Transitional Modvat credit transfer is limited to unutilised RG 23 balances, not set-off register entries under exemption notifications.

Transitional Modvat credit under Rule 57H(3) was confined to unutilised duty credit actually lying in RG 23 immediately before the relevant declaration. Credit recorded only in a set-off register maintained under exemption notifications could not be treated as RG 23 balance for transfer into RG 23A on opting for Modvat. The exemption regime was described as operating only at the stage of clearance of the final product, supported by input-output correlation, and not as creating a transferable credit pool. Any unavailed benefit was indicated to lie in refund, not rollover into RG 23A.

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Issues: Whether credit accumulated in a set-off register under exemption notifications could be transferred to RG 23A under Rule 57H(3) of the Central Excise Rules, 1944 when the assessee opted for Modvat.

Analysis: Rule 57H(3) permits transfer only of credit of duty paid on materials or component parts lying unutilised in RG 23 immediately before the relevant declaration, and the language of the provision was treated as specific and restrictive. The exemption notifications under which the assessee had been operating were held to provide only for exemption at the time of clearance of the final product to the extent of duty suffered on the inputs, supported by monitoring records and input-output correlation, and not for creation of a transferable credit pool. The majority held that a set-off register maintained under the departmental procedure could not be equated with RG 23 for the purposes of Rule 57H(3), and that the remedy for any unavailed benefit was by way of refund rather than rollover into RG 23A.

Conclusion: The transfer of credit from the set-off register to RG 23A was not permissible and the Revenue's appeal succeeded.

Final Conclusion: The majority view prevailed, the departmental appeal was allowed, and the order permitting transfer of credit was set aside.

Ratio Decidendi: Transitional credit transfer under Rule 57H(3) is confined to unutilised credit actually lying in RG 23 and cannot be extended by analogy to balances maintained only in a set-off register under exemption notifications.

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