Modvat credit reversal on stock inputs applies when a manufacturer opts for small scale exemption under Rule 57H(7).

A manufacturer opting out of Modvat and availing small scale exemption was required under Rule 57H(7) of the Central Excise Rules to reverse credit attributable to inputs lying in stock or contained in finished excisable goods lying in stock on the date the exemption option was exercised. The rule imposed a specific obligation to debit the credit earlier taken on such inputs, and that obligation covered credit relatable to inputs embedded in finished goods remaining in stock. Authorities cited against reversal were held inapplicable because the express text of the rule governed the situation. The demand was therefore correctly sustained.

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Issues: Whether a manufacturer opting out of the Modvat scheme and availing small scale exemption was required under Rule 57H(7) to debit the credit relatable to inputs contained in finished goods lying in stock on the date of such option.

Analysis: The appellants had been availing small scale exemption based on the value of clearances and were therefore governed by Rule 57H(7) of the Central Excise Rules. That rule required a manufacturer who opts for exemption from the whole of the duty and who had been taking credit on inputs to pay an amount equivalent to the credit allowed in respect of inputs lying in stock or used in any finished excisable goods lying in stock on the date the option was exercised. The demand in these appeals was confined to credit taken on inputs contained in the finished products lying in stock when the appellants opted out of Modvat. The authorities cited by the appellants did not govern this situation because the rule itself contained a specific obligation to reverse the credit in such circumstances.

Conclusion: The appellants were required to reverse the credit attributable to inputs contained in finished goods lying in stock, and the demand was correctly upheld.

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