CENVAT credit on leftover scrap requires proper verification; mechanical denial under the job work notification is unsustainable.

CENVAT credit on leftover MS scrap received from a principal manufacturer was treated as admissible because the department had not undertaken any proper inquiry into the material's nature or actual use. The record showed that the principal manufacturer regarded the goods as scrap and the assessee as leftover material from job work, so denial of credit could not rest on mere assumption or disbelief. The notification condition requiring return of material was also not violated on these facts, as the purchase of leftover scrap satisfied the arrangement between the parties. The demand and interest were therefore not sustainable.

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Issues: (i) Whether CENVAT credit on duty paid on leftover MS scrap purchased from the principal manufacturer was admissible in the absence of further investigation into the nature and use of the material; (ii) Whether, on the facts of the case, the requirement under Notification No. 214/86-CE that the material be returned stood violated.

Issue (i): Whether CENVAT credit on duty paid on leftover MS scrap purchased from the principal manufacturer was admissible in the absence of further investigation into the nature and use of the material.

Analysis: The record showed that the disputed material was treated by the principal manufacturer as scrap and by the assessee as leftover material received against job work. The show cause notice itself proceeded on that basis. In such a situation, if the department wished to deny credit on the footing that the material was not usable as input, some investigation or verification of the actual nature and use of the material was necessary. The demand was confirmed only because the lower appellate authority assumed that such verification had not been done, without any independent basis to disbelieve the assessee's explanation.

Conclusion: The denial of credit on that ground was not sustainable, and the assessee was entitled to credit.

Issue (ii): Whether, on the facts of the case, the requirement under Notification No. 214/86-CE that the material be returned stood violated.

Analysis: The assessee had purchased the leftover scrap from the principal manufacturer, and in those circumstances the obligation under the notification, as between the assessee and the principal manufacturer, stood satisfied. On the facts presented, the requirement of return could not be invoked to sustain the demand, and no contrary authority was shown.

Conclusion: There was no violation of the notification sufficient to sustain the demand.

Final Conclusion: The demand and interest confirmed in appeal could not be sustained, and the assessee succeeded.

Ratio Decidendi: Where leftover material received in the course of job work is treated as scrap by the principal manufacturer and the assessee gives a plausible explanation of its receipt and use, denial of credit or confirmation of demand cannot rest on mere disbelief or absence of verification; the department must establish its case by proper inquiry, and the notification condition cannot be invoked mechanically on the facts of such purchase.

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