Modvat credit must be reversed on exempt final products cleared for testing; such batteries are not waste under Rule 57D.

Modvat credit on inputs used in fully manufactured dry cell batteries cleared under an exemption notification for laboratory testing could not be retained. The batteries were treated as exempt final products, not waste, so Rule 57D did not apply. Credit attributable to the duty-free clearances had to be reversed or debited before removal, and the appellate order was set aside in favour of the Revenue.

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Issues: Whether Modvat credit taken on inputs used in the manufacture of dry cell batteries cleared under an exemption notification for laboratory test was liable to be reversed, and whether the clearances could be treated as a waste product covered by Rule 57D of the Central Excise Rules, 1944.

Analysis: The batteries cleared for laboratory test were fully manufactured goods and not waste product. The exemption notification contemplated removal of such batteries for testing subject to destruction in test, and the inputs used in exempted final products did not qualify for retention of Modvat credit. The credit taken on the duty-free portion of the final products was therefore recoverable, and the position was consistent with the view that credit attributable to exempted final products must be debited in the Modvat account before clearance.

Conclusion: The issue was decided against the assessee and in favour of the Revenue; Modvat credit attributable to the exempted clearances was liable to be reversed.

Final Conclusion: The appellate order was set aside and the Department's appeal succeeded.

Ratio Decidendi: Modvat credit on inputs used in fully manufactured final products cleared as exempt goods cannot be retained and must be reversed or debited before removal, and such clearances are not treated as waste merely because the goods are sent for testing.

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