Modvat credit remains admissible for intermediate goods cleared duty-free within the same assessee's manufacturing chain to dutiable final products.

Modvat credit on inputs used to manufacture intermediate goods cleared under Notification No. 217/86 to another factory of the same assessee was held admissible where the ultimate final products were dutiable. Notification No. 217/86 was treated as part of the Modvat scheme, permitting duty-free movement of such intermediate goods within the same manufacturing chain, and Rule 57C was construed to deny credit only when the final product itself was wholly exempt or nil-rated. A mechanical reading of Rule 57C would defeat the object of the notification and the credit scheme, so the credit could not be denied on the basis that the intermediate goods were exempt or chargeable to nil duty.

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Issues: Whether Modvat credit on inputs used in the manufacture of goods cleared under Notification No. 217/86 dated 02.04.1986 to another factory of the same assessee for further manufacture of dutiable final products could be denied under Rule 57C of the Central Excise Rules on the ground that the cleared goods were exempted or chargeable to nil rate of duty.

Analysis: Notification No. 217/86 was treated as part of the Modvat scheme and as operating differently from a general exemption. It permitted removal of notified intermediate products without payment of duty for use within the same factory or in another factory of the same assessee, where the ultimate final product remained dutiable. Rule 57C was held to require denial of credit only where the final product itself was wholly exempt or nil-rated, and not where duty was merely postponed through a vertically integrated manufacturing chain. The Court considered that a mechanical application of Rule 57C would defeat the scheme of Modvat and the object of Notification No. 217/86, and relied on a harmonious construction consistent with the scheme of duty credit and the movement of inputs to another unit for manufacture of dutiable final goods.

Conclusion: Rule 57C did not bar Modvat credit in the facts of these appeals, and the credit was admissible.

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