Indefeasible Modvat/Cenvat credit cannot be reversed merely because the final product later becomes exempt from duty.

Validly taken Modvat/Cenvat credit on inputs, work-in-process and finished goods was held not reversible merely because the final product later became exempt from duty. The Court applied the principle that such credit is indefeasible unless the governing rule expressly authorises reversal or repayment; Rule 9(2) of the Cenvat Credit Rules was treated as materially identical to Rule 57H(5) of the Central Excise Rules, 1944, and neither provision supported recovery on the facts. The assessee therefore retained the credit, and the revenue's demand for reversal failed.

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Issues: Whether Modvat/Cenvat credit validly taken on inputs, inputs in process, and inputs contained in finished goods is liable to be reversed when the final product subsequently becomes exempt from duty.

Analysis: The governing rule provided for repayment only where a manufacturer opted for exemption in the manner specified by the rule, and the language of Rule 9(2) of the Cenvat Credit Rules was identical to Rule 57H(5) of the Central Excise Rules, 1944. The Court relied on the principle that validly taken credit is indefeasible and, absent a provision authorising reversal of such credit, the department cannot require repayment merely because the final product later becomes exempt. The Court also noted that the same view had been taken in decisions of other High Courts on the same statutory language.

Conclusion: The assessee was not required to reverse the Modvat/Cenvat credit already taken, and the question was answered in favour of the assessee and against the revenue.

Ratio Decidendi: Validly taken Modvat/Cenvat credit cannot be reversed merely because the final product later becomes exempt, unless the governing rule expressly authorises such reversal.

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