Modvat credit on non-exempt inputs sustained, while credit linked to exempt tractor manufacture remained barred under Rule 57C.

Modvat credit under Rule 57A was allowable on inputs used in hydraulic assemblies transferred between units under Chapter X procedure and on assemblies cleared on payment of duty, because those clearances were neither exempt nor at nil rate. Credit was barred only to the extent relatable to inputs used in manufacturing exempt tractors under Rule 57C, and that segment had already been reversed at clearance. Credit for the non-exempt tractor categories and the hydraulic assemblies was therefore sustainable in law.

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Issues: Whether Modvat credit on inputs used in hydraulic assemblies transferred to another unit under Chapter X procedure and on assemblies cleared on payment of duty was admissible, and whether credit attributable to inputs used in manufacture of exempt tractors was barred.

Analysis: Rule 57A of the Central Excise Rules permits credit on inputs, while Rule 57C bars credit where inputs are used in the manufacture of exempted final products. On the facts, only the inputs used in manufacturing tractors below the exempted horsepower category attracted the prohibition, and the credit relatable to that segment had already been reversed at the time of clearance. The hydraulic assemblies transferred between units under Chapter X procedure were neither exempt nor subject to nil rate of duty, and the credit taken on inputs used for those assemblies was therefore properly availed.

Conclusion: Credit was not admissible only to the extent relatable to the exempt tractor segment, but credit on inputs used for the other two categories was correctly taken and was sustainable in law.

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