Modvat credit on SKD components and limitation for reclassification-based demand were decided in favour of the credit recipient.

Components of a painting system received in SKD condition and assembled in the recipient's factory were treated as eligible inputs under the Modvat scheme, so credit could not be denied merely because the supplier's classification was later altered. The demand also failed on limitation because the show cause notice relied only on reclassification, with no evidence of collusion, suppression, or intent to evade duty; the extended limitation period was therefore unavailable. The denial of credit on merits was not justified, and the demand was time-barred.

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Issues: (i) Whether Modvat credit was admissible on components of a painting system received in SKD condition and assembled in the factory; (ii) Whether the demand for denial of Modvat credit was barred by limitation.

Issue (i): Whether Modvat credit was admissible on components of a painting system received in SKD condition and assembled in the factory?

Analysis: The goods were received not as a fully assembled machine but as component parts in SKD condition, and were assembled at the recipient's factory into a painting system. On that factual basis, the credit could not be denied merely because the supplier's classification was later reclassified. The reasoning treated the parts as eligible inputs under the Modvat scheme, even if they did not qualify as capital goods.

Conclusion: Modvat credit was admissible; the denial of credit on merits was not justified.

Issue (ii): Whether the demand for denial of Modvat credit was barred by limitation?

Analysis: The show cause notice was founded on the supplier's reclassification of the goods, without any evidence that the respondent had colluded in misclassification or suppressed material facts. In the absence of evidence of intent to evade duty or collusion, the extended limitation period was unavailable.

Conclusion: The demand was time-barred.

Final Conclusion: The order denying credit was upheld, and the revenue's challenge failed on both merits and limitation.

Ratio Decidendi: Where goods are received as component parts for assembly in the recipient's factory, Modvat credit cannot be denied merely because the supplier's classification is later altered, and extended limitation cannot be invoked without evidence of collusion or suppression by the credit recipient.

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