Excise credit reversal on captively consumed rectified spirit is limited to 8% where the intermediate product remains excisable.

Where molasses is used as a common input to manufacture rectified spirit and other dutiable products, and the rectified spirit is then captively consumed in making non-excisable Indian Made Liquor, the relevant product for the reversal mechanism remains the excisable intermediate product. The Tribunal noted that reversal under Rule 57CC/Rule 57AD was already being made at 8% of the value of rectified spirit, and that method was sufficient because rectified spirit, not Indian Made Liquor, was the product to which the credit reversal rule applied. The demand for reversal of the entire Modvat/Cenvat credit and the penalty were therefore not sustainable.

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Issues: Whether the assessee was required to reverse the entire Modvat/Cenvat credit taken on molasses used for manufacture of rectified spirit which was further consumed in the assessee's distillery for manufacture of Indian Made Liquor, or whether reversal of 8% of the value of rectified spirit under Rule 57CC/Rule 57AD was sufficient.

Analysis: Molasses was used as a common input for manufacture of rectified spirit and other dutiable products. The disputed quantity of rectified spirit was transferred for use in the manufacture of Indian Made Liquor, which is non-excisable, and the assessee had already been reversing 8% of the value of rectified spirit in terms of the procedure followed under Rule 57CC. The controlling question was whether rectified spirit or Indian Made Liquor was to be treated as the relevant final product for applying the reversal mechanism. The Tribunal relied on its earlier decision holding that rectified spirit is an excisable intermediate product and remains the relevant final product for the purpose of Rule 57CC, even when it is captively consumed for manufacture of non-excisable Indian Made Liquor.

Conclusion: The assessee was entitled to retain the credit on molasses and was only required to reverse 8% of the value of rectified spirit. The demand for reversal of the entire credit and the penalty were not sustainable.

Final Conclusion: The appeal was allowed and the assessee's credit reversal method was upheld.

Ratio Decidendi: Where an excisable intermediate product is captively consumed for manufacture of a non-excisable product, the reversal mechanism under Rule 57CC applies with reference to the excisable intermediate product, and not by denying the entire input credit.

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