Modvat credit on unused inputs need not be reversed in-factory, but it cannot be used for other models.

Modvat credit validly taken on inputs for a discontinued three-wheeler model did not require immediate reversal while the inputs still remained in the factory, because reversal under the scheme arises when inputs are cleared as such and the credit is then debited against that clearance. The credit therefore continued to remain in the Modvat account until such clearance. However, credit on inputs meant exclusively for the discontinued model could not be used to pay duty on other models, since those inputs were not used in their manufacture. The demand for reversal was therefore unsustainable at that stage, but utilisation of the credit for other models was not permitted.

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Issues: Whether Modvat credit taken on inputs meant exclusively for a discontinued model of three-wheeler was required to be reversed while the inputs continued to remain in the factory, and whether such credit could be used for other models.

Analysis: The credit had already been validly taken on receipt of the inputs. Under the Modvat scheme, reversal is required when the inputs are cleared as such, because the credit then stands debited against such clearance. Since the inputs were still lying in the factory, there was no basis to insist on immediate reversal of the credit. At the same time, the credit earned on inputs meant exclusively for the discontinued model could not be used for payment of duty on other models, as those inputs were not used in the manufacture of those models.

Conclusion: The demand for reversal of credit was not sustainable while the inputs remained in the factory, and the credit would remain in the Modvat account until clearance of the inputs as such. Utilisation of that credit for other models was not permitted.

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