Modvat credit on intermediate goods cannot be denied when the department itself treats the product as dutiable and collects duty.

Modvat credit on inputs used in polyurethane foam could not be denied under Rule 57C merely because the end product, polyurethane sandwich panels, was exempt from duty. The department had accepted the classification list, treated the foam sheets as a dutiable intermediate product, and collected duty on that basis. In these circumstances, it could not contend that the foam had no separate existence only to refuse credit, while simultaneously treating it as duty-paid for levy purposes. Since duty was being collected on the foam sheets, they were the relevant final goods for Rule 57C, and the assessee was entitled to Modvat credit and relief.

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Issues: Whether Modvat credit on inputs used for polyurethane foam could be denied under Rule 57C on the footing that the ultimate product, polyurethane sandwich panels, was exempt from duty.

Analysis: The process showed that polyurethane foam came into existence inside the machine and was later sandwiched between metal sheets to form the final article. Although the final article was exempt, the department had accepted duty on the foam sheets on the basis of the approved classification list and had itself treated the foam as a dutiable product. In those circumstances, the department could not simultaneously insist that the foam had no separate existence for the purpose of denying credit and yet treat it as a duty-paid product for levy purposes. Since duty was being collected on the foam sheets, they were to be regarded as the relevant final goods for the purpose of Rule 57C.

Conclusion: Modvat credit could not be denied; the assessee was entitled to credit and relief.

Ratio Decidendi: Where the department has accepted and collected duty on an intermediate product as the dutiable final product, it cannot deny Modvat credit by characterising the same product as merely in situ and non-existent for the purpose of Rule 57C.

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