Modvat credit and differential duty demands fail where alleged non-manufacture is not proved and records support receipt of inputs.

Modvat credit could not be denied where inputs were shown as received under duty-paying documents, recorded in RG 23A Part I, and supported by prior departmental visits; the allegation of non-receipt and absence of manufacture was not established, so the credit denial failed. The demand for differential duty, with penalties and interest, also could not survive because it proceeded on an inconsistent premise of no manufacture while duty had already been paid on the clearances, and the factual basis for that premise was not proved. The assessee therefore obtained relief on both the credit and demand issues.

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Issues: (i) Whether Modvat credit could be denied on the allegation that inputs were not received in the factory and that no manufacture took place in the registered premises; (ii) Whether the demand of differential duty, along with the connected penalties and interest, could be sustained when duty had already been paid on the clearances and the factual basis of non-manufacture was not established.

Issue (i): Whether Modvat credit could be denied on the allegation that inputs were not received in the factory and that no manufacture took place in the registered premises.

Analysis: The proceedings rested on allegations of fictitious invoicing, outside manufacture, and statements said to indicate absence of manufacturing activity. However, the record also showed receipt of inputs under duty-paying documents, entries in RG 23A Part I, and prior visits by audit and departmental officers. The demand for differential duty itself proceeded on the footing that excisable goods had been manufactured and cleared on payment of duty, which was inconsistent with a complete denial of manufacture. In the absence of clear evidence that inputs were not received or that the credit was availed without any nexus to manufacture, the denial of credit could not be maintained.

Conclusion: The denial of Modvat credit was not sustainable and was set aside, in favour of the assessee.

Issue (ii): Whether the demand of differential duty, along with the connected penalties and interest, could be sustained when duty had already been paid on the clearances and the factual basis of non-manufacture was not established.

Analysis: The demand for differential duty proceeded on certain clearances where additional consideration was later received. The order nevertheless also proceeded on the premise that there had been no manufacture at all, which was logically inconsistent with the duty already paid on the same goods. Once the basic allegation of no manufacture was not clearly established, there was no sound basis for sustaining the differential duty demand or the consequential penal and interest liabilities.

Conclusion: The demand of differential duty, penalties, and interest was not sustainable and was set aside, in favour of the assessee.

Final Conclusion: The impugned order was unsustainable on the facts and evidence, and the appeal succeeded with consequential relief.

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