Modvat credit reversal on molasses used for rectified spirit was limited to 8% of value, not full denial.

Modvat credit on molasses used to manufacture rectified spirit for captive consumption in liquor production was not required to be reversed in full. The Tribunal applied the excise credit reversal rule on the footing that rectified spirit is an excisable intermediate product and that, in such cases, reversal is linked to 8% of the value of the intermediate or exempted product rather than denial of the entire credit merely because the final product is captively consumed. The demand for full reversal was therefore not sustainable, and retention of credit subject to reversal of 8% was allowed.

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Issues: Whether the assessee was required to reverse the entire Modvat credit on molasses used in the manufacture of rectified spirit captively consumed for production of Indian Made Foreign Liquor, or whether reversal of 8% of the value of the intermediate product under the applicable excise rules was sufficient.

Analysis: The dispute turned on the applicability of the excise credit reversal mechanism to a case where molasses were used as a common input for manufacture of rectified spirit, which in turn was used in the liquor manufacturing section. The Tribunal followed earlier decisions holding that rectified spirit is an excisable intermediate product and that the relevant rule contemplates reversal based on the value of the exempted or nil-rated final product in such circumstances, rather than denial of the entire credit merely because the ultimate product is captively consumed.

Conclusion: The assessee was entitled to retain Modvat credit subject to reversal of 8% of the value of rectified spirit, and the demand for reversal of the entire credit was not sustainable.

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