Modvat credit and refund on additional excise duty were upheld for inputs used in dutiable tyres despite exempt intermediate goods.

Modvat credit on additional excise duty paid on duty-paid inputs used to manufacture dutiable tyres could not be denied merely because an intermediate product was exempt from that duty. The scheme restricted credit where the final product was exempt, not where only an intermediate stage product was exempt. The refusal to restore credit was therefore unsustainable, and unutilised credit relating to tyres exported under bond was refundable where adjustment against duty was not possible. The clarificatory notifications and circulars supported this treatment, and the refund rejection failed on the same incorrect premise as the credit denial.

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Issues: (i) Whether credit of additional excise duty paid on grey nylon tyre cord fabric could be denied merely because the intermediate product was exempt from additional excise duty when the final product, tyres, was dutiable; (ii) Whether refund of the credit attributable to tyres exported under bond was admissible.

Issue (i): Whether credit of additional excise duty paid on grey nylon tyre cord fabric could be denied merely because the intermediate product was exempt from additional excise duty when the final product, tyres, was dutiable.

Analysis: The credit restriction in the Modvat scheme operates where the final product is exempt, not where only an intermediate product is exempt. The inputs were duty-paid and used in the manufacture of intermediate products captively consumed for production of tyres, which remained dutiable. The relevant notifications and later departmental clarifications also recognised utilisation of additional excise duty credit towards duty on final products. The exemption of the intermediate tyre cord warp sheet did not, by itself, disable credit on the inputs used for making dutiable tyres.

Conclusion: The denial of credit was not sustainable and the assessee was entitled to restore the additional excise duty credit on the inputs.

Issue (ii): Whether refund of the credit attributable to tyres exported under bond was admissible.

Analysis: Where input credit cannot be adjusted against duty on clearances, the scheme permits refund of the unutilised amount. The exported goods were shown to have borne the relevant duty element and the department did not controvert the factual basis of the claim. The subsequent clarificatory notifications and circulars supported allowance of refund even where the duty was not leviable on the finished product. The rejection of the refund claim proceeded on the same erroneous premise that credit itself was inadmissible.

Conclusion: The refund claim was admissible and the rejection was unsustainable.

Final Conclusion: The appeals succeeded, the assessee's credit entitlement was upheld, and refund relief was granted with consequential benefits.

Ratio Decidendi: Credit of additional excise duty on duty-paid inputs used in manufacturing a dutiable final product cannot be denied solely because an intermediate product is exempt from that duty, and unutilised credit is refundable where the scheme so permits and adjustment is not possible.

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