Modvat credit can offset duty on final products even when input duty exceeds output duty, without one-to-one correlation.

Rule 57F(3) permitted Modvat credit on duty-paid inputs to be used for payment of duty on the final products manufactured from those inputs. The scheme did not require one-to-one correlation between particular inputs and final products, and accumulated credit was not barred merely because the duty on the finished goods was lower than the duty element on the inputs. On that basis, reversal of credit and the related penalty were unsustainable, and the appeal succeeded.

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Issues: Whether Modvat credit taken on duty-paid inputs could be utilised for payment of duty on the final products manufactured from those inputs, even when the credit accumulated because the duty on the final product was lower than the duty on the inputs.

Analysis: Rule 57F(3) permitted credit of specified duty allowed in respect of any inputs to be utilised towards payment of excise duty on any final product in or in relation to the manufacture of which such inputs were intended to be used in accordance with the declaration filed under Rule 57G. Read in the context of the object of the Modvat scheme, namely grant of instant credit and avoidance of cascading of tax, the rule did not prohibit utilisation of accumulated credit on the same final product merely because the duty on the finished goods was lower than the duty element on the inputs. The accepted scheme position was that there was no one-to-one correlation between inputs and final products for utilisation of credit.

Conclusion: The appellants were entitled to utilise the accumulated Modvat credit and the demand for reversal of credit was not sustainable.

Final Conclusion: The appeal succeeded and the order directing reversal of Modvat credit and imposition of penalty was set aside.

Ratio Decidendi: Under Rule 57F(3), Modvat credit on eligible inputs may be utilised for duty on the corresponding final products without any one-to-one correlation, and accumulation of credit because input duty exceeds output duty does not bar such utilisation.

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