Modvat credit on duty-paid inputs remains available despite waste or scrap being reprocessed or cleared at nil duty.

Modvat credit on duty-paid inputs used to manufacture BOPP films could not be reversed merely because waste and scrap generated in the process were later reprocessed into granules or cleared at nil rate of duty. The waste and scrap were treated as by-products, not final products for Rule 57C, and Rule 57D protected credit where part of the inputs remained in waste, refuse or by-product arising during manufacture. The assessee was therefore entitled to retain the credit, and reversal was held unsustainable.

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Issues: Whether Modvat credit taken on polypropylene granules was liable to reversal under Rule 57C of the Central Excise Rules, 1944 when waste and scrap arising during manufacture of BOPP films was used for reprocessing into granules and the balance was cleared at nil rate of duty.

Analysis: The credit had been taken on duty-paid inputs used in the manufacture of BOPP films. The waste and scrap generated in the course of manufacture was only a by-product or waste product and not a final product for the purpose of Rule 57C. Rule 57D protected credit where part of the inputs was contained in waste, refuse or by-product arising during manufacture, even if such waste or by-product was exempt or chargeable to nil rate of duty. The earlier Tribunal view and the cited line of authority were applied to hold that credit could not be denied merely because the waste was later reprocessed or cleared without duty.

Conclusion: The demand for reversal of Modvat credit was unsustainable and the credit was rightly retained by the assessee.

Ratio Decidendi: Credit of duty on inputs cannot be denied or reversed merely because waste or scrap arising during manufacture is exempt, chargeable to nil rate of duty, or reprocessed into another product, where such waste is only a by-product and the inputs were duty-paid.

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