Reversal of Modvat credit before notice defeated Rule 57CC demand on exempted ghee.

Reversal of Modvat credit on common inputs before issuance of the show cause notice meant the credit attributable to those inputs was treated as never having been taken for the exempted final product. On that footing, the statutory condition for demanding 8% of the value of exempted ghee under Rule 57CC of the Central Excise Rules, 1944 did not survive, because the disputed credit had already been fully debited before enforcement. The demand was therefore unsustainable and not payable.

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Issues: Whether the demand of 8% of the value of exempted ghee under Rule 57CC of the Central Excise Rules, 1944 was sustainable when the assessee had reversed the Modvat credit on the common inputs before issuance of the show cause notice.

Analysis: The assessee had taken credit on hydrochloric acid and caustic soda lye, but the entire credit attributable to the disputed inputs was debited before the show cause notice. The governing principle applied was that where credit on inputs used in exempted final products is reversed before removal or before enforcement, the situation is treated as if no credit had been taken for those inputs. On that footing, the condition for demanding the amount prescribed under Rule 57CC did not survive, and the demand could not be sustained.

Conclusion: The demand of 8% on the value of ghee was not payable, and the assessee succeeded on this issue.

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