Modvat credit on fuel inputs used for an exempt intermediate product need not be reversed when final products are dutiable.

Rule 57CC was treated as an adjustment provision for Modvat credit relating to exempted or nil-rated final products, but its mechanism was confined to inputs other than fuel. The Madras HC distinguished furnace oil used in manufacturing D.B.M., an intermediate product partly captively consumed and partly stock-transferred, from cases involving non-fuel inputs. Where the fuel was used to produce D.B.M. and the downstream final products were dutiable, the credit chain did not require reversal merely because D.B.M. itself was exempt or cleared without sale. Credit on furnace oil was therefore not liable to be reversed, and the assessee succeeded.

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Issues: Whether Modvat credit taken on furnace oil used in the manufacture of D.B.M., an exempted or nil-rated product, was required to be reversed under erstwhile Rule 57CC where the D.B.M. was partly captively consumed for manufacture of dutiable final products and partly stock-transferred within the same manufacturer.

Analysis: Rule 57CC was held to govern the adjustment of credit in relation to exempted or nil-rated final products, but its mechanism was confined to inputs other than fuel. The judgment distinguished between D.B.M. as an intermediate product consumed within the same entity and D.B.M. cleared as a final product. It was found that where the fuel was used in producing D.B.M. and all downstream final products were dutiable, the credit chain did not require reversal merely because the intermediate product itself was exempt or cleared without sale. The later authority on non-fuel inputs was held inapplicable to the present controversy concerning fuel inputs.

Conclusion: Credit availed on furnace oil used for manufacturing D.B.M. was not liable to be reversed, and the reference question was answered in favour of the assessee.

Ratio Decidendi: Rule 57CC does not require reversal of Modvat credit on fuel inputs used in producing an exempted intermediate product when the ultimate final products are dutiable and the fuel input falls outside the adjustment mechanism of the rule.

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