Modvat credit on input aluminium sheets was partly allowed where waste and scrap emerged as a separate dutiable final product.

Modvat credit on aluminium sheets used in bus body manufacture was denied to the extent the inputs went into bus bodies cleared at nil rate of duty, because the nil-rated final product attracted the credit restriction. However, aluminium waste and scrap arising in the same manufacturing process was treated as a distinct excisable final product covered by the assessee's Modvat declaration. Credit therefore remained admissible for the portion of inputs attributable to the scrap cleared on payment of duty, since the restriction for exempt or nil-rated final products did not extend to that separately dutiable output.

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Issues: Whether Modvat credit was admissible on the duty paid on aluminium sheets used in manufacture of bus bodies when the bus bodies were cleared at nil rate of duty, but aluminium waste and scrap generated in the process was itself a final excisable product.

Analysis: The aluminium waste and scrap generated in the course of manufacture was treated as a distinct excisable final product. Since the scrap was covered by the assessee's Modvat declaration and was not merely waste for the purpose of the relevant Modvat provisions, the restriction denying credit on inputs used in exempt or nil-rated final products did not extend to the portion of the inputs that went into the aluminium waste and scrap. The credit was therefore not available in relation to the bus bodies cleared at nil rate of duty, but remained available for the portion of inputs attributable to the scrap cleared on payment of duty.

Conclusion: Modvat credit was not admissible for the inputs used in the nil-rated bus bodies, but was admissible for the inputs attributable to aluminium waste and scrap; the Revenue's challenge failed.

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