Retrospective reversal of Modvat credit regularises demand, but interest remains payable until actual reversal.

Retrospective Rule 57CCC, read with Section 69(2) of the Finance Act, 2010, regularised reversal of Modvat credit attributable to exempted final products, so the disputed credit demand and penalty did not survive once the credit had been reversed. The scheme was treated as covering the relevant period, and the delay in making the reversal-related application was treated as condonable because the assessee was pursuing the matter before the Tribunal. However, interest remained payable for the intervening period between clearance of the goods and actual reversal of the credit, and that interest demand was sustained.

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Issues: (i) whether the demand of disputed Modvat credit and penalty was sustainable after the retrospective scheme for reversal of credit attributable to exempted final products; (ii) whether interest was payable for the intervening period from clearance of goods till reversal of the credit.

Issue (i): whether the demand of disputed Modvat credit and penalty was sustainable after the retrospective scheme for reversal of credit attributable to exempted final products

Analysis: The dispute arose from common inputs used in dutiable and exempted clearances, where the credit attributable to exempted products had been reversed, though one reversal was made belatedly. The later introduction of the reversal mechanism under Rule 57CCC of the Central Excise Rules, 1944, made applicable retrospectively through the Finance Act, 2010, covered the relevant period. The statutory scheme was treated as a regularising provision for reversal of credit attributable to exempted goods, and the delay in making the application under that scheme was treated as condonable because the assessee was pursuing the matter before the Tribunal.

Conclusion: The demand of disputed Modvat credit and the penalty were not sustainable and were set aside.

Issue (ii): whether interest was payable for the intervening period from clearance of goods till reversal of the credit

Analysis: The retrospective scheme under Rule 57CCC read with Section 69(2) of the Finance Act, 2010 required payment of the credit attributable to exempted goods along with interest for the period during which the amount remained unpaid. Since the assessee had reversed the credit only later, the intervening period attracted interest liability.

Conclusion: Interest was payable for the intervening period and the demand of interest was confirmed.

Final Conclusion: The appeal succeeded only to the extent that the duty demand and penalty were deleted, while the liability to pay interest for the delayed reversal period was maintained.

Ratio Decidendi: Where a retrospective statutory scheme regularises reversal of credit attributable to exempted goods, the credit demand and penalty may not survive if the credit has been reversed, but interest remains payable for the period of delay until reversal.

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