No manufacture in slitting steel coils into sheets; Modvat credit reversal and consequential penalty could not be sustained.

Decoiling steel coils and slitting or cutting them into sheets does not amount to manufacture, as earlier decisions had already settled the issue in favour of the assessee. On that legal basis, receipt of sheets against documents describing HR/CR coils did not justify denial or reversal of Modvat credit where the movement and identity of the goods were accepted. The Tribunal also held that once the credit demand failed on merits, the consequential penalty on the registered dealers under Rule 173Q(bb) could not be sustained. The impugned order was set aside and relief was granted to the assessee.

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Issues: (i) Whether decoiling of steel coils and slitting/cutting them into sheets amounted to manufacture so as to justify reversal of Modvat credit; (ii) whether penalty under Rule 173Q(bb) of the Central Excise Rules, 1944 could be sustained against the registered dealers.

Issue (i): Whether decoiling of steel coils and slitting/cutting them into sheets amounted to manufacture so as to justify reversal of Modvat credit.

Analysis: The Tribunal noted that the question was already settled in favour of the assessee by earlier decisions holding that decoiling of steel coils and slitting/cutting into sheets does not amount to manufacture. On that basis, receipt of sheets against documents describing HR/CR coils did not justify denial of credit where the material movement and identity were accepted under the settled position of law. The earlier contrary view could not sustain reversal of credit.

Conclusion: The denial and reversal of Modvat credit were not sustainable.

Issue (ii): Whether penalty under Rule 173Q(bb) of the Central Excise Rules, 1944 could be sustained against the registered dealers.

Analysis: Once the underlying credit demand failed on the merits and the alleged manufacturing theory was rejected, the consequential penalty imposed on the registered dealers also had no support. The Tribunal held that penalty under the cited rule could not be upheld in the facts of the case.

Conclusion: The penalty was not sustainable.

Final Conclusion: The impugned order was set aside and the appeals were allowed, resulting in complete relief to the assessee.

Ratio Decidendi: Slitting or cutting steel coils into sheets does not amount to manufacture, and where the credit dispute rests solely on that incorrect premise, reversal of Modvat credit and consequential penalty cannot be sustained.

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