Modvat credit in job-work manufacture remains available when inputs are used for intermediate products returned to the principal manufacturer.

Modvat credit on L.P.G., L.D.O. and other inputs used by a job worker in manufacturing automotive gears was treated as allowable where the goods were processed as intermediate products for return under the job-work scheme. The note explains that Rule 57C does not apply merely because the processed goods are cleared under Rule 57F(4) or Notification No. 214/86-CE; it applies only where the assessee clears its own exempt final product. Earlier Tribunal reasoning was followed to confirm that credit should not be denied mechanically in a common manufacturing process involving both own production and job work, and the denial of credit was therefore unsustainable.

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Issues: Whether Modvat credit on L.P.G. and L.D.O. used by a job worker in the manufacture and processing of automotive gears could be denied on the footing that the goods were cleared under Rule 57F(4) or Notification No. 214/86-CE, and whether Rule 57C applied to such intermediate processes.

Analysis: The credit was taken on fuels and other inputs used in a common manufacturing process where the assessee manufactured gears both on its own account and as a job worker. The dispute turned on whether the goods made for the principal manufacturer were final products of the assessee or merely intermediate products processed and returned under the job-work scheme. The reasoning followed earlier Tribunal decisions holding that Modvat credit is not to be denied mechanically where the job worker manufactures an intermediate product for further manufacture by the principal manufacturer, and that Rule 57C is attracted only when the job worker himself clears an exempt final product. The scheme of Modvat and Notification No. 214/86-CE was read as permitting credit without defeating the benefit of avoiding duty at intermediate stages.

Conclusion: Rule 57C did not bar the credit, and the assessee was entitled to Modvat credit on the inputs used in the job-work manufacture.

Final Conclusion: The impugned denial of credit was unsustainable, and the assessee's appeal succeeded with consequential relief.

Ratio Decidendi: In a job-work arrangement, Modvat credit cannot be denied merely because the processed goods are returned under Rule 57F(4) or Notification No. 214/86-CE; Rule 57C applies only where the assessee's own final product is exempt, not where the job worker manufactures an intermediate product for the principal manufacturer.

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