Modvat credit on fuel upheld where common-input restrictions did not bar credit for dutiable PET Chips manufacture

Modvat credit on fuel used in manufacture of PET Chips was admissible because the common-input restrictions under Rule 57C and Rule 57CC did not operate mechanically against fuel, which was treated as outside that restrictive scheme. The assessee was manufacturing PET Chips as its own dutiable final product as well as on job work, and credit could not be denied merely because part of the production was cleared on job work basis. The disallowance of credit was therefore not sustainable.

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Issues: Whether Modvat credit was admissible on fuel used by the assessee in the manufacture of PET Chips cleared partly on job work basis and whether the disallowance was justified on the ground that the goods were ultimately used in relation to exempted clearances.

Analysis: The relevant scheme under Rule 57C and Rule 57CC of the Central Excise Rules, 1944 restricts credit where inputs are used in exempted final products and contemplates reversal, payment, or maintenance of separate accounts for common inputs. However, the judgment treats inputs used as fuel as falling outside the restrictive operation of the common-input machinery, and notes that the assessee was manufacturing PET Chips as its own dutiable final product as well as on job work. The authorities below found that the fuel credit related to the assessee's own inputs and that the credit could not be denied merely because part of the production was on job work basis.

Conclusion: Modvat credit on the fuel was admissible, and the disallowance of credit was not sustainable.

Ratio Decidendi: Credit on inputs used as fuel cannot be denied by mechanically applying the common-input restrictions when the statute excludes fuel from that restriction and the assessee is otherwise manufacturing dutiable final products.

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