Modvat credit on inputs used in pole manufacture cannot be denied without proof of diversion or misutilisation.

Modvat credit on cement and steel rods used to manufacture RCC/PCC poles could not be denied merely on alleged input shortage, because the notice did not clearly explain the norms used to compute the shortage and there was no evidence of diversion or misutilisation. The open-yard manufacturing process reasonably explained wastage from exposure to wind, rain and water, and from cutting poles to required length. On these facts, the allegation of irregular availment was not established, so the denial of credit, demand, and penalties were unsustainable.

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Issues: Whether Modvat credit on cement and steel rods used in the manufacture of RCC/PCC poles was wrongly denied on the allegation of irregular availment and shortage of inputs.

Analysis: The inputs were used in manufacturing poles in open yards, where exposure to wind, rain and water could cause wastage of cement and steel. The show cause notice did not clearly set out the norms adopted for working out the alleged shortages. There was no evidence that the inputs had been diverted or misused, and the manufacturing process itself involved wastage when poles were cut to required length. These factors were not properly considered by the lower authority.

Conclusion: The allegation of misutilisation of inputs was not established, and denial of Modvat credit was unjustified.

Final Conclusion: The appeal succeeded and the demand and penalties could not be sustained.

Ratio Decidendi: A denial of Modvat credit based on alleged input shortage cannot be sustained in the absence of evidence of diversion or misutilisation, particularly where the manufacturing process itself reasonably explains the apparent wastage.

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