Modvat credit on inputs remains valid despite later exemption of final products, with limited recovery options for stock.

Modvat credit validly taken on inputs at the time of receipt was not rendered irregular merely because the final products were later exempted. For inputs lying in stock as such, the revenue's remedy was to demand duty under the relevant utilisation provisions, treating those inputs as if cleared from the factory. The Modvat scheme did not require one-to-one correlation between particular inputs and finished goods, and no specific provision permitted recovery of credit relatable to inputs contained in semi-finished goods or other stock after exemption intervened. The demand based solely on later exemption of the final products was therefore not sustainable.

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Issues: Whether Modvat credit validly taken on inputs could be denied or recovered merely because the final products were subsequently exempted, including inputs lying in stock and inputs contained in semi-finished goods.

Analysis: The Tribunal held that where Modvat credit was admissibly taken at the time of receipt of inputs, subsequent exemption of the finished products did not by itself render the credit irregular. It followed earlier decisions holding that, for inputs lying in stock as such, the revenue's remedy was to demand duty under the relevant utilisation provisions, treating such inputs as cleared from the factory. The Tribunal further noted that under the Modvat scheme there was no one-to-one correlation between specific inputs and finished products, and there was no specific provision permitting recovery of Modvat credit relatable to inputs contained in semi-finished goods or other stock when exemption later intervened.

Conclusion: The demand could not be sustained on the basis of later exemption of the final products, and the appeal was allowed in favour of the assessee.

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