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Issues: Whether Modvat credit was admissible on inputs used in the manufacture of goods cleared without payment of duty under an exemption notification for testing purposes.
Analysis: The credit scheme under Rule 57A had to be read with Rule 57C, which barred credit on inputs used in the manufacture of final products exempted from the whole of duty or chargeable to nil rate of duty. The mere fact that the assessee's main product was otherwise dutiable did not permit retention of credit for the portion cleared without duty under the exemption notification. Rule 57D did not apply because the goods were fully manufactured and cleared; destruction after testing did not amount to waste arising during the course of manufacture. The later introduction of Rule 57CC only made explicit the pre-existing position and did not create a new entitlement for the earlier period.
Conclusion: Modvat credit was not available on the inputs used in the exempted clearances, and the question was answered against the assessee and in favour of the revenue.
Ratio Decidendi: Where inputs are used in the manufacture of final products cleared without payment of duty under an exemption, Modvat credit is not retainable merely because the assessee's other clearances are dutiable or because the exempted goods are later destroyed after testing.
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