Modvat credit need not be reversed where manufacture rejects inputs as scrap and clears them on payment of duty.

Modvat credit on inputs issued for manufacture of watches was not required to be reversed merely because the inputs were later rejected during the production process and cleared as scrap on payment of duty. The inputs had already been used in manufacture, and the statutory scheme did not impose reversal in the absence of a specific requirement. The demand for reversal was therefore unsustainable.

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Issues: Whether Modvat credit availed on inputs issued for manufacture of watches was required to be reversed when such inputs were rejected in the course of production and sold as scrap on payment of duty.

Analysis: The inputs had been issued for manufacture and were actually used in the production process. They were later found unsuitable for assembly of quality watches and were therefore rejected. The rejected components were treated as scrap and cleared on payment of applicable duty. The statutory scheme did not require reversal of Modvat credit merely because the inputs, after being issued for manufacture, became scrap due to rejection in the manufacturing process.

Conclusion: The demand for reversal of credit was not sustainable and the assessee succeeded on this issue.

Ratio Decidendi: Inputs issued for manufacture, if rejected in the course of the manufacturing process and treated as scrap, do not attract reversal of Modvat credit in the absence of a specific statutory requirement.

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