Modvat credit reversal cannot stand where inputs were processed and not removed as such, despite defective finished goods.

Modvat credit on inputs could not be reversed under Rule 57-I where the factual finding was that the pre-painted stainless steel coils were subjected to manufacturing processes and were not removed as such. The Revenue's demand depended on the contrary assumption that the inputs had been cleared unchanged, but that assumption was negatived by the lower appellate authority's unchallenged finding. As the defective or deformed cabinets were rejected finished goods and not a basis to treat the inputs as removed as such, the demand for credit reversal was not sustainable.

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Issues: Whether Modvat credit taken on inputs was liable to reversal under Rule 57-I of the Central Excise Rules, 1944 on the footing that the inputs were removed as such when defective cabinets manufactured from those inputs were cleared as scrap.

Analysis: The Revenue's demand was founded on the premise that the pre-painted stainless steel coils, which were the inputs, had been cleared as such. The lower appellate authority had recorded a factual finding that the coils were subjected to various manufacturing processes and that the cabinets emerging from the machine were only defective or deformed, leading to rejection of the finished cabinets. That finding negatived the basic assumption underlying the notice. Once the factual conclusion that the inputs were not removed as such stood unchallenged, the demand for reversal of credit could not be sustained.

Conclusion: The credit reversal demand was not maintainable and the appeals were rejected.

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