Modvat credit on inputs need not be reversed when exemption arises later and no recovery rule applies.

Modvat credit validly taken and utilised on inputs did not have to be reversed merely because the finished product later became exempt after the credit had already been used. The scheme allowed immediate taking and utilisation of credit, and recovery was confined to cases specifically covered by the Modvat Rules. Rule 57C applied where the finished product was exempt at the relevant time, while Rule 57F addressed limited recoveries relating to inputs in stock. As there was no specific provision authorising recovery of credit attributable to inputs contained in finished goods already in stock, the subsequent exemption did not justify reversal. The demand against the assessee therefore failed.

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Issues: Whether Modvat credit validly taken and utilised on inputs had to be reversed or recovered when the finished product became exempt after the inputs had been received and the credit had already been used.

Analysis: The governing scheme recognised immediate taking and utilisation of Modvat credit, with recovery being provided only in situations specifically covered by the Modvat Rules. Rule 57C operated where the finished product was exempt at the relevant time, while Rule 57F dealt with certain recoveries relating to inputs in stock. The exemption arising subsequently, without any specific provision authorising recovery of credit relatable to inputs contained in finished goods already in stock, did not justify reversal. The earlier Larger Bench view was confined to situations where exemption existed at the time of receipt of inputs and did not cover the present contingency. The cited notification also showed that recovery could be made only where the exemption structure itself so permitted.

Conclusion: Recovery of the Modvat credit was not warranted and the demand against the assessee failed.

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