Modvat credit reversal under Rule 57AG(2) applies to usable intermediate products, but not to waste parings.

On opting out of the Modvat scheme and availing exemption, reversal under Rule 57AG(2) extends only to credit on inputs lying in stock or contained in finished goods when the option is exercised. Credit attributable to waste parings is outside that reversal obligation because waste is not treated as finished goods for this purpose, so no reversal was required on that component. Credit attributable to compounded rubber had to be reversed because it was treated as a usable intermediate product with shelf life and as an input in the manufacture of tread rubber, bringing it within the scope of Rule 57AG(2).

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Issues: Whether, on opting out of the Modvat scheme and availing exemption under Notification No. 8/2000, the assessee was required to reverse credit attributable to waste parings as well as compounded rubber under Rule 57AG(2) of the Central Excise Rules.

Analysis: Rule 57AG(2) requires reversal only of the credit allowed in respect of inputs lying in stock or contained in finished goods on the date the option is exercised. Waste products are not treated as finished goods for this purpose, and credit relatable to inputs contained in waste need not be reversed. By contrast, compounded rubber was found to be a usable intermediate product with shelf life and was also treated as an input used in the manufacture of tread rubber, so the credit attributable to it remained within the scope of the reversal obligation.

Conclusion: The assessee was not required to reverse credit attributable to waste parings, but was required to reverse credit attributable to compounded rubber.

Final Conclusion: The appeal succeeded only to the extent of excluding waste parings from the credit reversal, while the demand relating to compounded rubber was sustained.

Ratio Decidendi: On opting out of Modvat, reversal under Rule 57AG(2) extends only to credit on inputs in stock or contained in finished goods, not to credit relatable to waste, but it does apply to credit attributable to marketable intermediate products treated as inputs in manufacture.

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