Modvat credit already validly taken and used cannot be recovered merely because the final product later becomes exempt.

Modvat credit validly taken and utilised while the assessee remained within the scheme could not be reversed or recovered merely because the final product later became exempt. The scheme did not require a one-to-one correlation between inputs and outputs, and the credit formed part of a common pool. Only an unutilised balance in RG 23A Part II would lapse if the assessee opted out of the scheme. Accordingly, credit already lawfully availed and used was not liable to demand of reversal or recovery.

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Issues: Whether Modvat credit validly taken and utilised on inputs lying in stock when the final product later became exempt was liable to be reversed or recovered from the assessee.

Analysis: The assessee had taken Modvat credit when it was entitled to do so and had utilised that credit in accordance with the Modvat scheme. The mere fact that the final product was subsequently covered by an exemption notification did not establish any violation requiring reversal of credit already lawfully taken and utilised. There was no one-to-one co-relation between input and output under the scheme, and the credit once taken formed part of a common credit pool. The only consequence of opting out of the scheme was that any unutilised balance in RG 23A Part II would lapse and could not be used for future clearances. The rule relied upon by the Revenue did not justify recovery of credit already validly availed and used.

Conclusion: The demand for reversal or recovery of the Modvat credit already taken and utilised on the inputs was not sustainable. The issue was decided in favour of the assessee.

Ratio Decidendi: Modvat credit, once validly taken and utilised while the assessee was within the scheme, cannot be recovered merely because the final product is later exempted; only the unutilised balance may lapse.

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