MODVAT credit remains valid after later exemption of the finished product; recovery is confined to duty on stock inputs.

MODVAT credit validly taken on eligible inputs need not be reversed merely because the finished product is later exempted or subject to nil duty. The scheme treats credit as part of a common pool, so one-to-one correlation between particular inputs and outputs is not required. Where credit was correctly availed and utilised while eligibility existed, later exemption does not undo that lawful credit. Recovery, if any, is confined to duty on inputs still lying in stock under the governing rule, rather than reversal of properly taken credit.

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Issues: Whether MODVAT credit validly taken on inputs had to be reversed merely because the finished product was subsequently exempted or subjected to nil rate of duty, and whether duty could be recovered only in respect of inputs lying in stock.

Analysis: Credit on inputs was correctly taken when the assessee was eligible under the MODVAT scheme, and its later utilisation was also proper. The subsequent exemption of the finished product did not, by itself, undo the credit already lawfully availed. The scheme does not require one-to-one correlation between input and output, and the credit forms part of a common pool. In respect of inputs still lying in stock, the appropriate course is recovery of duty at the stage contemplated by Rule 57F, not reversal of duly taken and utilised credit. The prior view of the Tribunal on the same issue was followed.

Conclusion: The demand for reversal of MODVAT credit was not sustainable, and the assessee succeeded on the issue.

Ratio Decidendi: Where MODVAT credit is correctly taken and utilised while the inputs are eligible, subsequent exemption of the finished product does not require reversal of that credit; any recovery must be confined to duty on inputs lying in stock in accordance with the governing rule.

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