Modvat credit shortfall on exemption exit was payable under Rule 57H(7), and the refund claim failed.

Opting out of the Modvat scheme on availing exemption under Notification No. 7/97 required the manufacturer to pay the amount attributable to inputs and finished goods lying in stock under Rule 57H(7). The rule allowed adjustment against available Modvat credit, and any shortfall had to be paid; it did not waive the liability because the credit balance was insufficient or make the shortfall refundable. Payment made through the PLA toward that shortfall was therefore in accordance with the rule, and the refund claim was unsustainable.

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Issues: Whether, on opting for exemption from duty under Notification No. 7/97 and leaving the Modvat scheme, the manufacturer was required under Rule 57H(7) to pay the amount attributable to inputs and finished goods lying in stock, and whether the amount paid through PLA was refundable.

Analysis: Rule 57H(7) required a manufacturer opting for the exemption to pay an amount equivalent to the credit allowed in respect of inputs lying in stock or used in finished excisable goods lying in stock on the date of exercising the option. The provision permitted adjustment against the Modvat credit balance, and any shortfall had to be paid. The rule did not contemplate waiver of the liability merely because the credit balance was insufficient, nor did it treat such balance shortfall as refundable. Accordingly, payment made toward the shortfall in the PLA was in accordance with the rule.

Conclusion: The refund claim was not sustainable, and the liability to make the payment was rightly upheld against the assessee.

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