MODVAT credit cannot be reversed merely because part of the finished goods was cleared under exemption without duty.

Under the MODVAT scheme, credit validly taken on specified inputs for a declared final product could not be denied or reversed merely because some clearances of that product were later made without duty under an exemption notification. The credit-taking stage and credit-utilisation stage were treated as distinct, and once the inputs were declared and the credit was duly taken, the absence of one-to-one or batch-wise correlation between inputs and clearances did not by itself attract reversal. Rule 57C was applied to exempt final products at the stage of taking credit, not to later conditional exemptions on part-clearance, and Rule 57F permitted utilisation of the credit accordingly.

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Issues: Whether MODVAT credit validly taken on specified inputs under Rule 57A could be denied or reversed merely because part of the finished product was cleared without duty under an exemption notification.

Analysis: The credit-taking stage and the credit-utilisation stage were treated as distinct under the scheme. Once the inputs were specified, the declaration under Rule 57G was filed and acknowledged, and the credit was rightly taken, the absence of one-to-one correlation between particular inputs and particular clearances did not by itself attract reversal. Rule 57C was held to apply where the final product was exempt in the relevant sense at the stage of taking credit, not where part of the manufactured goods was later cleared without duty under a conditional exemption. The scheme under Rule 57F permitted utilisation of the credit for duty on the declared final product, and the rules did not require batch-wise correlation between inputs and clearances.

Conclusion: The credit was correctly taken and correctly utilised, and the Revenue could not compel reversal merely because part of the finished goods had been cleared under exemption.

Ratio Decidendi: Under the MODVAT scheme, where credit on specified inputs is validly taken for a declared final product, it cannot be denied solely because some clearances of that product are later made without duty under an exemption notification, in the absence of a statutory requirement of one-to-one correlation between inputs and clearances.

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