Modvat credit on DEPB debit entries denied, but penalty waived for bona fide dispute over admissibility.

Modvat credit was held inadmissible where additional customs duty was discharged by debit entries in DEPB scrips under the governing notification, because the applicable policy allowed credit only when such duty was paid in cash. The assessee therefore could not claim credit on duty settled through DEPB adjustment. Penalty, however, was set aside because the claim arose in a period when Tribunal views were not settled and earlier decisions supported the assessee's stand. The breach was treated as technical and based on bona fide belief, not deliberate defiance or contumacious conduct.

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Issues: (i) Whether modvat credit was admissible on additional customs duty paid through debit entries in DEPB scrips under the relevant import scheme and notification; (ii) Whether penalty imposed on the assessee was sustainable.

Issue (i): Whether modvat credit was admissible on additional customs duty paid through debit entries in DEPB scrips under the relevant import scheme and notification.

Analysis: The dispute on admissibility of credit on customs duty discharged through DEPB adjustment had already been settled by Larger Bench authority. The governing view was that where the benefit of the notification exempted imported goods from duty on debit of the equivalent amount in the DEPB book, the importer was not entitled to avail modvat credit of such duty. The relevant policy position during the material period recognised credit only when the additional customs duty was paid in cash and not by debit in DEPB.

Conclusion: The assessee was not entitled to modvat credit on the additional customs duty paid through DEPB debit entries.

Issue (ii): Whether penalty imposed on the assessee was sustainable.

Analysis: Penalty could not be justified merely because credit was later found to be inadmissible. There had been no settled position among the Tribunal benches at the material time, and the assessee's claim was supported by earlier decisions taking a contrary view. In these circumstances, the conduct could not be treated as deliberate defiance of law, contumacious conduct, or conscious disregard of obligation. The breach, if any, was technical and flowed from a bona fide belief.

Conclusion: The penalty was not sustainable and the assessee was entitled to relief on this aspect.

Final Conclusion: The demand of credit was upheld, but the penalty was set aside, and all connected appeals failed.

Ratio Decidendi: Modvat credit is not available where additional customs duty is discharged through DEPB debit in circumstances covered by the governing notification, but penalty is not warranted when the breach arises from a bona fide controversy and not from deliberate or contumacious conduct.

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