Modvat credit reversal for common inputs defeats Rule 57CC demand when excess credit is fully reversed, timing not material.

Reversal of the full Modvat credit attributable to common inputs used in manufacturing purified water was treated as sufficient compliance under the Modvat scheme, even though the water was captively consumed and partly cleared without duty. The settled position applied was that reversal of credit taken in excess of what was due cures the objection based on use of inputs in exempt goods, and the timing of reversal was not material. On that basis, the demand raised under Rule 57CC was held unsustainable and was set aside in favour of the assessee.

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Issues: Whether the demand raised under Rule 57CC of the Central Excise Rules was sustainable after the appellant reversed the entire credit taken on inputs used in the manufacture of purified water that was captively consumed and partly cleared without payment of duty.

Analysis: The demand was founded on the use of common inputs in exempt goods. The appellant had reversed the full Modvat credit attributable to the inputs used in the manufacture of purified water. The Tribunal applied the settled position that, under the Modvat scheme, reversal of credit taken in excess of what is due satisfies the requirement of law and that the timing of such reversal is not material. On that basis, the earlier view was followed and the demand was held unsustainable.

Conclusion: The demand under Rule 57CC was not sustainable and was set aside in favour of the assessee.

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