Modvat credit cannot be denied because a non-dutiable intermediate product emerges during manufacturing.

Modvat credit on polyester staple fibre could not be denied merely because a non-dutiable intermediate product emerged during manufacture of polyester/cotton blended yarn. Rule 57D(2) of the Central Excise Rules, 1944 was treated as a protective provision that preserves credit on inputs and does not operate as a condition precedent for availing Modvat credit. Applying the Larger Bench view, the emergence of an exempt or nil-rated intermediate product did not by itself defeat otherwise admissible credit. The denial of credit was therefore unjustified, and the assessee was entitled to the input credit.

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Issues: Whether Modvat credit on polyester staple fibre could be denied merely because carded/combed cotton emerged as an intermediate product in the manufacture of polyester/cotton blended yarn.

Analysis: Rule 57D(2) of the Central Excise Rules, 1944 was construed as a protective provision ensuring that credit already available on inputs is not denied or varied merely because an exempt or nil-rated intermediate product comes into existence during manufacture. The reasoning applied the Larger Bench view that Rule 57D(2) is not a condition precedent for availing credit under the Modvat scheme. Since the intermediate product in the present case was admittedly not dutiable, its emergence could not, by itself, defeat the credit otherwise admissible on the input.

Conclusion: The denial of Modvat credit was not justified, and the assessee was entitled to the credit.

Final Conclusion: The Revenue appeal failed because the order granting Modvat credit was sustained on the ground that the emergence of a non-dutiable intermediate product does not by itself bar credit on the input.

Ratio Decidendi: Under the Modvat scheme, credit on inputs cannot be denied solely because an intermediate product emerges during manufacture if that intermediate product is not dutiable or is chargeable to nil duty; Rule 57D(2) is not a condition precedent to the availability of credit.

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