Common inputs under Modvat/Cenvat may be inter-used in factory production without reversal when not used for exempted goods.

Common inputs used interchangeably for own-manufacture and job-work production were not treated as diverted or removed because they were consumed within the factory and movements were contemporaneously recorded through goods receipt notes. The Modvat/Cenvat scheme did not require one-to-one correlation between particular inputs and final products, and there was no prohibition on inter-utilisation of common inputs by the same assessee where the inputs were not used for exempted goods. The demand was therefore unsustainable and the penalty could not survive.

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Issues: Whether common inputs used interchangeably for manufacture on own account and on job-work basis could be treated as diverted or removed so as to require reversal of credit or duty payment, and whether the demand and penalty were sustainable.

Analysis: The inputs were used within the factory for manufacture of final products, with contemporaneous stock movement recorded through goods receipt notes and replenishment made when the own stock became available. The legal position applied was that the Modvat/Cenvat framework does not require one-to-one correlation between specific inputs and final output, so long as the inputs are not used for exempted goods. There was no prohibition under the erstwhile rules against inter-utilisation of common inputs for different products manufactured by the same assessee, and such internal movement did not amount to removal outside the factory for home consumption.

Conclusion: The demand was not sustainable and the penalty could not survive.

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