MODVAT credit reversal not required when exempt final products arise, though later use of inputs may attract duty.

MODVAT credit validly taken on inputs and correctly utilised for duty payment did not have to be reversed merely because the final product later became exempt, including for inputs lying in stock on the date of exemption. The scheme was treated as a beneficial anti-cascading measure, and Rule 57I was confined to wrongly availed or irregularly utilised credit; it did not authorise recovery where credit had been properly taken and used. The absence of batch-to-batch correlation under the scheme was relevant. If such inputs were later used outside the MODVAT framework, duty could be recovered under Rule 57F(1)(ii), but that did not require reversal of the credit already availed.

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Issues: Whether MODVAT credit validly taken and utilised on inputs had to be reversed merely because the final product later became exempt, in respect of inputs lying in stock on the date of exemption.

Analysis: The MODVAT scheme was treated as a beneficial scheme intended to avoid cascading of duty. The rules did not provide for reversal of credit where the credit was correctly taken on receipt of inputs and correctly utilised for duty payment on specified finished products. Rule 57I was confined to wrongly availed or irregularly utilised credit and did not authorise recovery where credit had been properly taken and used. The absence of batch-to-batch correlation under the scheme was also significant. If inputs remaining in stock after exemption were later taken into use outside the MODVAT framework, duty could be recovered under Rule 57F(1)(ii), but that did not justify reversal of the credit already availed and utilised.

Conclusion: Reversal of MODVAT credit was not warranted on the facts considered, though duty could be demanded when such inputs were subsequently taken into use.

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