Modvat credit on waste and recycled granules was protected for re-use, but reversed for exempt clearances.

Rule 57D(1) protected Modvat credit on inputs contained in waste, refuse or by-product arising during manufacture, so credit was not required to be reversed for waste cleared as waste. The same protection also covered recycled granules to the extent they were taken back into the manufacturing stream and reused in making BOPP films, because no separate credit reversal arose on that re-use. However, recycled granules cleared as exempted goods under Notification No. 53/88 were treated as a separate product outside Rule 57D(1), so the credit relatable to inputs contained in those granules had to be reversed.

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Issues: (i) Whether Modvat credit attributable to inputs contained in waste cleared as waste was liable to reversal; (ii) whether Modvat credit was required to be reversed in respect of granules obtained by recycling waste and reused in the manufacture of BOPP films; (iii) whether Modvat credit attributable to inputs contained in recycled granules cleared under Notification No. 53/88 was liable to reversal.

Issue (i): Whether Modvat credit attributable to inputs contained in waste cleared as waste was liable to reversal.

Analysis: Rule 57D(1) provided that credit could not be denied or varied merely because part of the inputs was contained in waste, refuse or by-product arising during manufacture, whether or not such waste was exempt, chargeable to nil duty, or not specified as a final product. The waste that arose during manufacture and was cleared as waste was therefore within the protective scope of the rule.

Conclusion: Modvat credit on inputs contained in waste cleared as waste was not liable to reversal and the assessee succeeded on this issue.

Issue (ii): Whether Modvat credit was required to be reversed in respect of granules obtained by recycling waste and reused in the manufacture of BOPP films.

Analysis: The recycled granules, to the extent they were taken back into the manufacturing stream and used for further manufacture of BOPP films, did not create any separate occasion for reversal of the original credit. No credit was availed on the granules as such after recycling for their re-use in manufacture.

Conclusion: No reversal of Modvat credit was required on the portion of recycled granules reused in the manufacture of BOPP films, and the assessee succeeded on this issue.

Issue (iii): Whether Modvat credit attributable to inputs contained in recycled granules cleared under Notification No. 53/88 was liable to reversal.

Analysis: Granules obtained after recycling of plastic waste and thereafter cleared as exempted goods were treated as distinct from waste covered by Rule 57D(1). On that portion of the recycled material cleared as exempted granules, the protection of Rule 57D(1) did not apply and the credit relatable to inputs contained therein had to be reversed.

Conclusion: Modvat credit attributable to inputs contained in recycled granules cleared under Notification No. 53/88 was liable to reversal and the revenue succeeded on this issue.

Final Conclusion: The orders were modified to grant relief on waste cleared as waste and on recycled granules reused in manufacture, while sustaining reversal only in respect of recycled granules cleared as exempted goods.

Ratio Decidendi: Rule 57D(1) protects credit on inputs contained in waste, refuse or by-product arising in manufacture, but that protection does not extend to recycled material cleared as exempted goods after being converted into a separate product.

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