

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