MODVAT credit limits clarified: inputs used for exempt intermediate goods cannot retain credit on inter-unit clearance.

MODVAT credit was treated as confined to inputs used and consumed within the same factory unit for manufacture of dutiable final products. Where exempt intermediate goods, such as Alkyd Resins, were cleared without duty from one unit to another unit of the same manufacturer, the credit taken on the inputs used for those goods could not be retained or transferred. The scheme contained no provision for inter-unit transfer of MODVAT credit, and its limited exceptions, such as specified job-work removals, did not extend to these clearances. The exemption notification relied on was held inapplicable because MODVAT had to operate strictly within its own statutory framework.

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Issues: Whether MODVAT credit on inputs used in the manufacture of exempt intermediate goods, namely Alkyd Resins cleared from one factory unit to another unit of the same manufacturer, was admissible.

Analysis: The MODVAT scheme permits credit only in relation to inputs used within the unit in which the credit is taken and for payment of duty on the final specified products cleared from that unit. The Rules contain no provision for transfer of MODVAT credit from one factory to another, nor for clearing exempt intermediate goods to another unit while retaining the benefit of the credit taken on the inputs that went into those goods. The scheme contemplated only specified removals such as to a job worker under the Rules, and if inputs on which credit was taken are not used for the manufacture of dutiable final products in the same unit, the credit cannot be retained. The exemption notification relied on by the appellants was held to be distinguishable because the MODVAT scheme is differently worded and must operate strictly within its own statutory framework.

Conclusion: The MODVAT credit in respect of inputs used in the manufacture of Alkyd Resins cleared without payment of duty to another unit was not admissible.

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