Modvat credit reversal on exempt final products must follow when inputs remain in stock at the date of exemption.

When a final product becomes exempt from excise duty, Modvat credit attributable to inputs lying in stock and inputs contained in finished goods in stock becomes inadmissible and must be reversed. A contrary view in an earlier final order was treated as an error apparent on the face of the record because it conflicted with the binding High Court principle. The rectification application was therefore allowed, the earlier order was set aside, and the respondents were held bound to reverse the credit on the relevant inputs as on the date of exemption.

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Issues: (i) Whether the error in the earlier final order, holding that the respondents were not required to reverse Modvat credit on unutilised inputs lying in stock and inputs used in the final product in stock on the date the final product became exempt from duty, was a mistake apparent from the record warranting rectification. (ii) Whether, upon the final product becoming exempt from excise duty, the Modvat credit taken on such inputs was required to be reversed.

Issue (i): Whether the error in the earlier final order, holding that the respondents were not required to reverse Modvat credit on unutilised inputs lying in stock and inputs used in the final product in stock on the date the final product became exempt from duty, was a mistake apparent from the record warranting rectification.

Analysis: The earlier order was tested against the binding High Court view that once a final product becomes exempt from duty, credit attributable to inputs in stock and inputs already used in the exempted product becomes inadmissible and must be reversed. On that basis, the contrary finding in the earlier order was treated as an error evident on the face of the record.

Conclusion: The mistake was held to be apparent from the record and the order was rectified.

Issue (ii): Whether, upon the final product becoming exempt from excise duty, the Modvat credit taken on such inputs was required to be reversed.

Analysis: The governing principle applied was that exemption of the final product from a specified date renders the Modvat credit on inputs lying in stock as well as inputs contained in stock of the final product inadmissible, because the credit is linked to dutiable clearance of the finished product.

Conclusion: The respondents were held bound to reverse the credit on the unutilised inputs lying in stock and on the inputs used in the final product in stock as on the date of exemption.

Final Conclusion: The rectification application succeeded, the Revenue's appeal was allowed, and the contrary earlier order was set aside; the reference application also did not survive and stood dismissed as not maintainable.

Ratio Decidendi: Where a final product becomes exempt from excise duty, Modvat credit attributable to inputs in stock or contained in stock of the exempted product must be reversed, and a contrary view in an earlier order constitutes a rectifiable error apparent from the record.

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