Modvat credit on common inputs cannot be denied when Rule 57CC payment for exempt goods is made.

Under the Modvat scheme, payment of the amount prescribed under Rule 57CC for exempt clearances was treated as compliance with Rule 57C where common inputs were used for both dutiable and exempt final products. The Tribunal noted that the manufacturers had paid 8% of the sale price of the exempted goods, and that such payment had been regarded in similar cases as equivalent to reversal of credit. Denial of Modvat credit on the ground that the inputs were common to both categories of final products was therefore unsustainable, and the demand for reversal could not be maintained.

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Issues: Whether Modvat credit on common inputs could be denied when the manufacturer had paid an amount equal to 8% of the price of the exempted final products under Rule 57CC.

Analysis: The dispute turned on the interaction between Rule 57C and Rule 57CC. Rule 57C(1) bars credit on inputs used in exempted final products, but Rule 57C(2) deems that requirement satisfied where the manufacturer complies with Rule 57CC, including payment of the prescribed 8% amount. The Tribunal found that the appellants had undisputedly paid 8% of the sale price of the exempted goods and that the earlier decisions in similar factual settings had held such payment to be equivalent to reversal of credit and sufficient compliance with the scheme of the rules. On that basis, denial of credit in addition to the 8% payment was held to be unsustainable.

Conclusion: The appellants were entitled to Modvat credit, and the demand for its reversal could not be sustained.

Final Conclusion: The orders of the Commissioner were set aside and the appeals were allowed with consequential relief.

Ratio Decidendi: Where a manufacturer of dutiable and exempted final products pays the amount prescribed under Rule 57CC in respect of exempted clearances, the requirement of Rule 57C is treated as satisfied and Modvat credit on the inputs cannot be denied on the ground that the goods were common inputs for both categories of final products.

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