Modvat credit on job-work clearances remains admissible when intermediate goods feed dutiable final products and Rule 57C does not apply.

Modvat credit remained available where inputs were sent to a job worker under the prescribed procedure and the processed goods were cleared without duty for use in manufacturing dutiable final products by the principal manufacturer. Rule 57C was held inapplicable because it bars credit only when the final product is exempt from duty or chargeable to nil rate; it does not deny credit merely because duty is not paid at an intermediate stage. The scheme was read purposively to avoid cascading, and intermediate clearances under the job-work procedure did not defeat credit when duty was ultimately paid on the final products.

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Issues: Whether Modvat credit on inputs used by a job worker is admissible when the processed goods are cleared without payment of duty under the prescribed job-work procedure and are ultimately used in the manufacture of dutiable final products by the principal manufacturer.

Analysis: The relevant scheme was read as a whole, with Rule 57F(3) providing a special procedure for movement of inputs to a job worker and return of processed goods, and Rule 57C applying only where the final product is exempted from the whole of duty or chargeable to nil rate of duty. The reasoning accepted that the object of the Modvat scheme is to avoid cascading and that a mechanical application of Rule 57C would defeat that object where duty is ultimately paid on the final product. The decision also followed the principle affirmed by the Supreme Court that intermediate products or parts cleared under the notification procedure do not attract Rule 57C merely because duty is not paid at the intermediate stage.

Conclusion: Modvat credit was held admissible and the reference was answered in favour of the assessee.

Ratio Decidendi: Rule 57C does not bar Modvat credit where inputs are used in the manufacture of intermediate goods cleared under the job-work procedure for ultimate use in the manufacture of dutiable final products, because the final products are neither exempted nor chargeable to nil rate of duty.

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