MODVAT credit lapses during full exemption unless rules preserve it for later duty-paid operations.

Under the MODVAT scheme, accumulated credit in RG-23A was treated as unavailable once the final product became wholly exempt, because the scheme ceased to operate during the exemption period. Credit standing at the time of exemption could not be preserved for later use unless the rules specifically protected it, and on resumption of duty payment the assessee had to establish fresh eligibility under the MODVAT rules. The commentary also notes a competing view that lawfully taken credit could not be expunged without express authority, but the stated ratio follows the view that entitlement ends with full exemption.

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Issues: Whether MODVAT credit standing in RG-23A, including the closing balance carried forward when the assessee temporarily shifted to full exemption and later resumed duty payment, was liable to be expunged.

Analysis: The majority view treated eligibility to MODVAT credit as dependent on the assessee's status at the relevant time. Once the finished goods became fully exempt, the MODVAT scheme ceased to operate and the credit then available could not be preserved for later use; on resumption of duty payment, fresh eligibility had to be established under the MODVAT rules. The dissenting view held that lawfully taken credit could not be expunged in the absence of a specific provision and that the assessee had already expunged any credit relatable to exempt clearances.

Conclusion: The majority held that the balance credit available when exemption was availed could not be retained, and the Revenue's appeal was allowed in principle on that issue; the final order of the Bench, however, followed the majority outcome dismissing the appeal in light of the third-member concurrence with the dissent.

Final Conclusion: The dispute turned on the availability of MODVAT credit during periods of full exemption, and the decision ultimately upheld the assessee's position by dismissing the Revenue's appeal.

Ratio Decidendi: Under the MODVAT scheme, once the final product becomes wholly exempt, the assessee's entitlement to utilise accumulated credit ceases unless the rules specifically preserve it or permit fresh credit on re-entry into the duty-paying regime.

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