Modvat credit on inputs becomes inadmissible when final products turn fully exempt and must be reversed or recovered.

Modvat credit under Rule 57A was treated as available only where duty is payable on the final product. When the final product becomes fully exempt or chargeable to nil rate, Rule 57C creates an absolute bar on retaining credit attributable to inputs, including inputs lying in stock and inputs already used in manufacture of the exempt goods. The scheme read with Rule 57F was understood to require such credit to be reversed or recovered, and earlier availment did not make it irrevocable. The analysis follows the binding Allahabad High Court view and rejects the contrary argument based on a Supreme Court decision on a different issue.

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Issues: Whether Modvat credit taken on inputs lying in stock, or on inputs used in the manufacture of final products, remains admissible when the final products become fully exempt from duty or chargeable to nil rate, or whether such credit must be reversed or recovered.

Analysis: The Modvat scheme under Rule 57A was held to operate only for credit that is allowed against duty payable on final products. Rule 57C imposes an absolute bar on allowance of credit where the final product is exempt or chargeable to nil rate, and the scheme read with Rule 57F contemplates that inputs are to be used only in relation to dutiable final products or otherwise dealt with in the manner prescribed. The reasoning adopted the view that once the final product becomes exempt, the credit attributable to inputs in stock as well as inputs already used in the manufacture of such exempt final products cannot continue to be retained. The decision followed the binding view of the Allahabad High Court and rejected the contention that earlier availment of credit made it irrevocable or that the contrary Supreme Court decision on a different issue rendered that High Court ruling per incuriam.

Conclusion: Modvat credit taken or utilised in respect of inputs lying in stock, and in respect of inputs used in the manufacture of exempt final products, is inadmissible and must be reversed or recovered, as the case may be.

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