Modvat credit becomes inadmissible once final products turn exempt, and reversal is recoverable under the Central Excise Rules.

Modvat credit taken and utilised while final products were dutiable became inadmissible once those products later became wholly exempt under Rule 57C of the Central Excise Rules, 1944. Rule 57C was applied to bar credit where the final product is exempt from duty, and Rule 57F(3) was read as tying credit to inputs used for the relevant final products. The Tribunal held that administrative practice permitting immediate availment and utilisation could not override the statutory restriction. Earlier authorities on proforma credit under Rule 56A and on full utilisation of inputs were distinguished as not covering a situation where the final product itself had become exempt. The credit was therefore recoverable and reversal was upheld.

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Issues: Whether Modvat credit validly taken and utilised while the final products were dutiable could be denied and recovered after those final products later became wholly exempt from duty under Rule 57C of the Central Excise Rules, 1944.

Analysis: Rule 57C bars credit where the final product is exempt from duty. Rule 57F(3) was construed as linking the credit to the inputs intended for use in the manufacture of the relevant final products, so that the liberal administrative practice of instant availment and utilisation could not override the statutory restriction. The Tribunal distinguished the earlier decision on proforma credit under Rule 56A and the Madras High Court decision on complete utilisation of inputs, holding that those authorities did not cover a situation where the final product itself had become exempt. Once the final products became exempt, any credit already taken and utilised in anticipation of their use in dutiable goods became irregular and recoverable.

Conclusion: The credit was inadmissible after the final products became exempt, and the demand for reversal of the credit was upheld against the assessee.

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