Modvat credit on defective goods remains available where materials are retrieved for reuse and double availment is not proved.

Modvat credit on inputs and packing materials used in defective cigarettes was held not reversible where the cigarettes were slit, tobacco was retrieved for fresh manufacture, and the paper and packing materials became waste. The record did not establish double availment of credit, and in the absence of proof of repeated credit taking, inputs used in manufacture did not lose credit eligibility merely because the finished goods were reprocessed or some components were discarded. The credit already taken was therefore sustained.

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Issues: Whether Modvat credit taken on inputs and packing materials used in defective cigarettes was reversible on the ground that the cigarettes were slit, the tobacco was retrieved and re-used, and the earlier credit was said to have been taken twice.

Analysis: The defective cigarettes were subjected to slitting and the tobacco contained in them was retrieved for use in fresh manufacture. The paper and packing materials became waste in the process. The record did not establish that credit had in fact been taken twice. In such circumstances, and applying the principle that inputs used in manufacture do not cease to qualify for credit merely because the finished product becomes waste or is remade from retrieved material, the credit already taken could not be treated as reversible.

Conclusion: The issue was decided in favour of the assessee and against reversal of Modvat credit.

Final Conclusion: The Revenue failed to dislodge the allowance of Modvat credit, and the order permitting credit was sustained.

Ratio Decidendi: Where inputs are used in manufacture and the resulting defective goods are slitted for retrieval and re-use of materials, Modvat credit is not reversible merely because the finished goods are recycled or some components become waste, absent proof of double availment of credit.

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