Modvat credit on factory-received inputs need not be reversed merely because the final product later became exempt.

Modvat credit on inputs already received into the factory was held to accrue when the inputs entered the factory for use in the final product, and no one-to-one co-relation was required between credit taken and credit utilised. The Tribunal further held that there was no specific provision under the Modvat scheme requiring reversal merely because the finished goods later became exempt or ceased to be excisable. Rule 57-I did not support recovery in those circumstances, so the demand for reversal or recovery of credit was not sustainable and the assessee was entitled to retain the credit.

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Issues: Whether Modvat credit validly taken on inputs lying in stock, or on inputs relatable to finished goods which later became exempt, was required to be reversed or recovered merely because the final product ceased to be excisable.

Analysis: The Tribunal held that, on the facts, credit had been taken after receipt of the inputs in the factory and there was no requirement of one-to-one co-relation between the credit taken and the credit utilised. Relying on earlier decisions, it was held that the right to credit accrues when the inputs enter the factory for use in the final product and that there was no specific provision under the Modvat scheme requiring reversal merely because the inputs were not actually used before exemption of the final product. Rule 57-I did not justify recovery in such circumstances.

Conclusion: The demand for reversal/recovery of Modvat credit was not sustainable and the assessee was entitled to retain the credit.

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