Modvat credit on invoiced inputs survives marginal transit loss when no diversion is shown; penalty falls with it.

Duty-paid inputs received under valid invoices retain the requisite nexus for Modvat credit even where the quantity physically received is marginally short because of normal transit loss. On the facts stated, there was no diversion of inputs, no defect in the invoices, and the inputs were used in manufacture; full credit on the invoiced quantity was therefore admissible and could not be curtailed merely due to the short receipt. Where the credit was correctly availed on this basis, the foundation for penalty under section 11AC disappeared, and no penalty was sustainable.

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Issues: (i) Whether full Modvat credit was admissible on the entire quantity covered by the invoices despite marginal short receipt caused by normal transit loss. (ii) Whether penalty under section 11AC of the Central Excise Act, 1944 was sustainable when the Modvat credit was correctly availed on the basis of the invoices and no diversion of inputs was shown.

Issue (i): Whether full Modvat credit was admissible on the entire quantity covered by the invoices despite marginal short receipt caused by normal transit loss.

Analysis: The credit claimed was supported by invoices evidencing duty payment on the consignment received in the factory. The short receipt was found to be marginal and attributable to normal evaporation or transit loss. There was no finding that any part of the consignment covered by the invoices was diverted to another use or that the invoices were incorrect. Rule 57(9) contemplates a direct nexus between the duty paid on the inputs and the credit evidenced by the invoices, and that nexus remained intact on the facts found.

Conclusion: Full Modvat credit was admissible and curtailment of credit on account of the marginal short receipt was not justified, in favour of the assessee.

Issue (ii): Whether penalty under section 11AC of the Central Excise Act, 1944 was sustainable when the Modvat credit was correctly availed on the basis of the invoices and no diversion of inputs was shown.

Analysis: Once the credit was held to have been rightly availed, the foundation for penalty on alleged excess availment disappeared. The finding that the short receipt was only normal transit loss and that the inputs were used as such in manufacture negatived any basis for treating the availment as wrongful.

Conclusion: Penalty under section 11AC was not sustainable, in favour of the assessee.

Final Conclusion: The Revenue's challenge failed because the entire credit taken on the invoiced inputs received in the factory was upheld, and the consequential penalty was also set aside.

Ratio Decidendi: Where duty-paid inputs are received under invoice, are used as inputs in manufacture, and any shortfall is only due to normal transit loss without diversion or defect in the invoices, Modvat credit cannot be reduced merely because the quantity physically received is marginally less than the invoiced quantity.

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