Modvat credit on capital goods used in job work remained admissible; exemption-based denial and penalty were unsustainable.

Modvat credit on capital goods was considered admissible where the goods were used during the job-work period under Notification No. 214/86-CE and were later cleared on payment of duty. On those facts, the capital goods could not be treated as used exclusively in the manufacture of exempted goods, so denial of credit was unsustainable. The related duty demand on removal of the used capital goods also failed, because goods processed under the job-work notification were not treated as exempted goods for this purpose. The penalty was consequently set aside, and the appeal succeeded with consequential relief.

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Issues: Whether Modvat credit on capital goods was deniable on the ground that they were used exclusively in the manufacture of exempted goods under the job work procedure, and whether penalty was sustainable on removal of used capital goods.

Analysis: The capital goods were used during the job work period under Notification No. 214/86-CE, and thereafter the goods were cleared on payment of duty. On these facts, the capital goods could not be treated as having been used exclusively for exempted goods. The clearance of used capital goods was also covered by the Tribunal's earlier view relied upon in the order. The reasoning accepted that goods processed under the job work notification were not to be treated as exempted goods for this purpose, and the cited precedents supported denial of neither credit nor duty demand on the removed used capital goods.

Conclusion: Modvat credit on the capital goods was held admissible, the duty demand on that score failed, and the penalty was set aside.

Final Conclusion: The appeals succeeded and the impugned order was set aside with consequential relief, if any.

Ratio Decidendi: Where capital goods are used both in job-work processing under Notification No. 214/86-CE and in dutiable production, they cannot be regarded as used exclusively for exempted goods so as to deny credit or sustain penalty.

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