MODVAT credit under Notification No. 175/86 need not be reversed for stock and work-in-progress inputs.

Opting for Notification No. 175/86 did not require reversal of MODVAT credit on inputs lying in stock, inputs in semi-finished goods, or inputs in finished goods. The notification was read as not barring MODVAT credit; instead, its exemption operated in a restricted manner under the relevant paragraph, with the proper consequence being limitation of the exemption or duty recovery at the stage of clearance for manufacture outside the MODVAT scheme. A demand for repayment of credit under Rule 57C read with Rule 57-I was therefore unsustainable, and the credit already availed on such inputs did not have to be reversed.

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Issues: Whether, on opting for the benefit of Notification No. 175/86, the assessee was required to reverse MODVAT credit attributable to inputs lying in stock, inputs contained in semi-finished goods, and inputs contained in finished goods on the date of opting for the notification.

Analysis: Notification No. 175/86 did not prohibit availment of MODVAT credit. The scheme of the notification showed that where credit had been taken on inputs, the exemption was to operate in a restricted manner under the relevant para 1(a)(i), rather than by demanding back the credit already availed. The proper consequence was limitation of exemption or, where appropriate, recovery of duty at the stage of clearance of inputs for manufacture outside the MODVAT scheme, not reversal of MODVAT credit under Rule 57C read with Rule 57-I. The position was treated as one of short levy arising from application of the notification, and the inputs lying in stock, when used later, could attract the limited exemption structure of the notification.

Conclusion: No reversal of MODVAT credit on the inputs lying in stock or contained in the goods under manufacture was warranted; the demand for repayment of credit was unsustainable and the assessee succeeded.

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