Modvat credit cannot be denied for inputs used in nil-rated intermediate goods where the rule treats such goods as duty-free.

Modvat credit on ammonia used to manufacture nitric acid could not be denied merely because the intermediate nitric acid was assessed at nil rate of duty. Rule 57D was read narrowly by the denial, but the Tribunal noted that the rule was later amended to expressly include intermediate goods chargeable to nil duty and relied on the Larger Bench view that nil-rated goods are treated as goods on which no duty is actually charged. On that construction, the stated ground for refusing credit was not sustainable and the impugned order was set aside.

---

---

Issues: Whether Modvat credit could be denied on ammonia used in the manufacture of nitric acid on the ground that the intermediate nitric acid was assessed to nil rate of duty, and whether Rule 57D of the Central Excise Rules protected such credit.

Analysis: The denial rested on a narrow reading of Rule 57D, limiting it to intermediate products exempt from the whole of duty and excluding goods assessed at nil rate. The Tribunal noted that the rule was subsequently amended to expressly cover intermediate goods chargeable to nil rate of duty as well. It also relied on the Larger Bench view that, in the Modvat context, goods charged to nil rate of duty are to be treated as goods on which no duty is actually charged.

Conclusion: The denial of Modvat credit was not sustainable and the credit could not be refused on the stated ground.

Final Conclusion: The impugned order was set aside and the appeal succeeded.

Ratio Decidendi: For Modvat purposes, an intermediate product assessed at nil rate of duty is not a valid basis to deny credit where the governing rule is construed to cover goods on which no duty is actually charged.

---