Modvat credit on duty-paid supplier inputs cannot be denied by invoking returned-goods provisions inapplicable to outside components.

Modvat credit was admissible on duty-paid inputs received from outside suppliers and used in manufacture of final products, where both the inputs and final products were notified as eligible items. Provisions dealing with retention, re-entry, or refund of duty on goods returned to factory did not apply, because those rules concerned duty-paid goods manufactured by the claimant, not externally sourced inputs. The claim could not be rejected by treating supplier-returned or rejected components as returned goods under that scheme. Credit on the duty-paid inputs was therefore allowable, and the rejection of the claim was unsustainable.

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Issues: Whether Modvat credit was admissible on duty-paid components received as inputs and later returned to the suppliers or rejected by them, and whether the provisions dealing with return of duty-paid goods to factory or refund on goods returned to factory applied.

Analysis: The claim related to duty paid on components received by the appellants as inputs for use in manufacture of final products. The appellants were not the manufacturers of those components. The inputs and final products were notified as eligible items, and the claim was therefore examined on that basis. The provisions concerning retention, re-entry, or refund of duty on goods returned to factory were held to be inapplicable because those provisions dealt with duty-paid goods manufactured by the claimant, not with inputs received from outside suppliers.

Conclusion: Modvat credit was admissible on the duty-paid inputs, and the rejection of the claim was unsustainable.

Final Conclusion: The reference was answered in favour of the assessee, and the appeal was allowed with consequential relief.

Ratio Decidendi: Where duty-paid inputs received from suppliers are themselves eligible items under the Modvat scheme, credit cannot be denied by invoking provisions meant for returned goods manufactured by the assessee.

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