MODVAT credit on job-work capital goods upheld where duty was paid later at principal manufacturer stage

Credit on capital goods used by a job worker for manufacture of wiring harness cleared to the principal manufacturer under the job-work procedure was admissible, because such clearances were not to be treated as exempted final products for denying MODVAT credit where duty was ultimately discharged at the principal manufacturer's stage and the job-worked value formed part of the final assessable value. The Tribunal's Larger Bench principle and later decisions supported this view, so the foundation for the demand failed. The connected penalty also could not survive and was set aside.

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Issues: Whether MODVAT credit on capital goods used by a job worker for manufacture of wiring harness cleared without payment of duty to the principal manufacturer was admissible, and whether the demand and penalty could therefore survive.

Analysis: The capital goods were used in the manufacture of goods cleared under the job-work procedure to the principal manufacturer. Such job-worked goods were not to be treated as exempted final products for the purpose of denying credit, because duty was ultimately paid at the stage of the principal manufacturer and the value of the job-worked goods formed part of the assessable value of the final product. The issue was covered by the Tribunal's Larger Bench decision and the subsequent application of that principle in later cases. On that basis, the credit taken on the capital goods was held to be admissible and the foundation for the demand disappeared.

Conclusion: The demand of MODVAT credit and the connected penalty were not sustainable and were set aside in favour of the assessee.

Final Conclusion: Credit on capital goods used by a job worker for goods cleared to the principal manufacturer under the job-work procedure could not be denied as if the goods were exempted final products, and the demand was liable to be vacated.

Ratio Decidendi: Goods cleared by a job worker without payment of duty under the job-work procedure are not, for credit-denial purposes, to be treated as exempted final products where duty is ultimately discharged at the principal manufacturer's stage.

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