Modvat credit reversal on exempt clearances raised conflicting views under the Central Excise Rules and was sent to larger Bench.

Modvat credit on inputs used for declared final products was examined in the context of clearances made free of duty under an exemption notification. The note contrasts Rule 57C, which denies credit where the final product is wholly exempt or taxed at nil rate, with Rule 57F(3)(i), and records the competing views on whether conditional exemption under Chapter X affects credit reversal. It stresses harmonious construction of the rules and notes the concern that credit should not be retained where the final product does not suffer duty. Because Tribunal decisions and High Court authorities were in conflict, the matter was referred for larger Bench consideration.

---

---

Issues: Whether Modvat credit of duty paid on inputs used in the manufacture of declared final products can be reversed when part of those final products are cleared free of duty under an exemption notification.

Analysis: The order records competing views on the interplay between Rule 57C and Rule 57F(3)(i) of the Central Excise Rules. One view treats Rule 57C as barring credit where the final product is wholly exempt or chargeable to nil rate, even if the exemption is conditional and clearance is under Chapter X procedure. Another view emphasises the use of the credit for declared final products and the absence of one-to-one correlation, but the order notes that the rules must be read harmoniously and that credit cannot be retained where the final product does not suffer duty. In view of conflicting Tribunal decisions and the relevance of the High Court authorities noticed, the matter was considered fit for reference to a larger Bench.

Outcome: The question was referred to the President for constitution of a larger Bench for decision.

---