Modvat credit cannot be denied for procedural premises defects when duty-paid inputs are duly used in manufacture.

Declared duty-paid inputs used in manufacture of declared final products supported Modvat credit, and the credit could not be denied merely because the inputs were received, stored, or processed through an unlicensed or undisclosed rented premises where the lapse was only procedural and the substantive nexus with the final products was proved. However, use of the rented premises as a godown and for movement of goods without proper declaration did constitute contravention of excise and Modvat requirements, so penalty was warranted. The penalty was therefore sustained in principle but reduced to reflect that the goods were cleared on payment of duty.

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Issues: (i) Whether Modvat credit could be denied merely because duty-paid inputs were received, stored, sent to job workers, and the finished goods were handled from a rented premises not covered by the licence, though the inputs were declared and the final products were duty-paid. (ii) Whether penalty for contravention of the excise and Modvat procedures was sustainable, and if so, to what extent.

Issue (i): Whether Modvat credit could be denied merely because duty-paid inputs were received, stored, sent to job workers, and the finished goods were handled from a rented premises not covered by the licence, though the inputs were declared and the final products were duty-paid.

Analysis: The declared inputs were received under valid duty-paid documents and were used for the manufacture of the declared final products. The only substantial objection was that the activities were carried on from a rented premises not included in the licence and not separately declared for Modvat purposes. The materials did not show that the inputs were unrelated to the manufacture or that the credit lacked nexus with the final products. In these peculiar facts, the defect was held to be procedural rather than substantive, and denial of credit would defeat the object of the Modvat scheme, which was intended to avoid cascading of input duty.

Conclusion: Modvat credit could not be denied, and the demand for reversal of credit was set aside.

Issue (ii): Whether penalty for contravention of the excise and Modvat procedures was sustainable, and if so, to what extent.

Analysis: The rented premises had been represented as a godown, but it was in fact used for receipt of Modvat inputs, movement of goods to job workers, receipt of fabricated goods, and clearance of finished goods. This amounted to clear contravention of the licensing and storage requirements, and the omission could not be treated as wholly innocent. At the same time, the goods were cleared on payment of duty, so the penalty did not call for the originally imposed amount. A reduced penalty was considered adequate as a corrective measure.

Conclusion: The penalty was sustained in principle but reduced from Rs. 10 lakhs to Rs. 5 lakhs.

Final Conclusion: The assessee succeeded on the credit demand but remained liable to a reduced penalty for the procedural and licensing violations.

Ratio Decidendi: Where declared duty-paid inputs are established to have been used in the manufacture of declared final products, Modvat credit cannot be denied solely because the inputs were handled from an unlicensed or undisclosed premises, if the lapse is only procedural and the substantive nexus is otherwise proved.

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