Modvat credit on inputs embedded in exempt reusable scrap was held inadmissible where the scrap arose during exemption.

Modvat credit was held inadmissible on duty paid plastic granules contained in reusable scrap generated while the assessee was under small scale exemption, because the scrap itself was exempt from duty. The analysis treated the cited authorities on exempt intermediate goods and waste and scrap as distinguishable. Since the reusable scrap arose during the exemption period, the granules embedded in that scrap could not be treated as inputs used in the manufacture of final products after the assessee moved into the duty-paying sector. The denial of credit was therefore upheld against the assessee.

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Issues: Whether Modvat credit was admissible on the duty paid plastic granules contained in reusable scrap generated during the period when the assessee was availing small scale exemption and the scrap itself was exempt from duty.

Analysis: The assessee sought credit on the duty paid inputs embedded in reusable scrap generated while it was enjoying small scale exemption. The cited authorities on credit relating to exempt intermediate goods and waste and scrap were found distinguishable. The reusable scrap was generated during the exemption period, and there was no question of treating the granules contained in such scrap as inputs in the manufacture of the final product after the assessee entered the duty paying sector. On those facts, the inputs embedded in the exempt scrap could not be regarded as admissible credit for the final clearances.

Conclusion: The credit was not admissible and the denial of credit was upheld, against the assessee.

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