Modvat credit reversal on exempt final products upheld; limitation challenge also failed on notices tied to exemption date.

Modvat credit on inputs cannot be retained once the final product becomes exempt from duty, because Rule 57C bars credit where no duty is leviable on the final product. Credit already taken is not irrevocable and may be validly demanded back when the statutory conditions for availment cease to exist. A demand for reversal of credit on inputs in stock was upheld where the exemption order had attained finality. The limitation challenge also failed, as the show cause notices were computed from the effective date of exemption and were found to be within the statutory period.

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Issues: (i) whether Modvat credit taken on inputs had to be reversed when the final product became exempt from duty, and (ii) whether the show cause notices were barred by limitation.

Issue (i): whether Modvat credit taken on inputs had to be reversed when the final product became exempt from duty.

Analysis: The credit was held to be inadmissible once the final product was exempt, because Rule 57C barred credit where no duty was leviable on the final product. The order restricting the benefit from a specified date had attained finality as no appeal was filed against it, and the demand for reversal of credit on inputs in stock was treated as valid. The decision relied on the principle that Modvat credit already taken is not irrevocable and must be reversed when the statutory conditions for availment cease to exist.

Conclusion: The issue was decided against the assessee and in favour of Revenue.

Issue (ii): whether the show cause notices were barred by limitation.

Analysis: The notices were held to be within time because they were linked to the effective date from which the exemption operated and the relevant demand period was computed from that date. On the facts, the tribunal found no merit in the plea of limitation.

Conclusion: The issue was decided against the assessee and in favour of Revenue.

Final Conclusion: The tribunal upheld the demand for reversal of Modvat credit and rejected the limitation challenge, resulting in dismissal of the appeals.

Ratio Decidendi: When final products become exempt from duty, Modvat credit on inputs cannot be retained and may be validly demanded back, and a demand computed from the effective date of exemption is not barred by limitation if it is otherwise within the statutory period.

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