Modvat credit under export bond rules cannot be denied merely because inputs also relate to intermediate or locally consumed goods.

Rule 57F(3) is explained as allowing Modvat credit on specified duty paid inputs used in final products cleared for export under bond, as well as on inputs used in intermediate products exported in accordance with the rule. The provision also contemplates utilisation or refund where adjustment is not possible. Credit is not to be denied merely because intermediate products arise during manufacture or because some inputs are also used in goods consumed locally. The note further states that denial of refund on the basis of drawback or rebate was not shown to apply, and that the cited precedent did not control the plain wording of the proviso.

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Issues: Whether Modvat credit under Rule 57F(3) could be denied in respect of inputs used in final products cleared for export under bond and in intermediate products, and whether the penalty sustained in the impugned order was liable to be set aside.

Analysis: Rule 57F(3) permits credit of specified duty on inputs used in final products cleared for export under bond and on inputs used in intermediate products cleared for export in accordance with the rule, and also contemplates utilisation or refund where adjustment is not possible. The provision does not require denial of credit merely because intermediate products arise in the manufacturing process or because part of the inputs relate to goods consumed locally. The conditions for denying refund on account of drawback or rebate were not shown to apply, and the departmental reliance on the cited precedent was found irrelevant to the plain language of the proviso.

Conclusion: Modvat credit could not be denied, and the order disallowing credit and imposing penalty was set aside in favour of the assessee.

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