Modvat credit cannot be denied for a mere procedural lapse when duty-paid inputs are received and used in manufacture.

Modvat credit cannot be denied, and penalties cannot be sustained, where duty-paid imported inputs are admittedly received in the factory and used in manufacture of dutiable final products. A procedural lapse, such as non-endorsement of the Bills of Entry for diversion of goods to the appellant's factory, does not override substantive entitlement when the credit claim is otherwise established. The scheme is to be applied effectively, and technical irregularities alone are insufficient to defeat the benefit or justify penal action.

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Issues: Whether Modvat credit and consequential penalties could be denied merely because the Bills of Entry were not endorsed for diversion of imported duty-paid goods to the appellant's factory.

Analysis: The duty-paid character of the imported inputs was not in doubt, and the record showed that the same goods were received in the appellant's factory and used in manufacture. The only objection was a procedural one based on absence of endorsement on the Bills of Entry. Where the entitlement to credit is otherwise established, a technical breach of procedure does not justify denial of the benefit or imposition of penalties. The scheme is to be implemented effectively and not defeated on purely procedural lapses.

Conclusion: Denial of Modvat credit was not justified, and the penalties could not be sustained. The issue is decided in favour of the assessee.

Ratio Decidendi: Credit cannot be denied, nor penalties imposed, on a mere procedural irregularity when the duty-paid nature of inputs and their receipt and use in the manufacture of dutiable final products are not disputed.

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