Reasonable steps for Modvat credit verification led to penalty being upheld, with reduced quantum for later reversal.

Penalty under Rule 173Q of the Central Excise Rules, 1944 was examined in relation to Modvat credit taken on fictitious gate passes. The appellant had failed to take reasonable steps to verify the duty-paid character of the inputs and the identity of the supplier, contrary to the caution required by the rule and its explanation. Subsequent reversal of credit did not by itself avoid penalty, particularly where no protest or speaking order was obtained at that stage. Penalty was therefore upheld, though the amount was reduced in view of the later reversal.

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Issues: Whether penalty under Rule 173Q of the Central Excise Rules, 1944 was leviable for availing credit on fictitious gate passes without taking reasonable steps to verify the duty-paid character and identity of the supplier, and if so, whether the penalty required reduction.

Analysis: The appellant had availed Modvat credit on 76 gate passes, 26 of which were found fictitious on verification by the originating range officer. The amount reversed pursuant to the Superintendent's direction was not treated as a valid ground to avoid penalty, especially since the appellant did not act under protest or obtain a speaking order at that stage. The applicable provision required a person availing credit to take reasonable steps to ensure that duty had been paid on the inputs, and the explanation to Rule 173Q(1)(bb) indicated the nature of such caution. On the facts, the appellant had failed to exercise adequate caution and thereby contravened the rule, though the subsequent reversal of credit was taken into account for leniency.

Conclusion: Penalty under Rule 173Q of the Central Excise Rules, 1944 was upheld, but the quantum was reduced to Rs. 5,000, rendering the appellant partly successful.

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