Modvat credit on duty-paid inputs cannot be denied on technical transfer formalities when receipt and substantive entitlement are established.

Modvat credit was stated to be available where duty-paid inputs were actually received in the factory, even if cleared from a warehouse on endorsed ex-bond bills of entry without a high-sea sale. The form of transfer did not defeat substantive entitlement when duty had been discharged and receipt was established, and denial on this technical objection was rejected. Credit was also said to remain admissible where gate-pass goods were not physically removed from the factory, if the inputs were identifiable, accounted for in production, and moved within the same manufacturing arrangement for job-work-based manufacture. The commentary concludes that credit cannot be denied on procedural technicalities when substantive conditions are met.

---

---

Issues: (i) Whether Modvat credit could be denied on duty-paid inputs cleared from warehouse on endorsed ex-bond bills of entry merely because there was no high-sea sale; (ii) Whether Modvat credit was inadmissible because the goods covered by gate passes were not physically removed from the factory premises.

Issue (i): Whether Modvat credit could be denied on duty-paid inputs cleared from warehouse on endorsed ex-bond bills of entry merely because there was no high-sea sale.

Analysis: The decisive factor was the duty-paid character of the inputs and their actual receipt in the assessee's factory. Once duty had been discharged and the goods were received, credit could not be refused on a narrow technical objection that the goods had not been sold on high-sea sale terms. The form of endorsement on the ex-bond bill of entry did not alter the substantive entitlement to credit.

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

Issue (ii): Whether Modvat credit was inadmissible because the goods covered by gate passes were not physically removed from the factory premises.

Analysis: The mere absence of physical outward removal was held insufficient to deny credit where the duty-paid inputs were otherwise identifiable and had been accounted for in the manufacturing process. The explanation that the goods moved within the same manufacturing arrangement and were received back for job-work-based production was accepted, and denial of credit on the basis of a purely technical view was rejected.

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

Final Conclusion: The order denying Modvat credit on technical grounds was set aside, and the assessee's entitlement to credit was upheld.

Ratio Decidendi: Modvat credit cannot be denied where the inputs are duty paid and actually received in the factory merely because the procedural mode of transfer or physical removal does not match the departmental view, if the substantive entitlement is otherwise established.

---