Modvat credit on capital goods is inadmissible when removal to a sister unit bypasses prescribed procedure and intimation requirements.

Modvat credit on capital goods removed to a sister unit without intimation to the proper officer and without following the prescribed procedure was held inadmissible; the balance credit was required to be reversed because the statutory safeguards for such movement had not been observed. Contravention of the rules justified penalty, but the immediate reversal of a substantial part of the credit after detection was treated as a mitigating factor, so the penalties were reduced.

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Issues: (i) Whether Modvat credit on capital goods was admissible when the goods had been shifted to a sister unit without intimation to the proper officer and without following the prescribed procedure; (ii) whether the penalties imposed required reduction in the circumstances.

Issue (i): Whether Modvat credit on capital goods was admissible when the goods had been shifted to a sister unit without intimation to the proper officer and without following the prescribed procedure.

Analysis: The capital goods were found to have been removed to the sister unit on the strength of endorsed photocopies of invoices, without raising a proper modvatable invoice and without observing the procedure prescribed for removal of capital goods. Since the statutory procedure governing such movement was not followed, the credit could not be treated as admissible. The amount already reversed was taken into account, and the balance credit was held liable to reversal.

Conclusion: The credit was not admissible and the balance credit was required to be reversed.

Issue (ii): Whether the penalties imposed required reduction in the circumstances.

Analysis: Although contravention of the rules justified imposition of penalty, the immediate reversal of a substantial part of the credit after detection was treated as a relevant mitigating factor. On that basis, the penalties were scaled down in view of the overall facts and circumstances.

Conclusion: The penalties were reduced.

Final Conclusion: The appeal succeeded only to the extent of reduction of penalty, while the disallowance of Modvat credit and liability to reverse the balance credit were sustained.

Ratio Decidendi: Modvat credit on capital goods removed without complying with the prescribed statutory procedure and without intimation to the proper officer is not admissible, though penalty may be moderated on mitigating facts.

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