Modvat credit on fuel and stock transfers: reversal was not required where exempt intermediate goods were not sold.

Modvat credit on furnace oil used as fuel could not be denied merely because the intermediate product manufactured with that fuel was cleared without payment of duty, since Rule 57C(3) expressly excludes fuel from reversal and the scheme of Rules 57C, 57CC and 57D does not require credit reversal in that situation. Rule 57CC also did not apply to transfer of the intermediate product between units on a stock transfer basis, because the provision operates only where exempt goods are sold and a stock transfer between units of the same manufacturer is not a sale. The Tribunal therefore held that the assessees were entitled to Modvat credit and consequential relief.

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Issues: (i) Whether Modvat credit on furnace oil used as fuel in the manufacture of an intermediate product cleared without payment of duty could be denied under Rules 57C, 57CC and 57D of the Central Excise Rules, 1944. (ii) Whether Rule 57CC applied where the intermediate product was transferred to another unit on stock transfer basis and there was no sale.

Issue (i): Whether Modvat credit on furnace oil used as fuel in the manufacture of an intermediate product cleared without payment of duty could be denied under Rules 57C, 57CC and 57D of the Central Excise Rules, 1944.

Analysis: The governing rules create an express exclusion in respect of inputs used as fuel. Rule 57C(3) removes fuel from the operation of Rule 57C(2), and the harmonious reading of Rules 57C, 57CC and 57D shows that credit on fuel is not to be reversed merely because the product manufactured with such fuel is exempt or cleared without duty. The intermediate product remained an intermediate product and did not lose that character merely because it was cleared from the factory.

Conclusion: The denial of Modvat credit on furnace oil used as fuel was unsustainable, and the assessee succeeded on this issue.

Issue (ii): Whether Rule 57CC applied where the intermediate product was transferred to another unit on stock transfer basis and there was no sale.

Analysis: Rule 57CC operates on the footing of sale of exempted goods. Where the goods are merely shifted or transferred between units of the same manufacturer and no sale takes place, the statutory condition for applying Rule 57CC is absent. The definition of sale under Section 2(h) of the Central Excise Act, 1944 supports this construction, because stock transfer between units of the same legal entity does not amount to a sale.

Conclusion: Rule 57CC was not applicable to the stock transfer, and the assessee was entitled to Modvat credit on this issue as well.

Final Conclusion: The common question was decided in favour of the assessees, the impugned orders were set aside, and both appeals were allowed with consequential relief according to law.

Ratio Decidendi: Fuel used as an input is expressly excluded from reversal provisions under the Modvat scheme, and Rule 57CC applies only where exempt goods are sold, not where they are merely stock transferred within the same manufacturer.

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