Modvat credit on inputs cannot be reduced merely because debit notes lowered the purchase price without any duty refund

Modvat credit on inputs remained admissible where the duty paid on the goods was undisputed and no refund of that duty to the supplier was shown. A later reduction in the purchase price through debit notes for a quality difference was only a commercial adjustment and did not alter the duty already paid on the inputs. The rule and departmental circular relied on by Revenue applied to situations involving refund of duty to the manufacturer of inputs, not to mere price reduction without any corresponding duty refund. Accordingly, credit could not be reduced on the basis of the debit notes.

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Issues: Whether Modvat credit taken on inputs is required to be reduced merely because the buyer issued debit notes and paid a reduced price to the supplier on account of quality difference.

Analysis: The duty paid on the inputs received in the factory was not in dispute, and there was no claim or evidence that any part of that duty had been refunded to the supplier. The reduction in price was only a commercial adjustment between the buyer and the supplier. The rule relied upon by the Revenue, and the departmental circular, applied to situations involving refund to the manufacturer of inputs and not to a case where the purchase price was reduced without any alteration of the duty already paid on the goods. In these circumstances, full credit of the duty paid on the inputs remained admissible.

Conclusion: Modvat credit could not be reduced on the basis of the debit notes, and the Revenue's challenge failed.

Ratio Decidendi: Where duty paid on inputs is unchanged and no refund of duty is shown to have been obtained by the supplier, a subsequent reduction in purchase price by debit note does not warrant proportionate reduction of Modvat credit.

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