Modvat credit reversal on stock inputs follows when the final product becomes wholly exempt from duty.

Modvat credit taken on inputs lying in stock had to be reversed when the final product later became wholly exempt from duty. The majority applied the Larger Bench ruling in Raghuvar (India) Ltd. and held that the credit remained recoverable because the relevant date was the date on which the exemption applied, not the later manufacture or clearance of finished goods from those inputs. The contrary approach based on Ashok Iron and Steel Fabricators was rejected on the facts found by the majority, so the assessee's appeal failed.

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Issues: Whether Modvat credit taken on inputs lying in stock was liable to be reversed when the final product subsequently became exempt from duty.

Analysis: The majority applied the Larger Bench ruling in Raghuvar (India) Ltd. and held that where inputs were lying in stock on the date the final product became fully exempt, the credit taken on such inputs was recoverable by reversal. The later manufacture and clearance of finished goods from those inputs did not alter the liability to reverse credit. The contrary view based on Ashok Iron and Steel Fabricators was not accepted on the facts found by the majority.

Conclusion: The credit was liable to be reversed and the assessee's appeal failed.

Ratio Decidendi: Modvat credit on inputs lying in stock is reversible when, on the date of exemption, the final product has become wholly exempt from duty.

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