Modvat credit on duty-paid scrap survives procedural lapse, and no reversal is needed for properly accounted waste clearance.

Modvat credit on duty-paid imported metal scrap could not be denied merely because the inputs were first sorted at a registered godown instead of being received first in the factory, where their receipt, accountal and use in manufacture were undisputed and the omission was only procedural. The Tribunal also held that unfit scrap cleared as waste and scrap at its proper market value did not require reversal of credit when the clearance was duly accounted for and duty was paid on the waste and scrap. The revenue appeal therefore failed and the order allowing credit was left undisturbed.

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Issues: (i) Whether Modvat credit on imported metal scrap could be denied for the procedural lapse of first sorting the duty-paid inputs at a registered godown instead of first receiving them in the factory; (ii) Whether clearance of unfit scrap as waste and scrap at its lower market value required reversal of credit.

Issue (i): Whether Modvat credit on imported metal scrap could be denied for the procedural lapse of first sorting the duty-paid inputs at a registered godown instead of first receiving them in the factory.

Analysis: The imported inputs were duty paid, their receipt at the registered godown was not in dispute, and the material fit for manufacture was thereafter moved to the factory for use in the final products. The only deficiency was a failure to generate the internal challans that would have formally shown movement from the factory to the sorting premises and back. The Tribunal held that such a lapse was merely procedural, and in the absence of any dispute about accountal, duty payment, or utilisation of the inputs in manufacture, Modvat credit could not be denied on that ground.

Conclusion: The denial of Modvat credit on this ground was not sustainable and the issue was decided in favour of the assessee.

Issue (ii): Whether clearance of unfit scrap as waste and scrap at its lower market value required reversal of credit.

Analysis: The unserviceable portion of the scrap was cleared as waste and scrap, and the clearance value was lower than the proportionate input cost. The Tribunal accepted that waste and scrap could be removed at the price applicable to such material, and no basis existed to require credit reversal where the clearance was duly accounted for and duty was paid on the waste and scrap.

Conclusion: Credit reversal was not warranted and the issue was decided in favour of the assessee.

Final Conclusion: The revenue appeal failed, and the order allowing Modvat credit was left undisturbed because the procedural irregularity did not defeat the substantive entitlement and the treatment of waste and scrap was held to be proper.

Ratio Decidendi: Modvat credit cannot be denied for a merely procedural deviation where duty-paid inputs are duly accounted for, received in registered premises, and used in manufacture, and waste and scrap may be cleared at their appropriate scrap value without necessitating reversal of credit.

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